SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
Commission File Number: 0-20307
AVALON CORRECTIONAL SERVICES, INC.
(Exact name of small business issuer as
specified in its charter)
Nevada 13-3592263
(State of Incorporation) (I.R.S. Employer I.D. Number)
13401 Railway Drive, Oklahoma City, Oklahoma 73114
(Address of principal executive offices)
(405) 752-8802
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 12 months (or such shorter
period as the registrant was required to file such reports), and (2) been
subject to such filing requirements for the past 90 days:
Yes X No ___
As of November 1, 1999, 4,670,630 shares of the issuer's Class A common
stock, par value $.001, were issued and outstanding.
Transitional Small Business Disclosure Format: Yes ___; No X .
<PAGE>
PART I - FINANCIAL INFORMATION
AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------ -------------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 677,000 $ 5,181,000
Restricted cash 798,000 ---
Investment in short term U.S. treasury bills 5,919,000
Accounts receivable, net 2,500,000 1,348,000
Current maturities of notes receivable 136,000 322,000
Prepaid expenses and other 538,000 100,000
------------------ -------------------
Total current assets 4,649,000 12,870,000
------------------ -------------------
Property and equipment, net 28,680,000 13,644,000
Other assets 4,811,000 2,251,000
------------------ --------------------
Total assets $ 38,140,000 $ 28,765,000
================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued liabilities and other $ 1,743,000 $ 2,026,000
Current maturities of long-term debt 493,000 2,201,000
------------------ -------------------
Total current liabilities 2,236,000 4,227,000
------------------ -------------------
Long-term debt, less current maturities 25,723,000 14,348,000
Convertible debentures 3,850,000 3,850,000
Redeemable Common Stock, $.001 par value
1,622,448 shares issued and outstanding 4,124,000 4,124,000
Stockholders' equity:
Common stock:
Par value $.001; 20,000,000 shares
authorized; 4,670,630 and 4,664,598 shares
issued and outstanding, less 1,622,448 shares
subject to repurchase. 3,000 3,000
Preferred stock; par value $.001; 1,000,000
shares authorized; none issued and outstanding --- ---
Paid-In capital 6,626,000 6,618,000
Accumulated deficit (4,422,000) (4,405,000)
------------------ -------------------
Total stockholders' equity 2,207,000 2,216,000
------------------ -------------------
Total liabilities and stockholders' equity $ 38,140,000 $ 28,765,000
================== ===================
</TABLE>
These accompanying notes are an integral part of these consolidated
financial statements.
Page 1
<PAGE>
AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 5,303,000 $ 1,911,000 $ 11,613,000 $ 5,578,000
---------------- ---------------- ---------------- ---------------
Costs and expenses
Direct operating 3,720,000 1,289,000 7,751,000 3,600,000
General and administrative 309,000 258,000 970,000 784,000
Development Costs 28,000 24,000 339,000 174,000
Depreciation and amortization 341,000 159,000 750,000 469,000
Interest expense 787,000 282,000 1,785,000 717,000
---------------- ---------------- ---------------- ---------------
Income (loss) from continuing operations
before income tax expense (benefit) $ 118,000 $ (101,000)$ 18,000 $ (166,000)
Income tax expense (benefit) --- --- --- ---
---------------- ---------------- ---------------- ---------------
Income (loss) before extraordinary items and
cumulative effect of change in accounting
principles $ 118,000 $ (101,000)$ 18,000 $ (166,000)
---------------- ---------------- ---------------- ---------------
Cumulative effect of change in accounting
principles --- --- --- (74,000)
Extraordinary loss from early retirement of
debt --- --- (35,000) ---
---------------- ---------------- ---------------- ---------------
Net income (loss) $ 118,000 $ (101,000)$ (17,000) $ (240,000)
================ ================ ================ ===============
Basic income (loss) per share:
Income (loss) before extraordinary loss and
cumulative effect of change in accounting
principle $ 0.03 $ (0.03)$ 0.00 $ (0.05)
Cumulative effect of change in
accounting principles --- --- --- (0.02)
Extraordinary loss from early
retirement of debt --- --- 0.00 ---
