SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
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 July 31, 1998, 3,041,880 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
June 30, December 31,
1998 1997
------------ ------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 1,724,000 $ 1,458,000
Short term certificate of deposit --- 500,000
Accounts receivable, net of allowance for
doubtful accounts of $8,000 807,000 673,000
Current maturities of notes receivable 322,000 16,000
Prepaid expenses and other 286,000 107,000
- ------------------------------------------------- ------------ ------------
Total current assets 3,139,000 2,754,000
- ------------------------------------------------- ------------ ------------
Property and equipment, net 9,379,000 9,212,000
Notes receivable, net of current maturities 8,000 318,000
Other assets 1,131,000 1,111,000
- ------------------------------------------------- ------------ ------------
Total assets $ 13,657,000 $ 13,395,000
================================================= ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued liabilities and other $ 1,096,000 $ 1,030,000
Current maturities of long-term debt 1,766,000 849,000
- ------------------------------------------------- ------------ ------------
Total current liabilities 2,862,000 1,879,000
- ------------------------------------------------- ------------ ------------
Long-term debt, less current maturities 4,323,000 5,129,000
Convertible debentures 4,150,000 4,150,000
Commitments and contingencies --- ---
Stockholders' equity:
Common stock:
Class A - par value $.001; 20,000,000 shares
authorized; 3,037,880 and 2,982,170 shares
outstanding 3,000 3,000
Class B - no par; 4,000,000 shares authorized;
none and 3,900,000 shares outstanding --- ---
Preferred stock; par value $.001; 1,000,000
shares authorized; none issued --- ---
Paid-In capital 6,338,000 6,189,000
Accumulated deficit (4,019,000) (3,955,000)
- ------------------------------------------------- ------------ ------------
Total stockholders' equity 2,322,000 2,237,000
- ------------------------------------------------- ------------ ------------
Total liabilities and stockholders' equity $ 13,657,000 $ 13,395,000
================================================= ============ ============
These accompanying notes are an integral part of these consolidated financial
statements.
Page 1
<PAGE>
<TABLE>
<CAPTION>
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
- ------------------------------------------------- ---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 1,860,000 $ 1,329,000 $ 3,667,000 $ 2,520,000
- ------------------------------------------------- ---------------- --------------- --------------- ---------------
Costs and expenses
Direct operating 1,145,000 861,000 2,280,000 1,655,000
General and administrative 439,000 225,000 707,000 402,000
Depreciation and amortization 158,000 107,000 310,000 205,000
Interest expense 212,000 164,000 435,000 317,000
- ------------------------------------------------- ---------------- --------------- --------------- ---------------
Loss from continuing operations
before income tax expense (benefit) (94,000) (28,000) (65,000) (59,000)
Income tax expense (benefit) --- --- --- ---
- ------------------------------------------------- ---------------- --------------- --------------- ---------------
Loss from continuing operations (94,000) (28,000) (65,000) (59,000)
- ------------------------------------------------- ---------------- --------------- --------------- ---------------
Discontinued operations:
Loss from operations, net of income tax --- (21,000) --- (24,000)
(Loss)gain on disposal, net of income tax --- --- --- ---
- ------------------------------------------------- ---------------- --------------- --------------- ---------------
Loss from discontinued operations --- (21,000) --- (24,000)
- ------------------------------------------------- ---------------- --------------- --------------- ---------------
Net loss $ (94,000) $ (49,000) $ (65,000) $ (83,000)
================================================= ================ =============== =============== ===============
Net loss per share:
Continuing operations $ (0.03) $ (0.01) $ (0.02) $ (0.02)
Discontinued operations 0.00 (0.01) 0.00 (0.01)
- ------------------------------------------------- ---------------- --------------- --------------- ---------------
Net income (loss) per share: $ (0.03) $ (0.02) $ (0.02) $ (0.03)
================================================= ================ =============== =============== ===============
Weighted average number of common
and common equivalent shares outstanding 3,031,360 2,929,650 3,009,963 2,929,132
================================================= ================ =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 2
<PAGE>
<TABLE>
<CAPTION>
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
For the six months ended June 30,
1998 1997
-------------- ---------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (65,000) $ (83,000)
