As filed with The Securities and Exchange Commission on December 4, 1998
Registration No. 333-13103
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 4 TO
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)
_______________________
<TABLE>
<CAPTION>
Calculation of Registration Fee
Proposed Proposed Maximum
Title of Each Class of Amount to Maximum Aggregate Amount of
Securities to Be Registered be Registered Offering Price Offering Price Registration Fee
Per Share
- ------------------------------------------- ----------------- ---------------- --------------------- ----------------
<S> <C> <C> <C> <C>
Common Stock (1) 1,000,000 $1.50 $1,500,000.00 $ 517.24
Common Stock (1) 50,000 $5.125 $ 256,150.00 $ 88.35
Placement Agent Warrant Common Stock (1) 100,000 $1.50 $ 150,000.00 $ 51.72
Common Stock on Exercise of Warrant (1) 100,000 $3.19 $ 319,000.00 $ 120.69
Common Stock Purchase Warrant Series B (1) 275,100 $0.01 $ 2,751.00 $ 0.95
Common Stock on Exercise of Warrant (1) 275,100 $5.50 $1,650,600.00 $ 569.17
Common Stock Purchase Warrant Series C (1) 737,500 $0.01 $ 7,375.00 $ 2.79
Common Stock on Exercise of Warrant (1) 737,500 $3.19 $2,352,625.00 $ 975.60
Common Stock Purchase Warrant Series D (1) 200,000 $0.01 $ 2,000.00 $ 0.69
Common Stock on Exercise of Warrant (1) 200,000 $4.20 $ 840,000.00 $ 353.45
Convertible Debentures (1) 4,150,000 $0.01 $4,150,500.00 $1,224.25
Common Stock on Conversion of Debentures (1) 1,383,333 $3.00 $4,150,500.00 $1,224.25
Placement Agent Warrant Common Stock (1) 79,000 $0.01
Common Stock on Exercise of Warrant (1) 79,000 $3.00 $ 237,000.00 $ 69.92
- ------------------------------------------- ----------------- ---------------- --------------------- ----------------
Registration Fee (2) $5,199.07
=========================================== ================= ================ ===================== ================
<FN>
(1) Securities carried forward from previous registration statements
(2) Paid with previous registrations
</FN>
</TABLE>
Pursuant to Rule 429(b), the Registrant has combined the Prospectus
with the Prospectuses in Form SB-2, Registration Number
33-83932 and Form S-2, Registration Number 333-42993
<PAGE>
<TABLE>
<CAPTION>
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 For 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 Indemni-
fication 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>
2
<PAGE>
PRELIMINARY AMENDED PROSPECTUS
AVALON COMMUNITY SERVICES, INC.
290,500 Redeemable Common Stock Purchase Warrants
2,724,933 Shares of Common Stock
$2,440,000 Convertible Debentures
Of the 1,362,600 shares of Common Stock (the "Common Stock") and the 211,500
Redeemable Common Stock Purchase Warrants (the "Warrants") of Avalon Community
Services, Inc. (the "Company") offered hereby, 211,500 Class C Warrants and
50,000 shares of Common Stock are being sold by certain security holders of the
Company. In addition, 100,000 shares of Common Stock and 100,000 Class C
Warrants are reserved for issuance by the Company to Westminster Securities
Corporation and its permitted assigns ("Westminster") upon the exercise by
Westminster of a warrant previously issued by the Company to Westminster in
connection with a private placement of securities in 1994 under Regulation D.
Upon issuance, the resale by Westminster of such shares and Warrants is
registered hereby. Except for the 50,000 shares of Common Stock held by certain
security holders of the Company , and except for the 100,000 shares of Common
Stock reserved for issuance to Westminster, (the Selling Shareholders), the
remaining balance of 1,212,600 shares of Common Stock are issuable by the
Company upon the exercise of the Warrants. Unless the context otherwise
requires, the holders of the Common Stock and Warrants 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."