---------------- ---------------- ---------------- ---------------
Net income (loss) per share, basic $ 0.03 $ (0.03)$ 0.00 $(0.07)
================ ================ ================ ===============
Weighted average number of common
and common equivalent shares outstanding,
basic 4,670,630 3,305,888 4,669,540 3,106,828
================ ================ ================ ===============
Diluted income (loss) per share:
Income (loss) before extraordinary loss and
cumulative effect of change in accounting
principle $ 0.02 $ (0.03)$ 0.00 $ (0.05)
Cumulative effect of change in
accounting principles --- --- --- (0.02)
Extraordinary loss from early
retirement of debt --- --- 0.00 ---
---------------- ---------------- ---------------- ---------------
Net income (loss) per share, basic $ 0.02 $ (0.03)$ 0.00 $ (0.07)
================ ================ ================ ===============
Weighted average number of common
and common equivalent shares outstanding,
diluted 5,051,300 3,305,888 4,669,540 3,106,828
================ ================ ================ ===============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
Page 2
<PAGE>
AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended September 30,
1999 1998
------------------ -------------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (17,000) $ (240,000)
Adjustments to reconcile net loss to
net cash provided by (used for) operating activities
Depreciation and amortization 750,000 469,000
Amortization of debt issue costs 155,000 ---
Writeoff of development and acquisition costs 4,000 111,000
Cumulative effect of change
In accounting principles --- 74,000
Extraordinary loss on early retirement of debt 35,000 ---
Changes in operating assets and liabilities:
Decrease (increase) in -
Accounts receivable (1,054,000) (247,000)
Prepaid expenses and other (438,000) (70,000)
Increase (decrease) in accounts payable,
accrued liabilities and other 948,000 1,567,000
------------------ -------------------
Net cash provided by operating activities $ 383,000 $ 1,664,000
------------------ -------------------
INVESTING ACTIVITIES:
Proceeds from maturity of certificate of deposit $ --- $ 500,000
Proceeds from sales and maturities of securities 5,919,000 ---
Capital expenditures (8,859,000) (1,851,000)
Payment for purchase of businesses (10,977,000) ---
Proceeds from payments on notes receivable 186,000 7,000
------------------ -------------------
Net cash used in investing activities (13,731,000) $ (1,344,000)
------------------ -------------------
FINANCING ACTIVITIES:
Payment of loan fees and deferred costs $ (693,000) $ ---
Repayment of borrowings (11,903,000) (5,407,000)
Proceeds from borrowings 21,432,000 14,244,000
Proceed from the sale of redeemable common stock --- 4,124,000
Proceeds from warrant and option exercise 8,000 163,000
------------------ -------------------
Net cash provided by financing activities $ 8,844,000 $ 13,124,000
------------------ -------------------
NET INCREASE (DECREASE) IN CASH $ (4,504,000) $ 13,444,000
CASH, BEGINNING OF PERIOD 5,181,000 1,458,000
------------------ -------------------
CASH, END OF PERIOD $ 677,000 $ 14,902,000
================== ===================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
Page 3
<PAGE>
AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business -
Avalon Correctional Services, Inc. ("the Company" or "Avalon") is a leading
developer and manager of privatized community correctional facilities and
correctional programming in the United States. The Company currently has a total
offender capacity of 1,700 beds in Oklahoma, Texas and Colorado, in addition to
specialized programming for 800 offenders. The Company owns and operates nine
community correctional facilities and one juvenile correctional facility.
Principles of Consolidation -
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries after elimination of all material intercompany
balances and transactions.
Use of Estimates -
The preparation of the consolidated financial statements requires the use
of management's estimates and assumptions in determining the carrying values of
certain assets and liabilities and disclosures of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts for certain revenues and expenses during the reporting period.
Actual results could differ from those estimated.