Adjustments to reconcile net loss to
net cash provided by (used for) operating activities
Depreciation and amortization 310,000 205,000
Writeoff of development and acquisition costs 111,000 ---
Loss on sale of property --- 2,000
Changes in operating assets and liabilities:
Decrease (increase) in -
Accounts receivable (134,000) (162,000)
Prepaid expenses and other (179,000) (147,000)
Increase (decrease) in accounts payable,
accrued liabilities and other 66,000 (14,000)
- ------------------------------------------------------ -------------- ---------------
Net cash provided by (used in) operating activities 109,000 (199,000)
- ------------------------------------------------------ -------------- ---------------
INVESTING ACTIVITIES:
Proceeds from maturity of certificate of deposit 500,000 ---
Capital expenditures (536,000) (764,000)
Proceeds from payments on notes receivable 4,000 ---
Proceeds from disposition of property --- 19,000
- ------------------------------------------------------ -------------- ---------------
Net cash used in investing activities (32,000) (745,000)
- ------------------------------------------------------ -------------- ---------------
FINANCING ACTIVITIES:
Net cash advances (to) from affiliates --- (149,000)
Repayment of borrowings (2,874,000) (2,663,000)
Proceeds from borrowings 2,914,000 3,650,000
Proceeds from warrant and option exercise 149,000 5,000
- ------------------------------------------------------ ------------- ---------------
Net cash provided by financing activities 189,000 843,000
- ------------------------------------------------------ ------------- ---------------
NET INCREASE (DECREASE) IN CASH 266,000 (101,000)
CASH, BEGINNING OF PERIOD 1,458,000 314,000
- ------------------------------------------------------ ------------- ---------------
CASH, END OF PERIOD $ 1,724,000 $ 213,000
====================================================== ============= ===============
</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 specializing in operating private correctional facilities and
providing 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 community correctional
facilities and provides substance abuse services in seven additional
correctional facilities.
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 requires the use of
management'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 results could differ from those estimated.
Cash and Cash Equivalents -
The Company considers all highly liquid investments with original maturities
of three months or less when purchased and money market funds to be cash
equivalents.
Concentrations of Credit Risk -
Financial instruments potentially subjecting the Company to concentrations of
credit risk consist principally of temporary cash investments, accounts
receivable and notes receivable. The Company places its temporary cash
investments with high credit quality financial institutions and money market
funds and limits the amount of credit exposure to any one institution or fund.
However, the Company had a significant portion of its cash equivalents in one
money market fund and the short term certificate of deposit at one financial
institution at December 31, 1997. Concentrations of credit risk with respect to
accounts receivable are limited due to the fact that a significant portion of
the Company's receivables are from state governments. The Company maintains an
allowance for doubtful accounts for potential credit losses. Actual bad debt
expenses have not been material. Credit risk on a note receivable is partially
mitigated by the collateralization of the note by second lien on real estate.
Property and Equipment -
Property and equipment are recorded at cost. Expenditures for major additions
and improvements are capitalized, while minor replacements, maintenance and
repairs are charged to expense as incurred. When property and equipment is
retired or otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts and any resulting gain or loss is reflected in
current operations. Depreciation is provided using the straight-line method over
the following estimated useful lives:
Buildings and Improvements 40 Years
Furniture and Equipment 5 to 7 Years
Transportation Equipment 3 to 15 Years
Page 4
<PAGE>
Impairment losses are recorded on long-lived assets when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amounts. When required,
impairment losses are recognized based upon the estimated fair value of the
asset.
Income Taxes -
Deferred income taxes are recognized for the tax consequences in future years
of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the period in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
Revenue Recognition -
The Company recognizes revenues as services are provided. Revenues are earned
based upon the number of inmates on a per diem basis at the Company's
correctional facilities. Revenues are earned on a monthly contract basis for
substance abuse treatment services. All correctional and substance abuse
revenues are received monthly from various governmental agencies.