Of the $2,440,000 Convertible Debentures, the 79,000 Class E Warrants, and the
1,362,333 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 1,362,333 shares offered hereby,
1,283,333 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 of September 12, 2007. 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 1,283,333 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 $4.00 per share on
November 16, 1998. 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 COMMISSION PASSED 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................................... $1.50 $-0- $-0- $1.50
Offering Price per Share of $6.00 (B) $-0- $-0- $6.00 (B)
Common Stock Underlying $3.19 (C) $-0- $-0- $3.19 (C)
Warrants(4)............................... $4.20 (D) $-0- $-0- $4.20 (D)
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.................................... $-0- $-0-
============================================== ============ ============== ============ ===========
<FN>
(1) Before deducting expenses payable by the Company and Selling Shareholders, which are estimated at
$16,000.
(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 $16,000. 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 because of future stock dividends, stock distributions,
stock splits or similar capital readjustments.
The date of this Prospectus is December 4, 1998
<PAGE>
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, 1997 (File No. 0-20307),
(B) Forms 10-QSB filed on April 24, 1998, August 17, 1998, and November 13,
1998
(C) Form 8-K and an amendment thereto filed on March 19, 1998 and May 15,
1998 respectively,
(D) Form 8-K filed on October 1, 1998, and
(E) Proxy Statement for Annual Meeting of Stockholders to be held May 29,
1998.
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.
<PAGE>
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, a
150-bed adult residential community corrections 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 was awarded a five year contract
in March 1998 with the Oklahoma Office of Juvenile Affairs for 80 male youthful
offenders. The Company is in process of completing construction of a new
facility and will commence operations under the contract in the first quarter of
1999. The Company was awarded a new contract in July 1998 with the Texas
Department of Criminal Justice for an additional 200 adult male offenders. The
Company is in process of constructing a new facility and will commence
operations under this contract in the second quarter of 1999.
The Offering
Securities Offered by
Company........................ Up to 2,724,933 shares of Common Stock upon
the exercise of the all outstanding Warrants
and the conversion of any Debentures.
Securities Offered by Selling
Securities Holders ............ 211,500 Class C Warrants and 79,000 Class E
Warrants, plus any shares of Common Stock
issued pursuant to the exercise of Class B,
Class C, Class D and Class E Warrants by any
persons who acquired the Warrants in the
original private placement of such Warrants
or by the placement agent upon its exercise
of its placement agent warrant. The Class A
Warrants previously registered have expired.
100,000 shares of Common Stock and 100,000
Class C Warrants are issuable pursuant to
and upon the exercise of a placement agent's
warrant agreement. Said warrants are
included in the 325,000 Class C Warrants
listed above. $2,440,000 Convertible
Debentures, plus any shares of Common Stock
issued pursuant to the conversion of the
Convertible Debentures.
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 B Warrant will entitle the holder
to purchase one share of Common Stock at a
price of $6.00 per share, subject to certain
adjustments. The Warrants are exercisable at
any time until their expiration in March,
1999. 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."
Each Class C Warrant will entitle the holder
to purchase one share of Common Stock at a
price of $3.19 per share, subject to certain
adjustments. The Warrants are exercisable at
any time until their expiration December 30,
1999. 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."
Each Class D Warrant will entitle the holder
to purchase one share of Common Stock at a
price of $4.20 per share, subject to certain
adjustments. The Warrants are exercisable at
any time until their expiration in August,
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."
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 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......... 4,664,328 Class A shares.
Common Stock Outstanding
after this Offering............ 7,389,261 Class A shares if all outstanding
Warrants are exercised and all outstanding
Debentures are converted.
