SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-20307
AVALON CORRECTIONAL SERVICES, INC.
(Name of small business issuer 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) (Zip Code)
Issuer's telephone number (405) 752-8802
Securities registered under Section 12 (b) of the Exchange Act: None
Securities registered under Section 12 (g) of the Exchange Act:
Shares of Class A Common Stock, par value $.001
(Title of class)
The issuer has (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) has been subject to
such filing requirements for the past 90 day: Yes [X] No [ ]
Disclosure of delinquent filers in response to Item 405 of Regulation S-B
is not contained in this form, and no disclosure will be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this form 10-KSB. [ X ]
Revenues from continuing operations for the year ended December 31, 1999
were $16,803,000.
The aggregate market value of voting common stock held by non affiliates
was $5,800,200 on March 23, 2000, based on the average high and low prices of
such stock as reported by the National Association of Securities Dealers
Automated Quotations Systems ("NASDAQ") on that day. As of March 23, 2000,
4,715,900 shares of the issuer's common stock, par value $.001, were issued and
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statements for the 2000 Annual Meeting of
Shareholders are incorporated by reference in Part III.6
Transitional Small Business Disclosure Format: Yes [ ] No [X].
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
The Company -
Avalon Correctional Services, Inc., is an owner and operator of private
community correctional facilities. Avalon Correctional 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, and Colorado, with plans to significantly expand into
additional states. Avalon's business strategy is designed to elevate the Company
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 correctional services industry.
According to the U.S. Bureau of Justice Department statistics, 40 percent
of the current U.S. inmate population is expected to be released in the next 12
months. Inmates serving the last 6 to 12 months of their incarceration in a
community correctional facility report a lower recidivism rate than those who
bypass programs to help inmates reenter society. As of the second quarter 1998,
1.3 million individuals were incarcerated in this country's prisons and jails,
an increase of 4.8% from the prior year. The total prison and jail population
has grown 6.7% annually during the last five years. It is estimated that the
weekly need for new corrections beds remains between 1,500 and 2,000 beds. At
the end of 1998, 30 states reported 24,925 state prisoners held in local jails
or other facilities because of crowding in state facilities. Avalon contracts
with various governmental agencies to provide community corrections operations
and services. Studies have documented a 10 to 30 percent savings to government
agencies when 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
programming positions the Company for substantial growth in the corrections
industry. The number of adult correctional beds operated by private managers has
grown an astounding 2,200% over the past 10 years. The number of privately
operated corrections beds is projected to triple over the next five years.
Avalon currently owns and operates 1,700 private community corrections
beds. The Company owns and operates three minimum-security correctional
facilities in Oklahoma, a 160-bed juvenile residential treatment center in
Oklahoma; two medium-security correctional facilities in Texas; and three
community correctional facilities in Colorado. Avalon 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 a complete range of 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. The Colorado community corrections programs also provide
non-residential services to approximately 800 offenders in the State of
Colorado. The Union City juvenile residential treatment facility is the first
privately operated juvenile residential treatment facility in the State of
Oklahoma. Avalon's private pay program, operated out of the private community
correctional facilities, has a growing population of clients referred by the
local judicial district system as an alternative to secure incarceration.
Intensive programming is an essential part of community based corrections.
Avalon has provided substance abuse programs in facilities for over 14 years.
Avalon's management has been engaged in the business of providing private
community correctional services since 1985.
Avalon's management made the decision to change the Company name to Avalon
Correctional Services, Inc., to reflect the Company's focus on the correctional
industry. This name change was approved by the stockholders at the 1999 annual
meeting.
Avalon's corporate office is located at 13401 Railway Drive in Oklahoma
City, Oklahoma 73114. Avalon's common stock is traded on the NASDAQ SmallCap
Market with the symbol "CITY".
Facilities -
The following table summarizes certain information with respect to facilities
and programs managed by Avalon at March 23, 2000.