Deferred Development Costs -
Deferred development costs consist of costs that can be directly associated
with an anticipated contract and, if the recoverability from that contract is
probable, they are deferred until the anticipated contract has been awarded. The
development costs are deferred until the commencement of operations of the
facility or contract period and amortized over the anticipated life of the
contract (including option and renewal periods). Costs of unsuccessful or
abandoned contracts are charged to expense when their recovery is not considered
probable. Facility costs are incurred (after a contract is awarded) in
connection with the opening of new facilities under the contract. These costs
are capitalized from the date of award until commencement of operations and
amortized on a straight-line basis over the term of the contract.
Net Loss Per Common Share -
Basic loss per share has been computed on the basis of weighted average shares
outstanding during each period. Diluted loss per share for the three months and
six months ended June 30, 1998 and 1997 is the same as basic loss per share for
each period because assumed exercise of options, warrants and convertible
debentures would be anti-dilutive.
Interim Financial Statements -
The consolidated balance sheet as of June 30, 1998 and the statements of
operations for the three months and six months ended June 30, 1998 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 except for a writeoff of costs
associated with a terminated business acquisition described in Note 8.
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, 1997 Form 10-KSB filing. Footnote disclosures which would
substantially duplicate the disclosure contained in the most recent annual
report on Form 10-KSB have been condensed or omitted. The results of operations
for the three months and six months ended June 30, 1998, are not necessarily
indicative of the results that may be expected for the entire year ended
December 31, 1998.
Page 5
<PAGE>
NOTE 2. LONG-TERM DEBT
Long-term debt consists of the following:
June 30, December 31,
1998 1997
-------------- --------------
Revolving bank line of credit $ 330,000 $ 167,000
Notes payable to banks, collateralized by
equipment due in installments through
July 1999 with interest from 7.99% to 8.5% 86,000 89,000
Notes payable to banks, collateralized
by transportation equipment, due in
installments through March 2012
with interest ranging from 4.90% to 9.49%. 701,000 621,000
Notes payable to banks, collateralized
by land, buildings and improvements
due in installments through June 2012
with interest ranging from 8.5% to 11% 4,812,000 4,941,000
Note payable to an individual, unsecured,
with interest at 8.5%, due in full April 1999 160,000 160,000
-------------- --------------
6,089,000 5,978,000
Less - current maturities 1,766,000 849,000
-------------- --------------
$ 4,323,000 $ 5,129,000
============== ==============
The Company's revolving bank line of credit provides for aggregate maximum
borrowings of $750,000 and bears interest at 1% over national prime, (effective
rate of 9.5% at June 30, 1998 and December 31, 1997). The line of credit is
secured by the Company's Federal and state contract receivables. Payment of
dividends is restricted by terms of the Company's revolving credit facility. The
revolving bank line of credit matures June 5, 1999.
The Company refinanced a correctional facility in March 1998 for $1,730,000.
The note bears interest at 1.25% over national prime (effective rate of 9.75% at
June 30, 1998). The note is secured by a mortgage on one of the Company's
correctional facilities. Interest is due monthly on the note with all principal
advances and accrued interest due at April 15, 1999. The Company utilized
approximately $500,000 of the proceeds to repay existing debt on the
correctional facility. The remaining unfunded loan proceeds of $1,225,000 may be
drawn by the Company at any time prior to maturity.
The Company entered into a financing agreement in June 1998 to borrow up to
$1,730,000 to construct a new correctional facility. The note bears interest at
1.75% over national prime (effective rate of 10.25% at June 30, 1998). The note
is secured by a mortgage on the correctional facility. Interest is due monthly
on the note with all principal advances and accrued interest due at July 5,
1999. The Company has utilized $30,000 of the proceeds as of June 30, 1998. The
remaining unfunded loan proceeds of $1,700,000 may be drawn by the Company at
any time prior to maturity. Substantially all notes payable and long-term debt
has been personally guaranteed by the Company's CEO.
Page 6
<PAGE>
NOTE 3. CONVERTIBLE DEBENTURES
The Company completed a private placement of $4,150,000 of convertible
debentures on September 12, 1997. The debentures bear interest at 7.5% and
mature on September 12, 2007. The debentures may be redeemed by the Company at
any time after May, 2001 at 106.5% of principal, declining to 100% at maturity.