Cash, Cash Equivalents and Restricted Cash -
The Company considers all highly liquid investments with original
maturities of three months or less when purchased and money market funds to be
cash equivalents. The company has made deposits for construction accounts that
are classified as restricted cash.
Concentrations of Credit Risk -
Financial instruments potentially subjecting the Company to concentrations
of credit risk consist principally of temporary cash investments, accounts
receivable and notes receivable. The Company places its temporary cash
investments with high credit quality financial institutions and money market
funds and limits the amount of credit exposure to any one institution or fund.
Concentrations of credit risk with respect to accounts receivable are limited
due to the fact that a significant portion of the Company's receivables are from
state governments. The Company maintains an allowance for doubtful accounts for
potential credit losses. Actual bad debt expenses have not been material. Credit
risk on a note receivable is partially mitigated by the collateralization of the
note by second lien on real estate.
Property and Equipment -
Property and equipment are recorded at cost. Expenditures for major
additions and improvements are capitalized, while minor replacements,
maintenance and repairs are charged to expense as incurred. When property and
equipment is retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
reflected in current operations. Depreciation is provided using the
straight-line method over the following estimated useful lives:
Buildings and Improvements 40 Years
Furniture and Equipment 5 to 7 Years
Transportation Equipment 3 to 15 Years
Page 4
<PAGE>
Impairment losses are recorded on long-lived assets when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amounts. When required,
impairment losses are recognized based upon the estimated fair value of the
asset.
Income Taxes -
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates applicable to the period in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
Revenue Recognition -
The Company recognizes revenues as services are provided. Revenues are
earned based upon the number of inmates on a per diem basis at the Company's
correctional facilities. Correctional revenues are received monthly from various
governmental agencies and daily from inmates on certain programs.
Deferred Development Costs -
Prior to 1998, development costs that could be directly associated with an
anticipated contract were capitalized, and, if the recoverability from that
contract was probable, they were deferred until the anticipated contract had
been awarded. The development costs of successful proposals were deferred and
amortized over the anticipated life of the contract (including option and
renewal periods), while costs of unsuccessful or abandoned contracts were
charged to expense when their recovery was not considered probable. Facility
costs were incurred (after a contract is awarded) in connection with the opening
of new facilities under the contract, and were capitalized from the date of
award until commencement of operations and amortized on a straight-line basis
over the term of the contract. As of January 1, 1998, the Company, pursuant to
Statement of Position 98-5 "Reporting on the Costs of Start Up Activities",
expensed development and new facility opening costs.
Net Income (Loss) Per Common Share -
Basic income (loss) per share has been computed on the basis of weighted
average shares outstanding during each period. Diluted loss per share for the
nine months ended September 30, 1999 and 1998, and the three months ending
September 30, 1998, is the same as basic loss per share for each period because
assumed exercise of options, warrants and convertible debentures would be
anti-dilutive. Diluted income per share for the three months ended September 30,
1999 has been adjusted for dilutive effects of options and warrants that were
dilutive during the three month period.
Interim Financial Statements -
The consolidated balance sheet as of September 30, 1999 and the statements
of operations for the three months and nine months ended September 30, 1999 and
1998 are unaudited and, in the opinion of management, reflect all adjustments
that are necessary for a fair presentation of the financial position as of such
date and the results of operations and cash flows for the periods then ended.
All such adjustments are of a normal and recurring nature.
The financial statements included herein have been prepared in conformity
with generally accepted accounting principles and should be read in conjunction
with the December 31, 1998 Form 10-KSB filing. Footnote disclosures which would
substantially duplicate the disclosure contained in the most recent annual
report on Form 10-KSB have been condensed or omitted. The results of operations
for the three months and nine months ended September 30, 1999, are not
necessarily indicative of the results that may be expected for the entire year
ended December 31, 1999.