Facility Name Facility/
And Location Company Role Capacity Program Type
- ------------ ------------ -------- ------------
Carver Center, Complete Facility Siting, 250 Beds Community
Oklahoma City, OK Design, Construction, Security
Ownership, and Corrections
Management
Avalon Correctional Complete Facility Siting, 252 Beds Community
Center, Tulsa, OK Design, Construction, Security
Ownership, and Corrections
Management
Turley Correctional 1997 Acquisition 150 Beds Community
Center, Tulsa, OK Complete Facility Security
Ownership and Corrections
Management
El Paso Intermediate 1996 Acquisition 150 Beds Medium
Sanction Facility Complete Facility Security
El Paso, TX Ownership and Correctional
Management Facility
Union City Complete Facility Siting, 160 Beds Medium
Juvenile Center, Design, Construction, Security
Union City, OK Ownership, and Juvenile
Management Facility
El Paso Multi Complete Facility Siting, 300 Beds Medium
Purpose Facility, Design, Construction, Security
El Paso, TX Ownership, and Correctional
Management Facility
Phoenix Center 1999 Acquisition 135 Beds Community
Henderson, CO Complete Facility Security
Ownership and Corrections
Management
The Villa at Greeley 1999 Acquisition 300 Beds Community
Greeley, CO Complete Facility Security
Management Corrections
The Loft House 1999 Acquisition 35 Beds Community
Denver, Colorado Complete Facility Security
Management Corrections
The Garland Center 1999 Acquisition N/A Day
Northglen, Colorado Complete Facility Reporting
Management Center
Corrections
Avalon Corporate Corporate Headquarters N/A Administrative
Oklahoma City, OK
Correctional Services -
Avalon owns and operates eight correctional centers, Carver Center, Avalon
Correctional Center, Turley Correctional Center, Union City Juvenile Center, El
Paso Intermediate Sanction Facility, El Paso Multi Purpose Facility, Phoenix
Center and The Villa at Greeley. The Company also operates the Loft House, a 35
- -bed community corrections program and The Garland Center, a day reporting
center, both in leased facilities. The community correctional centers provide
complete correctional administration, correctional officer staffing, housing,
food services, vocational assistance, transportation, and rehabilitation
services.
Oklahoma. Avalon's contracts with the Oklahoma Department of Corrections
extend through June 30, 2000. The contracts with the Oklahoma Department of
Corrections are bid every three years. The structure of the Oklahoma contracts
is based upon three one year contract periods. Avalon has contracted with the
State of Oklahoma pursuant to similar contracts since 1985. The State of
Oklahoma's performance under the contracts is subject to annual appropriation by
the legislature. Avalon also provides services pursuant to a Federal contract
obtained in connection with the acquisition of the Turley Correctional Center in
October 1997. The five year contract extends through 2004. Carver Center is a
250-bed minimum security correctional facility located in Oklahoma City,
Oklahoma. Carver Center has been expanded from its initial capacity of 25 beds
in 1985, to its current capacity of 250 beds to accommodate the increasing needs
of the Oklahoma Department of Corrections. Carver center was sited, designed,
and constructed by Avalon and opened in 1986.
Avalon Correctional Center is a 252-bed minimum security correctional
facility located in Tulsa, Oklahoma. The Avalon Correctional Center was sited,
designed, and constructed by Avalon and opened in July 1995.
Turley Correctional Center is a 150-bed minimum security correctional
facility located in Tulsa, Oklahoma. The Turley Correctional Center was
purchased by Avalon in October 1997. A new 150-bed correctional facility is
under construction on the grounds at the Turley Correctional Center. The new
center is scheduled to open in April 2000.
Union City Juvenile Center is an 160-bed medium security juvenile
correctional facility located in Union City, Oklahoma. The Union City Juvenile
Center was sited, designed, and constructed by the Company. Construction of the
Union City Juvenile Center was completed and the Center began receiving
offenders in February 1999. The Center has a licensed capacity of 160 beds and
is in the second year of a five year contract with the Oklahoma Office of
Juvenile Affairs. The contract includes a provision requiring single occupancy
of all cells in the facility and a maximum capacity of 80 offenders.