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
<PAGE>
<TABLE>
<CAPTION>
Summary Financial Data
(dollars in thousands except for per share amounts)
Nine Months
Year Ended Ended
December 31, September 30,
---------------------- -------------
1996 1997 1998
---------- ---------- -------------
Statement of Operations Data: (Reclassified) (Unaudited)
<S> <C> <C> <C>
Revenues From Continuing Operations................. $3,313 $5,878 $5,578
Income (Loss) From Continuing Operations............ (60) 1,853) (166)
Income (Loss) From Continuing Operations
Per Common Share.................................. (0.02) (0.63) (0.05)
Income (Loss) From Discontinued Operations.......... (974) (728) ---
Income (Loss) From Discontinued Operations
Per Common Share.................................. (0.36) (0.25) 0.00
</TABLE>
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997 1998
---------- ---------- -------------
Balance Sheet Data:
<S> <C> <C> <C>
Total Assets........................................ $9,523 $13,395 $29,117
Long-Term Debt,
less Current Maturities .......................... 5,861 5,129 14,484
Convertible Debentures ............................. - 4,150 3,850
Stockholder's Equity................................ 2,695 2,237 2,500
</TABLE>
<PAGE>
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 50% 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.
The current contract with the Oklahoma Department of Corrections formally ended
on June 10, 1998. However, the Oklahoma Department of Corrections is in the
process of implementing a "flat rate" compensation methodology. The
implementation of this flat rate compensation program is still subject to
certain administrative proceedings. Renewal of the Company's contracts under the
new flat rate compensation has been delayed because of internal delays at the
Oklahoma Department of Corrections. The Company continues to operate on a month
to month basis and has been assured by the Oklahoma Department of Corrections
that its contracts will be renewed on terms no less favorable than the prior
fiscal year 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 re-accreditation. 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 a certain
debt agreement, the Company is limited to a leverage of 75% of total cost of any
acquisition.
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.
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
salaries of $60,000 and $85,000, respectively, 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.
Control by Donald Smith and RSTW Partners III. The Company's Chief Executive
Officer, Donald E. Smith, owns 1,054,000 shares of Common Stock which is
approximately 23% of all Common Stock presently outstanding. An additional
750,000 warrants may be issued to Mr. Smith in consideration of his guarantee of
Company obligations which would further increase his voting percentage, if
exercised. See "DESCRIPTION OF SECURITIES - Warrants." On September 16, 1998,
the Company completed a private placement of equity and debt with RSTW Partners
III. As a result of this private placement, RSTW received 1,622,448 shares of
Common Stock, which is approximately 35% of all Common Stock presently
outstanding. Each of the parties owns substantial interest in the Company and
the combined interests represent a majority of the stock outstanding.
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 and
1,000,000 of preferred stock, of which 4,664,328 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 (2,725,638 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 $2,581,000 for the year ended
December 31, 1997 of which $1,853,000 was from continuing operations and
$728,000 from discontinued operations. There was a loss of $166,000 in the nine
months ended June 30, 1998, primarily due to the writeoff of certain costs
related to a terminated acquisition. 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., is a Nevada Corporation owning and operating
private correctional facilities. Avalon Community Services, Inc. and its wholly
owned subsidiaries ("Avalon" or the "Company") specialize in operating private
community correctional facilities and providing intensive correctional
programming. Avalon currently operates facilities and manages programs in
Oklahoma, Texas, Missouri, and Nebraska with plans to significantly expand into
additional states. Avalon's business strategy is designed to escalate Avalon
into a dominant role as a provider of community correctional services. Avalon's
development plan is to expand operations through new state and Federal contracts
and selective acquisitions to capitalize on the current rapid growth trends in
the private corrections industry.
The private correctional services industry has experienced significant growth
in recent years. During 1995 there were 3.8 million individuals on probation or
parole. This population is expected to increase to over 7 million by the year
2005. Annual correction industry growth rates have been approximately 7 to 8
percent per year. This growth rate exceeds the general population growth because
of increasing crime rates, higher conviction rates and longer prison sentences.
Avalon contracts with various government agencies to provide community
corrections services. Studies have documented a 10 to 30 percent savings to
government agencies as a result of utilizing private corrections providers to
build and operate correctional facilities. Avalon management believes its
background and abilities to build and operate community correctional facilities
and provide correctional programing position the Company for substantial future
growth in the corrections industry.