Page 5
<PAGE>
NOTE 2. LONG-TERM DEBT
<TABLE>
<CAPTION>
Long-term debt consists of the following:
September 30, December 31,
1999 1998
----------------------------------
<S> <C> <C>
Revolving senior line of credit $ 12,911,000 $ 724,000
Notes payable to banks, collateralized by
equipment due in installments through
July 1999 with interest from 7.99% to 8.5% --- 2,000
Notes payable to banks, collateralized
by transportation equipment, due in
installments through March 2012
with interest ranging from 1.90% to 9.49%. 703,000 676,000
Notes payable to banks, collateralized
by land, buildings and improvements due in
installments through June 2012 with interest
ranging from 9.75% to 11% 2,114,000 4,631,000
Note payable to state government, collateralized
by accounts receivable, non-interest bearing,
due in installments through August 2007 155,000 ---
Note payable to an individual, uncollateralized,
with interest at 8.5%, due in full April 1999 --- 160,000
Note payable to an investment company, unsecured
with interest at 12.5%, due in four installments
beginning in 2005, including original issue premium 10,333,000 10,356,000
---------------- --------------
26,216,000 16,549,000
Less - current maturities 493,000 2,201,000
---------------- --------------
$ 25,723,000 $ 14,348,000
================ ==============
</TABLE>
Avalon Correctional Services Inc. entered into a senior credit facility
with the Fleet Capital Corporation on February 25, 1999. The loan is a four year
revolving credit facility primarily utilized to finance the expansion of the
Company's business.
The credit facility provides for an $18 million senior revolving debt
facility secured by substantially all assets of the Company. The credit facility
is subject to a 1/2% unused line fee and interest on outstanding balances at
Prime + .25% to .50 % (currently at 8.75%) or LIBOR + 2.0 to 3.0%. The maturity
date of the credit facility is February 25, 2003.
Initially, no amounts were extended on the credit facility and the Company
utilized existing cash reserves to retire debt that was collateralized by assets
now pledged to Fleet Capital under the agreement. Two acquisitions were
completed through the use of the credit facility in the second quarter of 1999.
The balance on the revolving credit facility at September 30, 1999 was
$12,911,000.
Page 6
<PAGE>
NOTE 3. CONVERTIBLE DEBENTURES
The Company completed a private placement of $4,150,000 of convertible
debentures on September 12, 1997. The debentures bear interest at 7.5% and
mature on September 12, 2007. The debentures may be redeemed by the Company at
any time after May, 2001 at 106.5% of principal, declining to 100% at maturity.
The debentures are convertible into common stock at $3.00 per share at any time
until their maturity.
NOTE 4. STOCKHOLDERS' EQUITY
The Company's 275,100 Class B stock purchase warrants providing for the
purchase of the Company's common stock at a price of $6.00 per share expired
March 26, 1999. No Class B warrants were exercised during 1999.
The Company issued 1,000,000 Class C stock purchase warrants in August
1994, in connection with a private placement. The placement provided for 100,000
Class C stock purchase warrants reserved for underwriters. The Company issued an
additional 165,000 Class C stock purchase warrants in 1996 and 25,000 Class C
stock purchase warrants in 1997. The Company has issued 452,500 shares of common
stock upon the exercise of the Class C stock purchase warrants through September
30, 1999. The Company currently has 837,500 Class C stock purchase warrants
outstanding, including the 100,000 warrants reserved for underwriters.
The Class C stock purchase warrants provide for the purchase of the
Company's common stock at any time until their expiration at December 30, 1999.
Anti-dilution provisions of the warrant agreement have reduced the exercise
price from $3.50 to $3.19 per share as of September 30, 1999. The warrants may
be redeemed by the Company upon certain events, for $.01 per share.
The Company issued 200,000 Class D stock purchase warrants in August 1996,
in connection with the acquisition of the El Paso Intermediate Sanction
Facility. The Class D stock purchase warrants provide for the purchase of the
Company's common stock at any time until their expiration at August 2, 2001. The
exercise price of the class D warrants is $4.20 per share as of September 30,
1999. The warrants may be redeemed by the Company upon certain events for $.01
per share.