Carver Center, Avalon Correctional Center, and Turley Correctional Center
are accredited by the American Correctional Association ("ACA") as Adult
Community Correctional Facilities. ACA accreditation or candidacy is required to
contract with the State of Oklahoma for correctional services. The ACA, a
private not-for-profit organization, was established to develop uniformity and
industry standards for the operation of correctional facilities and provision of
inmate care. Accreditation involves an 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 2002. Avalon
Correctional Center was initially accredited in 1996 and is accredited through
2002. Turley Correctional Center will renew its ACA accreditation in the fall of
2000.
Texas. Avalon purchased the El Paso Intermediate Sanction Facility in El
Paso, Texas in August 1996. The facility has a capacity of 150-beds. The Company
entered into a fifteen year contract to provide services in the facility for the
West Texas Community Supervision and Corrections Department in July 1996.
The Company was awarded a contract in June 1998 with the Texas Department
of Criminal Justice to provide 250 multi-purpose beds in El Paso, Texas. A new
300 bed facility was constructed adjacent to the existing El Paso Facility in
1999 to accommodate this new contract. The El Paso Multi-Purpose Facility was
completed and became operational in the second quarter of 1999.
Colorado. The Company purchased a management contract in May 1999 to
operate Adams Community Corrections Program (ACCP) in Northglen, Colorado. The
ACCP Program provides residential and non-residential services in three
locations: The Phoenix Center, a 135-bed residential center in Henderson,
Colorado; The Loft House, a 35-bed residential program in Denver, Colorado and
The Garland Center, a day reporting center in Northglen, Colorado. The ACCP
Program provides services pursuant to various state and local agencies.
The Company purchased The Villa at Greeley in June 1999. The Villa owns and
operates a 300-bed multi-purpose facility and provides residential and
non-residential offender services and an assisted living program in Greeley,
Colorado. The Villa contracts with various state and local agencies.
Avalon is evaluating additional correctional projects in several states.
Asstets Held For Sale-
Avalon previously provided mental health services and assisted living
services in Oklahoma and Colorado. 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. The remaining non-correctional assets
at December 31, 1999, consists of an investment in one assisted living center
which is marketed for sale. The Company has evaluated various offers to sell
this investment, and management believes that the facility will be sold in the
future.
Competition -
Corrections. The trend in the United States toward privatization of
government services and functions continues to increase as governments have
faced continuing pressure to control costs and improve the quality of services.
Governmental agencies responsible for the operation of correctional facilities
are privatizing and contracting with private providers for services to address
these pressures.
A combination of factors in many states has led to a revamping of the
corrections processes (i.e., decreasing revenues, increasing prison population,
litigation arising from substandard prison conditions, and substantial
overcrowding) in addition to reallocation of limited prison resources. Private
correctional services provide a substantial economic savings allowing the
contracting governmental agency to comply with legislative and judicial pressure
to improve prison conditions. Privately operated correctional management
companies are able to provide high quality services at lower cost. Private
correctional facilities operating as contractors for government agencies,
pursuant to court order or otherwise, exist in virtually every state.
Avalon's primary focus is the area of community corrections. Community
corrections has experienced substantial growth over the past decade. Community
corrections provides services to individuals still in the correctional system
and individuals granted parole or sentenced to probation. Offenders are often
placed in a community corrections facility for the last six to twelve months of
their sentence. Community corrections facilities enable offenders to remain
employed and even upgrade their job skills. The inmates also contribute to
society by paying taxes, paying court costs, paying victim restitution, and
paying for a portion of the cost of their incarceration. Community corrections
facilities have the lowest re-imprisonment rate among the various types of
incarceration. Community corrections facilities generate revenue for local
communities, are more cost effective than building additional jail cells, and
help reduce the prison overcrowding problem. The community corrections market
segment is estimated at $4 billion annually and includes approximately 5,000
providers.
Contracts for correctional services are awarded by government agencies and
are generally based upon competitive bidding and quality of services provided.