Avalon currently owns and operates 805 private community corrections beds. The
Company owns and operates three minimum-security correctional facilities (655
beds) in Oklahoma and one medium-security correctional facility (150 beds) in
Texas. Avalon believes it is the largest private provider of community
correctional services in Oklahoma. The Avalon facilities provide numerous
programs for offenders generally serving the last six months of their sentence.
Avalon provides contract agencies the basic services relating to the security,
detention and care of inmates, and a broad range of rehabilitative programs to
reduce recidivism. The provided programming includes substance abuse treatment
and counseling, vocational training, work release programs, basic educational
programs, job and life skill training, and reintegration services.
Avalon also provides intensive substance abuse treatment services to inmates
in six medium security correctional facilities in Nebraska and one medium
security correctional facility in Missouri. Intensive programming is an
essential part of community based corrections. Avalon has provided substance
abuse programs in facilities for over thirteen (13) years. Avalon's management
has been engaged in the business of providing private correctional services
since 1985.
Avalon's management made the decision to divest all non correctional services
at the end of 1996 to allow management to focus exclusively on private
corrections. Avalon is aggressively developing its private correctional
operations through selective acquisitions and responding to requests of
governmental agencies.
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
If all of the Debentures are converted, the Company will not realize any
additional proceeds but will have an adjustment on its balance sheet through a
reduction in liabilities and an increase in stockholder's equity. Assuming all
Warrants are exercised, the Company would receive proceeds of approximately
$5,399,225 before paying approximately $16,000 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 would be used by the Company for working capital and
general corporate purposes. The Company will not receive any of the proceeds
from the sale of shares or of Warrants by the Selling Shareholders.
The Company will not receive any of the proceeds from the sale of shares of
Common Stock, Warrants, or Debentures 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, 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
December 31, 1997 5 5/16 3 3/4
March 31, 1998 4 7/8 3 5/8
June 30, 1998 4 3/4 3 7/8
September 30, 1998 4 3/8 3
The average of the bid and asked prices for the Common Stock, as reported on
the NASDAQ SmallCap Market System was $4.00 per share on November 16, 1998. The
Company had approximately 780 record holders of its common stock as of November
16, 1998.
CAPITALIZATION
The following table sets forth the historical capitalization of the Company as
of December 31, 1997 and September 30, 1998, 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.
<TABLE>
<CAPTION>
December 31, 1997 September 30,1998
----------------- -----------------
(Unaudited)
(In thousands)
<S> <C> <C>
of Long-Term Debt.......................................... $ 849 $1,546
======== ======
Long-Term Debt, less Current Maturities..................... $5,129 $14,484
======= =======
Convertible Debentures ..................................... $4,150 $3,850
======= ======
Redeemable Class A Common Stock, $.001 par value
none and 1,622,448 shares issued and outstanding........... $ --- $4,124
========= ======
Stockholders' Equity
Common Stock, 24,000,000 shares authorized:...............
Class A, par value $.001, 2,982,170 and 4,664,328
shares issued and outstanding less 1.622,448 shares
subject to repurchase.................................. 3 3
Paid-In Capital........................................... 6,189 6,351
Accumulated Deficit....................................... (3,955) (3,854)
--------- --------
Total Stockholders' Equity.............................. $ 2,237 $ 2,500
========= ========
</TABLE>
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data for the years ended December 31, 1996
and 1997 and the interim period ended September 30, 1998, 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>
Year Ended Nine Months Ended
December 31, September 30,1998
---------------- -----------------
1996 1997 (Unaudited)
---- ----
Statement of Operations Data: (Reclassified)
(dollars in thousands except per share amounts)
<S> <C> <C> <C>
Revenues From Continuing Operations...................... $3,313 $5,878 $5,578
Income (Loss) From Continuing Operations................. (60) (1,853) (166)
Income (Loss) From Continuing Operations
Per Common Share....................................... (0.02) (0.63) (0.05)
Income (Loss) From Discontinued Operations............... (974) (728) ---
Income (Loss) From Discontinued Operations
Per Common Share....................................... (0.36) (0.25) 0.00
</TABLE>
<TABLE>
<CAPTION>
December 31, September 30,1998
---------------- -----------------
1996 1997 (Unaudited)
---- ----
Balance Sheet Data:
<S> <C> <C> <C>
Total Assets............................................. 9,523 $13,395 $29,117
Long-Term Debt,
less Current Maturities ............................... 5,861 5,129 14,484
Convertible Debentures................................... --- 4,150 3,850
Stockholder's Equity..................................... 2,695 2,237 2,500
</TABLE>
<PAGE>
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 $79,000 of costs
related to non correctional facilities held for sale.