The Company issued 79,000 Class E stock purchase in September 1997, in
connection with the private placement of Convertible Debentures. The Class E
stock purchase warrants provide for the purchase of the Company's common stock
at a price of $3.00 per share at any time until their expiration at September
12, 2002. The warrants may be redeemed by the Company upon certain events for
$.01 per share.
The Company issued 200,539 stock purchase warrants to financial advisors in
September 1998, in connection with the $15,000,000 private placement. The stock
purchase warrants provide for the purchase of the Company's common stock at any
time until their expiration in September 2002. The exercise price of the
warrants is $3.75 per share as of September 30, 1999. The warrants may be
redeemed by the Company upon certain events for $.01 per share. The fair value
of the warrants was allocated between the proceeds the debt and equity issues as
debt issue cost and a reduction in redeemable common stock.
A 1994 agreement provided for the issuance of 750,000 common stock purchase
warrants to purchase common stock at $1.50 per share for each dollar of Company
debt guaranteed by the Company's CEO. The warrants will have a five year term
from the date of issuance.
Page 7
<PAGE>
NOTE 5. STOCK OPTION PLAN
The Company adopted a stock option plan (the "Plan") providing for the
issuance of 250,000 shares of Class A common stock pursuant to both incentive
stock options, intended to qualify under Section 422 of the Internal Revenue
Code, and options that do not qualify as incentive stock options
("non-statutory"). The Option Plan was registered with the Securities and
Exchange Commission in November 1995. The purpose of the Plan is to provide
continuing incentives to the Company's officers, key employees, and members of
the Board of Directors. The options generally vest over a four or five-year
period with a ten year expiration period. On December 1, 1996, the Company
amended its stock option plan, increasing the number of shares available under
the Plan to 600,000. There are currently outstanding non-statutory options
providing for the issuance of 530,440 shares of Class A common stock at exercise
prices ranging from $1.50 to $4.25 per share. Options providing for the issuance
of 273,140 shares were exercisable at September 30, 1999.
NOTE 6. LITIGATION
The Company is a party to litigation arising in the normal course of
business. Management believes that the ultimate outcome of these matters will
not have a material effect on the Company's financial condition or results of
operations.
NOTE 7. CHANGE IN ACCOUNTING PRINCIPLE
During the fourth quarter of 1998 the Company elected to adopt, for all of
1998 and future years, the provision of Statement of Position 98-5 "Reporting on
Costs of Start Up Activities". Development and new facility opening costs had
been deferred and amortized over the life of the contract prior to January 1,
1998. As a result of the adoption of the new pronouncement, deferred costs of
approximately $74,000 were charged to operations and reported as cumulative
effect of change in accounting principle, effective January 1, 1998. Pursuant to
the pronouncement, the results of operations of the third quarter of 1998 have
been restated to show the effect of the adoption of the Statement of Position as
of January 1, 1998. The Company charged $255,000 to operations in the nine
months ended September 30, 1999 related to the opening of two new correctional
facilities.
NOTE 8. ACQUISITIONS AND NEW FACILITIES
Southern Corrections Systems, Inc., a wholly owned subsidiary of Avalon
Correctional Services Inc., acquired the management contract on Adams Community
Corrections Program Inc. (ACCP) from CSC, Inc. on April 30, 1999. The management
contract was acquired for $2,100,000, and the related real estate for $865,000.
The management contract provides for fees, overhead and direct expense
reimbursement from ACCP. As part of the transaction, Southern Corrections
Systems was named as the sole voting member of ACCP.
ACCP is a Colorado non-profit company specializing in Community Corrections
in Adams County, Colorado. ACCP operates three facilities, the Phoenix Center,
Loft House and Garland Center. The Phoenix Center is a 135 bed halfway house
located in Henderson, Colorado. The Loft House is a 35 bed halfway house located
in Denver, Colorado. The Garland Center is a day reporting center in Northglenn,
Colorado providing services to non-residential offenders.