Avalon management believes the Company has several competitive advantages in
contracting for community correctional services including: a) a fifteen-year
history of providing quality services to the Oklahoma Department of Corrections;
b) a geographic location allowing for lower administrative overhead charges when
bidding against competitors for regional contracts; c) accreditation by the
American Correctional Association since 1990 and certification as a drug and
alcohol provider since 1985; and d) a high quality and cost-effective corporate
infrastructure for management, marketing, financial management, financial
reporting, quality assurance, and providing support services.
Avalon has developed a broad range of programs designed to reduce
recidivism, including substance abuse treatment and counseling, vocational
training, work release programs, GED classes, job and life skills training, and
reintegration services in addition to providing fundamental residential services
for adult inmates. The management services offered by Avalon range from project
consulting for the design and development of new correctional facilities, to the
complete turnkey development of siting, designing, constructing, and operating
correctional facilities. Avalon management believes its experience and success
in owning and operating community correctional facilities and providing
successful programming will be the basis for becoming the dominant company in
the community corrections industry.
Approximately 25% of the Company's revenue is derived from contracts with
the Oklahoma governmental agencies relating to the Company's private
correctional facilities in Oklahoma City ("Carver Center"), Tulsa ("Avalon
Correctional Center"), and Turley ("Turley Correctional Center"). Approximately
23% of the Company's revenue is derived from contracts with Colorado
governmental agencies. Approximately 19% of the Company's revenue is derived
from a contract with the Oklahoma governmental agencies relating to the Union
City Juvenile Center. Approximately 18% of the Company's revenue is derived from
contracts with Texas governmental agencies, relating to the Company's
correctional facilities in El Paso, Texas.
Insurance -
Avalon maintains insurance coverage for general liability, property and
contents, automobile physical damage and liability, workers' compensation, and
directors and officers. Avalon believes its existing insurance coverage is
adequate.
Regulations -
Avalon's community correctional facilities in Oklahoma are accredited by
the American Correctional Association ("ACA"), an independent organization
comprised of professionals in the corrections industry. The ACA utilizes
compliance audit teams to rigorously examine all aspects of the Company's
facilities and operations. The Company recognizes the importance of maintaining
high quality management and operations at its facilities. Accreditation is
generally granted for a three-year period. Carver Center has been accredited
since 1990 and is currently accredited through 2002. Avalon Correctional Center
was accredited in 1996 and is accredited through 2002. Turley Correctional
Center was accredited in 1997 and is accredited through 2000. The application
for accreditation of the Union City Juvenile Center was submitted during 1999.
The corrections industry is subject to federal, state and local regulations
administered by a variety of regulatory authorities. The correctional services
offered by Avalon in various states are subject to regulations and oversight by
the various government agencies. Management believes its operations are
currently in compliance with all applicable laws and regulations affecting
Avalon's business.
Employees -
At March 23, 2000, Avalon had approximately 470 full-time employees,
including directors and officers. Avalon has not experienced a work stoppage,
and management considers its employee relations to be good.
ITEM 2. DESCRIPTION OF PROPERTY.
Carver Center is a 250-bed minimum security correctional facility located
in Oklahoma City, Oklahoma. The facility is located on five acres of land and
includes five buildings. Avalon constructed a new 16,000 square foot dormitory
at Carver Center in the second quarter of 1995. The Carver Center facility
contains approximately 35,000 square feet of building space. Carver Center was
sited, designed, and constructed by the Company.
Avalon Correctional Center is a 252-bed minimum security correctional
facility located on approximately two acres of land in Tulsa, Oklahoma. The
construction of the approximately 36,000 square foot facility was completed and
opened by the Company in July 1995. The Avalon Correctional Center was sited,
designed, and constructed by the Company.
Turley Correctional Center is a 150-bed minimum security correctional
facility located in Tulsa, Oklahoma. The facility is located on a thirty-five
acre tract of land and includes seven buildings. The Turley Correctional Center
was purchased by the Company in October 1997. A new 26,000 square foot
correctional facility is being constructed on the grounds at the Turley
Correctional Center. The new facility is scheduled to open in April 2000.