The debentures are convertible into common stock at any time until their
maturity at $3.00 per share.
NOTE 4. STOCKHOLDERS' EQUITY
The Company has outstanding 275,100 Class B stock purchase warrants providing
for the purchase of the Company's Class A common stock at a price of $6.00 per
share. The warrants may be exercised at any time until their expiration at 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 issued 1,000,000 Class C stock purchase warrants in August 1994,
in connection with a private placement. The placement provided for 100,000 Class
C stock purchase warrants reserved for underwriters. The Company issued an
additional 165,000 Class C stock purchase warrants in 1996 and 25,000 Class C
stock purchase warrants in 1997. The Company has issued 448,500 shares of common
stock upon the exercise of the Class C stock purchase warrants through June 30,
1998. The Company currently has 841,500 Class C stock purchase warrants
outstanding, including 100,000 warrants reserved for underwriters.
The Class C stock purchase warrants provide for the purchase of the Company's
Class A common stock at any time until their expiration at December 30, 1999.
The exercise price of the class C warrants is $3.33 per share as of June
30,1998. The warrants may be redeemed by the Company upon certain events, for
$.01 per share.
The Company issued 200,000 Class D stock purchase warrants in August 1996, in
connection with the acquisition of the El Paso Intermediate Sanction Facility.
The Class D stock purchase warrants provide for the purchase of the Company's
Class A common stock at a price of $5.125 per share at any time until their
expiration at August 2, 2001. The warrants may be redeemed by the Company upon
certain events for $.01 per share.
The Company issued 79,000 Class E stock purchase warrants in September 1997,
in connection with the private placement of Convertible Debentures. The Class E
stock purchase warrants provide for the purchase of the Company's Class A common
stock at a price of $3.00 per share at any time until their expiration at
September 12, 2002. The warrants may be redeemed by the Company upon certain
events for $.01 per share.
A 1994 agreement provided for the issuance of an option for the issuance of
750,000 common stock purchase warrants to purchase Class A common stock at $1.50
per share for each dollar of Company debt guaranteed by the Company's CEO. The
warrants will have a five year term from the date of issuance. Management
believes that the warrants had no economic value when granted, and accordingly,
no amount has been assigned to such warrants in the financial statements.
NOTE 5. STOCK OPTION PLAN
The Company adopted a stock option plan (the "Plan") providing for the
issuance of 250,000 shares of Class A 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 Option Plan was registered with the Securities and
Exchange Commission in November 1995. The purpose of the Plan is to provide
continuing incentives to the Company's officers, key employees, and members of
the Board of Directors. The options generally vest over a four or five-year
period with a ten year expiration period. On December 1, 1996, the Company
amended its stock option plan, increasing the number of shares available under
the Plan to 600,000. There are currently outstanding non-statutory options
providing for the issuance of 492,900 shares of Class A common stock at exercise
prices ranging from $1.50 to $4.00 per share. Options providing for the issuance
of 139,260 shares were exercisable at June 30, 1998.
Page 7
<PAGE>
NOTE 6. LITIGATION
The Company is a party to litigation arising in the normal course of business.
Management believes that the ultimate outcome of these matters will not have a
material effect on the Company's financial condition or results of operations.
NOTE 7. SIGNIFICANT CONTRACT
The Company was awarded a five year contract in March 1998 with the Oklahoma
Office of Juvenile Affairs. The contract is to provide services for 80 youthful
delinquent male offenders ages 13 to 19. The Company will design, build and
operate a new medium security facility to provide for housing, education,
program and recreation areas for these offenders. The contract is expected to
generate annual revenues of approximately $3,600,000 beginning in the fourth
quarter of 1998. The contract is expected to generate revenues of $18,800,000
over a five year period. The Company will complete the construction of the
facility and commence operations under this contract in December 1998.