Working capital at September 30, 1998 was $12,162,000 representing a current
ratio of 3.92. This compares to working capital of $875,000 and a current ratio
of 1.47 at December 31, 1997. The increase in working capital from December 31,
1997 is primarily due to the $15 million private placement of debt and
redeemable common stock completed on September 16, 1998. The Company plans to
utilize this capital to expand its business through development of new contracts
and acquisitions.
The Company has approximately $14.9 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. The Company is
currently negotiating with financial institutions to obtain additional 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.
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 primary exposure to y2k
problems is in its financial reporting area. The Company has purchased and
ordered computer equipment and software to become fully y2k compliant. The cost
of this equipment, including testing and implementation to become y2k compliant
is expected to be approximately $15,000. The Company will 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 September 30, 1998 Compared to the Three Months Ended
September 30, 1997-
Total revenues increased by 27% to $1.91 million for the three months ended
September 30, 1998 from $1.51 million for the three months ended September 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, and increased revenues from the Company's El Paso operations.
Revenues in the third quarter of 1998 were enhanced by the Turley Correctional
Facility providing $341,000 of revenues and the Company's El Paso operations
providing increased revenues of approximately $66,000 over the third quarter of
1997. The new community transition program contract award beginning in June
1998, accounted for $99,000 of revenues in the third quarter of 1998.
The Company had a net loss for the three months ended September 30, 1998 of
$101,000 or $.03 basic and diluted earnings per share, as compared to a net loss
for the three months ended September 30, 1997 of $1,806,000 or $.61 basic and
diluted loss per share. The Company's net loss was primarily due to development
costs and other administrative expenditures for the Company's growth through
development of new projects and acquisitions. The loss in 1997 was primarily the
result of an immediate recognition of a discount on convertible debentures
issued in the third quarter of 1997.
Direct operating expenses increased by 31% for the three months ended
September 30, 1998 over the three months ended September 30, 1997, primarily as
a result of the contract award for the community transition program at Fordland,
Missouri, and the acquisition of the Turley Correctional Center in Tulsa,
Oklahoma in October 1997. The gross profit margin decreased slightly to 35% for
the three months ended September 30, 1998 from 37% for the three months ended
September 30, 1997. The majority of the decrease in the gross profit margin was
a result of the start up expenditures for the Company's new contract awards.
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 were recorded in 1996 and 1997. The
Company currently has two non correctional facilities held for sale and
anticipates one facility will be sold in 1998. Third quarter 1998 costs related
to facilities held for sale were approximately $48,000 and are included in
continuing operations.
Corporate. General and administrative expenses increased to $245,000 for the
three months ended September 30, 1998 from $201,000 for the three months ended
September 30, 1997. The majority of this increase was a result of increased
staffing to manage the Company's development and expansion. 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 $89,000 for the three months ended
September 30, 1998 over the third quarter of 1997 resulted from interest on the
convertible debentures issued in August and September of 1997, and interest
expense incurred on the private placement debt issued on September 16, 1998.
Immediate amortization of the discount on the convertible debentures in 1997
resulted in a $1.8 million charge to earnings in the third quarter of 1997.
Depreciation and amortization expense have increased commensurate with the
growth of the correctional operations.
Nine months ended September 30, 1998 compared to the nine months ended September
30, 1997 -
Net loss for the nine months ended September 30, 1998 was $166,000 or $.05 per
share as compared to a loss of $1,889,000 or $.64 per share in 1997. The loss in
1998 was primarily due to the writeoff of certain costs related to a terminated
acquisition and development costs incurred to obtain and develop new contracts.