El Paso Intermediate Sanction Facility is a 150-bed medium security
correctional facility located on seven acres of land in El Paso, Texas. The
facility was constructed as an intermediate sanction facility. The 36,000 square
foot facility was purchased by the Company in 1996.
Union City Juvenile Center is an 160-bed medium security juvenile
correctional facility located on 20 acres of land in Union City, Oklahoma.
Construction of the 45,000 square foot facility was completed and the Center
began receiving offenders in February 1999. The Union City Juvenile Center was
sited, designed, and constructed by the Company.
El Paso Multi Purpose Facility is a 300-bed medium security correctional
facility on seven acres of land purchased in 1998 in El Paso, Texas.
Construction of the 54,000 square foot facility was completed in 1999. The El
Paso Multi Purpose Facility was sited, designed, and constructed by the Company.
The Phoenix Center is a 135-bed minimum security correctional facility
located in Northglen, Colorado. The 13,200 square foot facility is located on
approximately 2.2 acres of land. The Phoenix Center was acquired by the Company
in 1999.
The Villa at Greeley is a 300-bed multi-use correctional facility located
in Greeley, Colorado. The 101,000 square foot facility is located on
approximately four acres of land. The Villa at Greeley was acquired by the
Company in 1999.
The Loft House is a 35-bed minimum security leased facility located in
Denver, Colorado.
The Garland Center is a day reporting correctional program in Northglen,
Colorado. The center is leased and contains approximately 3,500 square feet.
Avalon Corporate Office is located in Oklahoma City, Oklahoma, in a
commercial building at 13401 Railway Drive, Oklahoma City, Oklahoma 73114. The
Company owned building contains approximately 21,000 square feet of warehouse
space including approximately 8,000 square feet of office space.
Substantially all property owned by Avalon is pledged as collateral on the
Company's credit facilities. See Note 6 to the Consolidated Financial
Statements.
ITEM 3. LEGAL PROCEEDINGS.
Avalon 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 Avalon's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of Avalon's stockholders during the
quarter ended December 31, 1999.
Part II
-------
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Avalon's common stock trades on the NASDAQ SmallCap Market with the symbol
"CITY". The following table reflects the range of high and low sales prices, as
reported by the National Quotation Bureau for each quarterly period during 1999
and 1998. The prices represent inter-dealer prices, without retail mark up, mark
down, or commission and may not represent actual transactions. Trading in
Avalon's common stock is limited and may not be an indication of the value of
the common stock.
Quarterly Period Ended High Low
- ---------------------- ---- ---
March 31, 1998 4 3/4 2 3/4
June 30, 1998 4 11/16 3 1/4
September 30, 1998 4 1/4 3 7/8
December 31, 1998 4 3 7/8
March 31, 1999 4 7/8 3 5/8
June 30, 1999 4 3/4 3 7/8
September 30, 1999 2 7/8 2 1/32
December 31, 1999 2 1/2 1 1/4
Avalon had approximately 800 holders of record of its common stock as of
March 23, 2000. No dividends were declared during 1999 and 1998. Avalon's Board
of Directors presently intends to retain all earnings in the foreseeable future
for use in Avalon's business. Payment of dividends on the Common Stock is
restricted by certain credit facilities.
The average high and low price for the Common Stock, as reported on the
NASDAQ SmallCap Market System was $1.87 per share on March 23, 2000.
ITEM 6. 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 community
corrections industry, expanding its operations in existing and 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 December 31, 1999 was $915,000 representing a current
ratio of 1.36:1.00, compared to working capital of $8,643,000 and a current
ratio of 3.04:1.00 at December 31, 1998. The decrease in working capital from
December 31, 1998 is primarily due to the utilization of the proceeds from the
$15 million private placement completed September 16, 1998. Capital expenditures
were $21.1 million in 1999, compared to $3.7 million in 1998. The 1999 capital
expenditures include: construction costs for the Union City Juvenile Center,
completed in February 1999; construction costs for the El Paso Multi-Purpose
facility, completed in June, 1999; the acquisition of the operations of ACCP in
May, 1999; and the acquisition of the Villa at Greeley in June, 1999; and
construction of the new facility at the Turley Correctional Center, scheduled
for completion in April 2000.