NOTE 8. TERMINATED ACQUISITION
The Company terminated its agreement to acquire certain assets of Rebound
Programs LLC in July 1998. The agreement was contingent upon criteria that could
not be satisfied. The Company incurred costs of approximately $100,000 related
to this acquisition. The Company recorded a $100,000 charge in the second
quarter of 1998 for these costs.
NOTE 9. CORPORATE NAME CHANGE
The Company's Board of Directors approved a corporate name change to Avalon
Correctional Services, Inc in July 1998. The Company will begin conducting
business under the new name immediately. The name was changed to reflect the
Company's focus on the business of private corrections, since all non
correctional operations have been divested or are held for sale. The name change
is subject to shareholder approval at next year's annual meeting. The amendment
of the name change in the articles of incorporation will be made after
shareholder approval.
Page 8
<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 business strategy is to focus on the private corrections
industry, expanding its operations into additional states through new Federal
and state contracts and selective acquisitions. This strategy was implemented in
the fourth quarter of 1996. The Company's non correctional operations have been
discontinued and all related assets have been sold or are held for sale. The
Company's 1998 results of operations include approximately $17,000 of costs
related to non correctional facilities held for sale.
Working capital at June 30, 1998 was $277,000 representing a current ratio of
1.10. This compares to working capital of $875,000 and a current ratio of 1.47
at December 31, 1997. The decrease in working capital from December 31, 1997 is
primarily due to refinancing a portion of the Company's long term debt over a
one year term in the second quarter of 1998.
The Company has approximately $1.7 million of cash available for new projects.
The Company also has $2.9 million available from lines of credit.
The Company believes it has adequate cash reserves and cash flow from
operations to meet its current cash requirements. The Company expects current
contracts to generate sufficient income to increase cash reserves, while
minimizing income taxes through the utilization of tax loss carryforwards.
Additional sources of funding may be required on a project funding basis. The
Company is currently negotiating with financial institutions to obtain financing
to fund future growth. The Company is also evaluating equity sources of
financing. The Company may receive equity from the exercise of stock options,
warrants, or conversion of debentures in 1998.
The Company is aware of the risk of computer error in the year 2000. Such
error could cause computers to recognize the year 2000 as 1900 and cause the
computer to fail in calculation or function. As a result, the Company has
reviewed its computer operations and have identified all computers and systems
that are not year 2000 compliant (y2k). The Company's operations are not reliant
on computers. The Company's primary exposure to y2k problems is in its financial
reporting area. The Company has determined that the cost of computer equipment
and software, including testing and implementation to become y2k compliant is
approximately $35,000. The Company intends to purchase, test and implement the
new equipment and software before January 1, 1999.
The Company's major customers are State and Federal correctional agencies. An
effort is being made to confirm y2k compliance of each agency and how this may
impact the Company. The Company has no reason to believe that its contracts with
State and Federal government agencies will have an adverse effect because of y2k
compliance.
Results of Operations -
Three Months Ended June 30, 1998 Compared to the Three Months Ended June 30,
1997-
Total revenues increased by 40% to $1.86 million for the three months ended
June 30, 1998 from $1.33 million for the three months ended June 30, 1997. The
increase was a result of the acquisition of the Turley Correctional Facility in
Tulsa, Oklahoma in October 1997, a new community transition program contract
awarded in June 1998 at the Ozark Correctional Facility in Fordland, Missouri,
increased revenues from the contract award to provide substance abuse counseling
in Fordland, Missouri in May 1997, and increased revenues from the Company's El
Paso operations.
Revenues in the second quarter of 1998 were enhanced by the Turley
Correctional Facility providing $315,000 of revenues, the Fordland, Missouri
substance abuse counseling contract providing increased revenues of $77,000 over
the second quarter of 1997, and the Company's El Paso operations providing
increased revenues of approximately $86,000 over the second quarter of 1997. The
new community transition program contract award accounted for $32,000 of
revenues in the second quarter of 1998.
Page 9
<PAGE>
The Company had a net loss for the three months ended June 30, 1998 of $94,000
or $.03 basic and diluted earnings per share, as compared to a net loss for the
three months ended June 30, 1997 of $49,000 or $.02 basic and diluted loss per
share. The Company's net loss was a result of the terminated acquisition.