Southern Corrections Systems, Inc, acquired The Villa at Greeley, LLC on
June 9, 1999. The Villa at Greeley is a private provider of residential services
and programs for community corrections offenders. Avalon Correctional Services,
Inc. assumed management and began operating the facility effective June 1, 1999.
The Villa at Greeley, LLC provides services to approximately 300 individuals for
residential services and also provides day reporting and non-residential
services to approximately 560 offenders. Southern Corrections Systems, Inc. also
purchased the buildings and land in Greeley, Colorado utilized by The Villa at
Greeley, LLC. Pursuant to the terms of the agreement, all assets and liabilities
existing at June 1, 1999 were excluded from the transaction with the exception
of the property, plant, equipment and contracts with various state and local
government agencies and legal rights. Southern Corrections Systems, Inc.
acquired all real property for approximately $7,400,000, and contract rights for
approximately $1,200,000.
Page 8
<PAGE>
The real estate was acquired from University Holdings, LLC, a company
having common ownership as The Villa at Greeley, LLC. The Villa at Greeley, LLC
was acquired from the three principal member owners of the LLC. Each of the
three principal member owners of The Villa at Greeley, LLC also owned the same
proportional interest in University Holdings LLC. Avalon financed $8,461,000 of
the purchase price through Avalon's senior line of credit.
Page 9
<PAGE>
AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Liquidity and Capital Resources -
The Company's business strategy is to focus on the community corrections
industry, expanding its operations into additional states through new Federal
and state contracts and selective acquisitions. The successful implementation of
the Company's growth plan has created the need for additional capital and
financing. The Company has been successful in securing $37 million of new
capital and credit facilities since September 1997.
Working capital at September 30, 1999 was $2,413,000 representing a current
ratio of 2.08:1, compared to working capital of $8,643,000 and a current ratio
of 3.04:1 at December 31, 1998. The decrease in working capital from December
31, 1998 is primarily due to construction costs of the Union City Juvenile
Center and the El Paso Multi-Use Facility. The Union City Juvenile Center was
completed and became operational in the first quarter of 1999, and the El Paso
Multi-Use Facility was completed and became operational in the second quarter of
1999.
The Company had approximately $675,000 cash and approximately $2 million of
available credit on its revolving line of credit for new projects at September
30, 1999. 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 secured an $18 million senior credit facility with Fleet Capital
Corporation in February 1999. The credit facility and available cash balance has
enabled the Company to expand its operations through acquisitions and
development.
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 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
implemented new equipment and software that is y2k compliant as of September 30,
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 be adversely effected from y2k
problems.
Results of Operations -
Three Months Ended September 30, 1999 Compared to the
Three Months Ended September 30, 1998-
Total revenues increased by 178% to $5.30 million for the three months
ended September 30, 1999 from $1.91 million for the three months ended September
30, 1998. The increase was a result of the opening of the Union City Juvenile
Center in February 1999, the acquisition of Adams Community Corrections Program
in Adams County, Colorado in April 1999, the acquisition of the Villa at Greeley
in June 1999, and the opening of the El Paso Multi-Use Facility in June 1999.
Revenues in the third quarter of 1999 were enhanced by the Union City
Juvenile Center providing $934,000 of revenues, the El Paso Mulit-Use Facility
providing $409,000 of revenue, Adams Community Corrections Program providing
$777,000 of revenues, and the Villa at Greeley providing $1,345,000 of revenues.
Page 10
<PAGE>
The Company had net income for the three months ended September 30, 1999 of
$118,000 or $.03 basic earnings per share and $.02 diluted earnings per share,
as compared to a net loss for the three months ended September 30, 1998 of
$101,000 or $.03 basic and diluted loss per share. The Company's net income was
the result of the contributions of the Union City Juvenile Center and the
acquisitions of the Villa at Greeley and Adams Community Corrections Program.
Operating income, before interest, depreciation, and income taxes,
increased 266% for the three months ended September 30, 1999 to $1,246,000
compared to $340,000 for the three months ended September 30, 1998. The increase
in operating income was a result of the Company's continuing expansion efforts.