The Company had approximately $2.3 million of cash and revolving credit
available for new projects at December 31, 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 carry forwards.
The Company secured an $18 million senior credit facility with Fleet
Capital Corporation in February 1999. The credit facility with Fleet Capital
Corporation was amended in December of 1999 to provide for a credit facility
consisting of a $13.5 million term loan and a revolving line of credit equal to
the lesser of $3 million or 80% of eligible accounts receivable.
All non-correctional operations were discontinued in the fourth quarter of
1996 and all related assets have been sold or are being held for sale. 1998
earnings include only correctional facility operations, except for $91,000
recorded for losses on facilities held for sale.
Results of Operations -
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998 -
Total revenues from continuing operations increased by 118% to $16.8
million in 1999 from $7.7 million in 1998. The net increase in revenues was a
result of increased census at the Avalon Correctional Center, the opening of the
Union City Juvenile Center in February 1999, the opening of the El Paso
Multi-Purpose facility in June 1999, the acquisition of the ACCP operations in
May 1999, and the acquisition of The Villa at Greeley in June 1999.
The Company's net income before cumulative effect of change in accounting
principles and extraordinary loss was $118,000 or $0.03 basic and $0.02 diluted
per share in 1999 compared to a loss in 1998 of $376,000 or $0.11 basic and
diluted per share.
The Company reported net income of $83,000 or $0.02 basic and diluted per
share in 1999 compared to a net loss in 1998 of $450,000 or $0.13 basic and
diluted per share.
Operating income, before interest, depreciation, and income taxes increased
approximately 162% to $3,871,000 in 1999 from $1,476,000 in 1998. The average
daily inmate census increased to 1,145 in 1999 from 496 in 1998. The census
increase was a result of an increase in census at the Avalon Correctional Center
during 1999, the opening of the Union City Juvenile Center in February 1999, the
opening of the El Paso Multi-Purpose facility in June 1999, the acquisition of
the ACCP operations in May 1999, and the acquisition of The Villa at Greeley in
June 1999.
Direct operating expenses increased by 140% in 1999 over 1998. The increase
was a result of the opening of the Union City Juvenile facility in February
1999, the opening of the El Paso Multi-Purpose facility in June 1999, the
acquisition of the ACCP operations in May 1999, and the acquisition of The Villa
at Greeley in June 1999.
General and administrative expenses increased by 18% in 1999. The majority
of the increase was a result of additional staffing for the new facilities
opening in 1999 and the 1999 acquisitions. General and administrative expenses
decreased to 8% of revenues in 1999 compared to 14% of revenues in 1998.
Interest expense increased by $1,343,000 in 1999 as a result of the
indebtedness utilized for the new facilities opening in 1999 and the 1999
acquisitions.
ITEM 7. FINANCIAL STATEMENTS.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Avalon Correctional Services, Inc.