Direct operating expenses increased by 33% for the three months ended June 30,
1998 over the three months ended June 30, 1997, primarily as a result of the
contract award for substance abuse counseling services at Fordland, Missouri,
and the acquisition of the Turley Correctional Center in Tulsa, Oklahoma. The
profit margin increased slightly to 38% for the three months ended June 30, 1998
from 35% for the three months ended June 30, 1997.
Discontinued Operations. The Company made the decision to discontinue all non
correctional operations in the fourth quarter of 1996. The Company's strategy is
to focus on opportunities in the corrections industry. All actual and expected
losses through the first quarter of 1998 have been recorded in 1996 and 1997.
The Company currently has two non correctional facilities held for sale and
anticipate that these facilities will be sold in 1998. Second quarter 1998 costs
related to facilities held for sale were approximately $17,000 and are included
in continuing operations.
Corporate. General and administrative expenses increased by 95% to $439,000
for the three months ended June 30, 1998 from $225,000 for the three months
ended June 30, 1997. The majority of this increase was a result of the
terminated acquisition charges in the amount of $100,000. Excluding the
terminated acquisition charge to operations, general and administrative expenses
increased 51% primarily due to increased staffing to prepare for growth of new
facilities, contracts, and acquisitions. The additional costs resulted from the
Company's focus on corrections and implementing a strategy for growth through
new contracts and acquisitions.
The increase in interest expense of $48,000 for the three months ended June
30, 1998 over the second quarter of 1997 resulted from interest on the
convertible debentures. Depreciation and amortization expense have increased
commensurate with the growth of the correctional operations.
Six months ended June 30, 1998 compared to the six months ended June 30, 1997 -
Net loss for the six months ended June 30, 1998 was $65,000 or $.02 per share
as compared to a loss of $83,000 or $.03 per share in 1997. The loss in 1998 was
primarily due to the writeoff of certain costs related to the terminated
acquisition.
Revenues from continuing operations increased by 46% in 1998 or by $1,147,000
compared to 1997. Revenue was $3,667,000 in 1998 compared to $2,520,000 in 1997.
Operating expenses from continuing operations increased by $625,000. Both
revenue and operating expense increases were primarily a result of the
acquisition of the Turley Correctional Facility, increased revenues from the
substance abuse counseling contract in Fordland, Missouri which began in May
1997 and a new community transition program contract at the Ozark Correctional
Facility in Fordland, Missouri.
General and administrative expenses increased by $305,000 or 76% in 1998. This
increase was due to the $100,000 charge relating to the terminated acquisition,
and staffing and development costs associated with the Company's growth plan.
Interest expense increased approximately $118,000 due to the interest related to
the convertible debentures issued in the third quarter of 1997. Depreciation and
amortization expense have increased commensurate with the growth of the
correctional operations.
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 - None.
Item 4. Submission of Matters to a Vote of Security Holders - None.
Item 5. Other Information - None.
Item 6. a) Exhibits
Exhibit 27. Financial Data Schedule.
b) Reports on Form 8-K -
None filed in the second quarter of 1998
Page 11
<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: August 14, 1998 AVALON COMMUNITY SERVICES, INC.
By: /s/ Jerry M. Sunderland
-----------------------------
Jerry M. Sunderland, President
By: /s/ Paul Voss
------------------------------------
Paul Voss, Vice President of Finance
Page 12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,724,000
<SECURITIES> 0
<RECEIVABLES> 807,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,139,000
<PP&E> 10,715,000
<DEPRECIATION> 1,336,000
<TOTAL-ASSETS> 13,657,000
<CURRENT-LIABILITIES> 2,862,000
<BONDS> 0
0
0
<COMMON> 3,000
<OTHER-SE> 2,319,000
<TOTAL-LIABILITY-AND-EQUITY> 13,657,000
<SALES> 0
<TOTAL-REVENUES> 1,860,000
<CGS> 0
<TOTAL-COSTS> 2,987,000
<OTHER-EXPENSES> 310,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 212,000
<INCOME-PRETAX> (94,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (94,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (94,000)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