Direct operating expenses increased by 188% for the three months ended
September 30, 1999 compared to the three months ended September 30, 1998,
primarily as a result of the Union City Juvenile Center, the El Paso Multi-Use
Facility, and the acquisitions of the Villa at Greeley and Adams Community
Corrections Program.
Corporate. General and administrative expenses increased by 20% to $309,000
for the three months ended September 30, 1999 from $258,000 for the three months
ended September 30, 1998. General and administrative expenses increased
primarily due to increased staffing for management of new facilities and
acquisitions. The increase in interest expense of $505,000 for the three months
ended September 30, 1999 over the third quarter of 1998 resulted from interest
on debt utilized to complete acquisitions and new facilities. Depreciation and
amortization expense have increased commensurate with the growth of the
correctional operations.
Nine months ended September 30, 1999 compared to the
Nine monthsended September 30, 1998 -
Net loss for the nine months ended September 30, 1999 was $17,000 or $.00
per share as compared to a loss of $240,000 or $.05 per share in 1998. The loss
in 1999 was primarily due to the startup costs incurred at the Union City
Juvenile Center and the El Paso Multi-Use Facility. The Union City Juvenile
Center became operational in the first quarter of 1999 and the El Paso Multi-Use
Facility became operational in the second quarter of 1999. Startup costs
relating to these facilities incurred before they became operational were
$255,000 in the nine month period ended September 30, 1999.
Income from continuing operations, before interest, depreciation and income
taxes increased 150% to $2,553,000 in 1999 compared to $1,020,000 in 1998.
Revenues increased 108% in 1999 to $11,613,000 compared to $5,578,000 in 1998.
The increase in income from operations was a result of the operations at the new
Union City Juvenile Center and the acquisitions of the Villa at Greeley and
Adams Community Corrections Program. The increase in revenues was a result of
the operations at the Union City Juvenile Center, the El Paso Multi-Use
Facility, and the acquisitions of the Villa at Greeley and Adams Community
Corrections Program.
General and administrative expenses increased by $186,000 to 8% of gross
revenues compared to 14% of gross revenues in 1998. The increase was a result of
staffing and development costs associated with the Company's growth plan.
Interest expense increased approximately $1,068,000 as a result of the interest
on debt utilized to complete acquisitions and new facilities. Depreciation and
amortization expense have increased commensurate with the growth of the
correctional operations.
Page 11
<PAGE>
AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None.
Item 2. Changes in Securities - None.
Item 3. Defaults Upon Senior Securities - None.
Item 4. Submission of Matters to a Vote of Security Holders - None.
Item 5. Other Information - None.
Item 6. Exhibits
Exhibit 27. Financial Data Schedule.
Page 12
<PAGE>
AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
SIGNATURES
In accordance with the requirement of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Date: November 12, 1999 AVALON CORRECTIONAL SERVICES, INC.
By: //s// Jerry M. Sunderland
------------------------------
Jerry M. Sunderland, President
By: //s// Paul Voss
-----------------------------
Paul Voss, Vice President of Finance
Page 13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,475,000
<SECURITIES> 0
<RECEIVABLES> 2,509,000
<ALLOWANCES> 9,000
<INVENTORY> 0
<CURRENT-ASSETS> 4,649,000
<PP&E> 30,234,000
<DEPRECIATION> 2,139,000
<TOTAL-ASSETS> 38,140,000
<CURRENT-LIABILITIES> 2,236,000
<BONDS> 3,850,000
0
0
<COMMON> 3,000
<OTHER-SE> 6,328,000
<TOTAL-LIABILITY-AND-EQUITY> 38,140,000
<SALES> 0
<TOTAL-REVENUES> 5,303,000
<CGS> 0
<TOTAL-COSTS> 4,057,000
<OTHER-EXPENSES> 341,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 787,000
<INCOME-PRETAX> 118,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 118,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 118,000
<EPS-BASIC> 0.03
<EPS-DILUTED> 0.02
</TABLE>