The loss in 1997 was primarily the result of an immediate recognition of a
discount on convertible debentures issued in the third quarter of 1997.
Revenues from continuing operations increased by 39% in 1998 or by $1,552,000
compared to 1997. Revenue was $5,578,000 in 1998 compared to $4,026,000 in 1997.
Operating expenses from continuing operations increased by $941,000. Both
revenue and operating expense increases were primarily a result of the
acquisition of the Turley Correctional Facility and a new community transition
program contract at the Ozark Correctional Facility in Fordland, Missouri. The
gross profit margin increased to 37% for the nine months ended September 30,
1998 from 36% for the nine months ended September 30, 1997.
General and administrative expenses increased by $205,000 in 1998. This
increase was due to staffing and administrative costs associated with the
Company's growth plan. Interest expense increased approximately $207,000 due to
the interest related to the convertible debentures issued in the third quarter
of 1997 and the private placement debt issued on September 16, 1998. Immediate
amortization of the discount on the convertible debentures in 1997 resulted in a
$1.8 million charge to earnings in the third quarter of 1997. Depreciation and
amortization expense have increased commensurate with the growth of the
correctional operations.
SELLING SECURITY HOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Debentures and Warrant holders as of November 16,
1998 by the securities holders 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 Donald E. Smith, the Chief
Executive Officer of the Company, who is custodian for the Warrants for his
children (for which he disclaims any beneficial interest), Westminster
Securities Corporation who acted as a placement agent for the Company in a 1994
private placement and in the private placement of the Debentures, and Protrust
Equity Growth Fund I LP, whose principal director, Mark S. Cooley, is also a
director of the Company.
<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>
ProTrust Equity Growth Fund, I, L.P. Debenture 2,000,000 48.19 2,000,000 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 --
Pio Verges Debenture 25,000 * 25,000 0 --
Ralph & Jean Sorrentino Debenture 50,000 1.20 50,000 0 --
Mark Berg Debenture 50,000 1.20 50,000 0 --
George E. Groehsl Debenture 45,000 * 45,000 0 --
John D. Kilmartin, Jr. C Warrant 40,000 3.60 40,000 0 --
Paul & Felicia A. Pappadio C Warrant 10,000 * 10,000 0 --
Donald E. Smith, Custodian C Warrant 10,000 * 10,000 0 --
Westminster Securities Corporation C Warrant 100,000 9.10 100,000 0 --
Commercial Ventures, Inc. C Warrant 1,500 * 1,500 0 --
Myrna Trickey C Warrant 25,000 2.80 25,000 0 --
MLPF&S Custodian for
Charles Thomas SEP C Warrant 25,000 2.80 25,000 0 --
RECOR, Inc. Common 22,500 * 22,500 0 --
Edwin Bruce Lowman II. Common 22,500 * 22,500 0 --
R.P. Pearce, Jr.. Common 5,000 * 5,000 0 --
Westminster Securities Corporation E Warrant 79,000 100.00 79,000 0 --
- -----------
*Less than 1% of outstanding security
</TABLE>
DESCRIPTION OF SECURITIES
The Company is authorized to issue 24,000,000 shares of common stock par value
$0.001 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 16,1998 there were 4,664,328 shares of Common Stock
outstanding.
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. On September 16,
1998, the Company sold 1,622,448 shares of redeemable common stock to RSTW
Partners III, as part of a private placement of equity and debt. These shares
are subject to repurchase by the Company after five years from the date of
issuance at the fair value, as defined in the agreement, under certain
circumstances or if the Company fails to meet certain covenants required by the
agreements.