We have audited the accompanying consolidated balance sheets of Avalon
Correctional Services, Inc. and subsidiaries (the "Company") (formerly Avalon
Community Services, Inc.) as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 1999 and 1998, and the consolidated results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
As discussed in Note 17 to the financial statements, during the year ending
December 31, 1998, the Company adopted the provisions of Statement of Position
98-5 " Reporting on Costs of Start Up Activities" which changed its method of
accounting for deferred development and new facility opening costs.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
March 17, 2000
AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Year Ended December 31,
1999 1998
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents .................... $ 601,000 $ 5,181,000
Investment in short term U.S. treasury bills . -- 5,919,000
Related party receivables .................... 294,000 --
Accounts receivable, net ..................... 2,174,000 1,348,000
Current maturities of notes receivable ....... 31,000 322,000
Prepaid expenses and other ................... 360,000 100,000
------------ ------------
Total current assets .................... 3,460,000 12,870,000
Property and equipment, net .................... 29,552,000 13,644,000
Other assets ................................... 5,428,000 2,251,000
------------ ------------
Total assets ................................... $ 38,440,000 $ 28,765,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued liabilities
and other .................................. $ 1,395,000 $ 2,026,000
Current maturities of long-term debt ......... 1,150,000 2,201,000
------------ ------------
Total current liabilities ............... 2,545,000 4,227,000
Long-term debt, less current maturities ........ 25,554,000 14,348,000
Convertible debentures ......................... 3,850,000 3,850,000
Redeemable common stock, $.001 par
value 1,622,448 shares issued and
outstanding in 1999 and 1998 ................. 4,124,000 4,124,000
Stockholders' equity:
Common stock - par value $.001; 24,000,000
shares authorized; 4,715,900 and 4,664,598
shares issued and outstanding in 1999 and
1998, respectively, less 1,662,448 shares
subject to repurchase in 1999 and 1998 ..... 3,000 3,000
Preferred stock; par value $.001; 1,000,000
shares authorized; none issued ............. -- --
Paid-In capital .............................. 6,686,000 6,618,000
Accumulated deficit .......................... (4,322,000) (4,405,000)
------------ ------------
Total stockholders' equity .............. 2,367,000 2,216,000
------------ ------------
Total liabilities and stockholders' equity ..... $ 38,440,000 $ 28,765,000
============ ============
These accompanying notes are an integral part of these
consolidated financial statements
AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
1999 1998
------------ ------------
Revenues ....................................... $ 16,803,000 $ 7,686,000
Costs and expenses:
Direct operating ............................. 11,302,000 4,692,000
General and administrative ................... 1,292,000 1,091,000
Development costs ............................ 338,000 336,000
Losses from property held for sale ........... -- 91,000
Depreciation and amortization expense ........ 1,186,000 628,000
Interest expense ............................. 2,567,000 1,224,000
------------ ------------
Net income (loss) before cumulative effect of
change in accounting principles and
extraordinary loss ........................... 118,000 (376,000)
Cumulative effect of change in
accounting principles ........................ -- (74,000)
Extraordinary loss on extinguishment of debt ... (35,000) --
------------ ------------
Net income (loss) .............................. $ 83,000 $ (450,000)
============ ============
Basic income (loss) per share:
Net income (loss) before items noted below ... $ 0.03 $ (0.11)
Cumulative effect of change in
accounting principles ...................... -- (0.02)
Extraordinary loss on retirement of debt ..... (0.01) --
------------ ------------
Net income (loss) per share: ................. $ 0.02 $ (0.13)
============ ============
Weighted average number of common
shares outstanding, basic .................... 4,670,333 3,499,403
============ ============
Diluted income (loss) per share:
Net income (loss) before items noted below ... $ 0.02 $ (0.11)
Cumulative effect of change in
accounting principles ...................... -- (0.02)
Extraordinary loss on retirement of debt ..... -- --
------------ ------------
Net income (loss) per share: ................. $ 0.02 $ (0.13)
============ ============
Weighted average number of common
shares outstanding, diluted .................. 5,125,333 3,499,403
============ ============
The accompanying notes are an integral part of these
consolidated financial statements.
<TABLE>
<CAPTION>
AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Total Total
Common Stock Paid-In Accumulated Stockholders'
Stock Shares Amount Capital Deficit Equity
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998 . 2,982,170 $ 3,000 $ 6,189,000 $(3,955,000) $ 2,237,000
Net loss ................. -- -- -- (450,000) (450,000)
Stock options exercised .. 17,480 -- 29,000 -- 29,000
Issuance of redeemable
common stock............ 1,622,448 -- -- -- --
Issuance of warrants ..... -- -- 266,000 -- 266,000
Warrants exercised, net
of issuance costs ...... 42,500 -- 134,000 -- 134,000
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 4,664,598 3,000 6,618,000 (4,405,000) 2,216,000
Net income ............... -- -- -- 83,000 83,000
Stock options exercised .. 6,302 -- 8,000 -- 8,000
Warrants exercised, net
of issuance costs ...... 45,000 -- 60,000 -- 60,000
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 4,715,900 $ 3,000 $ 6,686,000 $(4,322,000) $ 2,367,000
=========== =========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of these
consolidated financial statements.