Class B Common Stock
- --------------------
The Company created a Class B common stock in connection with the acquisition
of two affiliated entities, in 1993 and the guaranty of certain Company debt
through 1996. 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. These 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 were 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 in 1994, Class C Warrants to
purchase 165,000 shares of Common Stock in settlement of a lawsuit and for
professional services and Class C Warrants to purchase 25,000 shares of Common
Stock in settlement of an employment dispute with a former employee. 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. In 1997, 33,000 Class C
Warrants were exercised. In 1998, 42,500 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 $3.19 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 $0.17 per share pursuant to the anti-dilution provisions discussed
above. In September of 1998, as a consequence of the Company's private placement
of redeemable equity and debt, the exercise price was reduced by $0.14 per share
pursuant to the anti-dilution 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. 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 $4.20 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 $5.125 per share, however, in September of 1998, as a consequence of the
Company's private placement of redeemable equity and debt, the exercise price
was reduced by $.925 per share pursuant to the anti-dilution 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
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 in 2002. See "RISK FACTORS -
Non-Registration in Certain Jurisdictions of Shares Underlying the 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, of which $300,000 was
retired in September, 1998. 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 1,283,333 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 filed with the Securities and Exchange Commission a registration
statement which was declared effective on January 13, 1998 with respect to the
resale, from time to time, of the Common Stock issuable upon conversion of the
Debentures. The Company agreed to keep such registration statement effective
until three years from the latest date of original issuance of the Debentures.
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 $2,440,000 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 a 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 1,362,600 shares of Common Stock
and the 211,500 Warrants being offered hereby for the benefit of the Selling
Stockholders were originally issued by the Company in (a) the Company's initial
public offering wherein the Class A and Class B Warrants were sold along with
Common Stock to the public, (b) a private placement of 50 units comprised of
Common Stock and Class C Warrants to "accredited investors" pursuant to
Regulation D promulgated by the Securities and Exchange Commission, and (c) by
the Company under an asset purchase contract and in settlement of a pending
litigation against the Company. Each unit in the private placement consisted of
20,000 shares of Common Stock and 20,000 Class C Warrants, and were sold on a
best-efforts basis by Westminster at a price of $30,000 per unit. The private
placement was completed in August, 1994. 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 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 2,724,933 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. Mark
Robertson beneficially owns 500 shares of Common Stock.
EXPERTS
The consolidated balance sheets of Avalon Community Services, Inc. and
subsidiaries as of December 31, 1996 and December 31, 1997 and the related
consolidated statements of operations, stockholders' equity and cash flow for
the years 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.
<PAGE>
======================================== =====================================
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.
290,500 REDEEMABLE
COMMON STOCK PURCHASE WARRANTS
---------------------- 2,724,933 SHARES OF COMMON STOCK
$2,440,000 CONVERTIBLE DEBENTURES
TABLE OF CONTENTS
PROSPECTUS
PROSPECTUS SUMMARY............ 4
RISK FACTORS.................. 7
THE COMPANY................... 10
USE OF PROCEEDS............... 11 December 4, 1998
DIVIDEND POLICY............... 11
PRICE RANGE OF COMMON STOCK... 12
CAPITALIZATION................ 13
SELECTED FINANCIAL DATA....... 14
MANAGEMENT DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION.................... 15
SELLING STOCKHOLDERS.......... 17
DESCRIPTION OF SECURITIES..... 18 13401 Railway Drive
PLAN OF DISTRIBUTION.......... 22 Oklahoma City, Oklahoma 73114
LEGAL MATTERS................. 23 (405) 752-8802
EXPERTS ..................... 23
======================================== =====================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
14. Other Expenses of Issuance and Distribution.(1)
SEC Filing Fees(2)........................................ $ 5,199.07
Registrar and Transfer Agent Fee.......................... 500.00
Printing and Engraving.................................... 500.00
Legal Fees(2)............................................. 7,000.00
State Registration Fees................................... 500.00
Accounting Fees........................................... 2,000.00
Miscellaneous Fees........................................ 300.93
-------------
Total................................................... $ 16,000.00
=============
- ----------
(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) Amendment to Registrant's Articles of Incorporation dated December
31, 1995
(v) Unanimous Consent of Board of Directors Authorizing Extension of
Expiration Dates of Class "A" and Class "B" Redeemable Warrants (3)
(vi) 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 "B" Redeemable Warrant (1)
(iii) Form of Class "B" Warrant Agreement (1)
(iv) Form of Class "C" Redeemable Warrant (6)
(v) Form of Class "C" Warrant Agreement (6)
(vi) Form of Class "D" Redeemable Warrant (7)
(vii) Form of Class "D" Warrant Agreement (7)
(viii)Form of Class "E" Warrant Agreement (9)
(ix) Form of Convertible Debenture Agreement (9)
10. (i) Contract between Southern Correction Systems, Inc. and the Oklahoma
Department of Corrections for halfway house services for the year
ended June 30, 1998 (6)
(ii) Contract between Southern Corrections Systems, Inc. and the
Oklahoma Department of Corrections for public works inmates for the
year ended June 30, 1998 (6)
(iii) Contract between Southern Corrections Systems, Inc. and the
Oklahoma Department of Corrections for halfway house services for
the year ended June 30, 1998. (6)
(iv) Stock Option Plan adopted by Board of Directors on August 16, 1994
(6)
(v) Placement Agent Agreement dated May 15, 1994, between Registrant
and Westminster Securities Corporation (6)
(vi) Change of Control Agreement between Donald E. Smith and Avalon
Community Services, Inc. dated August 25, 1997. (7)
(vii) Employment Agreement with Donald E. Smith dated August 8, 1997. (7)
(viii)Employment Agreement with Jerry M. Sunderland dated August 8, 1997
(7)
(ix) Letter of Acceptance and Notice of Award dated February 24, 1997 to
Avalon Community Services, Inc. from the Missouri Department of
Corrections. (7)
(x) Notice of Award dated March 3, 1998 to Southern Corrections
Systems, Inc. from the Oklahoma Office of Juvenile Affairs. (10)
(xi) Agreement dated June 1, 1998 between Southern Corrections Systems,
Inc. and the Texes Department of Criminal Justice. (11)
(xii) Agreements dated September 16, 1998 between Avalon Community
Services, Inc. and RSTW Partners III. (12)
16. (i) Letter re: Change in Certified Accountant (8)
21. (i) Subsidiaries of Registrant (5)
23. (i) Consent of Grant Thornton LLP - bound in Registration Statement
(ii) Consent of Robertson & Williams, Inc. - bound in Registration
Statement
24. Power of Attorney
Footnotes:
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 the Registrant's Form 10-KSB
for the 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 herein by reference to the Registrant's Registration
Statement on Form S-2 Amendment No. 1, dated April 16, 1996 and
amended.
8) Incorporated herein by reference to the Registrant's Form 8-K dated
March 4, 1997.
9) Incorporated herein by reference to the Registrant's Form S-2 dated
December 22, 1997.
10) Incorporated herein by reference to the Registrant's Form 8-K dated
March 19, 1998.
11) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-2 dated September 14, 1998.
12) Incorporated herein by reference to the Registrant's Form 8-K dated
October 1, 1998.
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.
<PAGE>
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 2, 1998.
(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 3, 1998
- -------------------- and Director
Donald E. Smith
\Jerry M. Sunderland President and Director December 2, 1998
- --------------------
Jerry M. Sunderland
\Paul Voss Vice President of Finance December 2, 1998
- ---------------------
Paul Voss
\Robert O. McDonald Director December 2, 1998
- ---------------------
Robert O. McDonald
\Mark S. Cooley Director December 2, 1998
- ---------------------
Mark S. Cooley
Exhibit 23 (i)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference into this Registration Statement
on Form S-2 (File Number 333- 13103) of our report dated February 27, 1998 on
our audit of the consolidated balance sheets of Avalon Community Services, Inc.
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flow for the years then
ended. We also consent to the reference to our firm under the caption "Experts."
Grant Thornton LLP
Oklahoma City, Oklahoma
December 2, 1998
Exhibit 23 (ii)
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 2, 1998