</FN>
</TABLE>
AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
Year ended December 31,
1999 1998
------------ ------------
OPERATING ACTIVITIES:
Net income (loss) ............................ $ 83,000 $ (450,000)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities
Amortization of discount on investments . (81,000) (47,000)
Depreciation and amortization ........... 1,186,000 628,000
Amortization of debt issue costs ........ 211,000 55,000
Extraordinary item - extinguishment of debt 35,000 --
(Gain) loss on sale of property ........ (5,000) 18,000
Write down of property .................. 13,000 17,000
Cumulative effect of change in accounting
principles ............................ -- 74,000
Other ................................... 29,000 --
Changes in operating assets and liabilities:
Decrease (increase) in -
Accounts receivable ................. (826,000) (675,000)
Due to / from related parties ....... (294,000) (97,000)
Prepaid expenses and other assets ... (260,000) 7,000
Increase (decrease) in accounts
payable and other ................. 700,000 (335,000)
------------ ------------
Net cash provided by (used in)
operations .................... 791,000 (805,000)
INVESTING ACTIVITIES:
Purchase of short term investments ........... -- (5,872,000)
Proceeds from maturity of certificate
of deposit ................................. -- 500,000
Capital expenditures and acquisitions ........ (9,513,000) (3,737,000)
Acquisitions of businesses and contracts ..... (11,634,000) --
Proceeds from sale of short term investments . 6,000,000 --
Funding of note receivable ................... -- (4,000)
Proceeds from payments on notes receivable ... 291,000 16,000
Proceeds from disposition of property ........ 17,000 16,000
Proceeds from disposition of discontinued
operations ................................. -- 280,000
------------ ------------
Net cash used in investing
activities .................... (14,839,000) (8,801,000)
FINANCING ACTIVITIES:
Proceeds from borrowing ...................... 26,480,000 16,515,000
Repayment of borrowing ....................... (16,272,000) (6,532,000)
Payment of debt issue costs .................. (808,000) (1,452,000)
Proceeds from warrant and option exercise .... 68,000 163,000
Proceeds from issuance of redeemable
common stock ............................... -- 4,635,000
------------ ------------
Net cash provided by
financing activities .......... 9,468,000 13,329,000
------------ ------------
Net increase (decrease)
in Cash And Cash Equivalents ... (4,580,000) 3,723,000
Cash and Cash Equivalents, Beginning of Period 5,181,000 1,458,000
Cash and Cash Equivalents End of Period ....... $ 601,000 $ 5,181,000
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest .............................. $ 2,389,000 $ 1,286, 000
Income Taxes .......................... -- --
Non cash investing and financing activities:
The Company had approximately $1,231,000 relating to construction costs,
and $100,000 relating to debt issue costs financed through accounts payable at
December 31, 1998. The Company issued warrants of approximately $266,000 in
exchange for financial advisory services during 1998.
The Company purchased businesses and contract rights during the year ended
December 31, 1999. The following liabilities were assumed in conjunction with
those purchases.
Assets acquired $ 11,800,000
Cash paid 11,634,000
-----------
Liabilities assumed $ 166,000
===========
The accompanying notes are an integral part of these
consolidated financial statements.
AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED 1999 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business-
Avalon Correctional Services, Inc. ("Avalon" or the "Company") (formerly
Avalon Community Services, Inc.) is an owner and operator of private community
correctional services. Avalon specializes in privatized community correctional
facilities and intensive correctional programming. Avalon is currently operating
in Oklahoma, Texas and Colorado with plans to significantly expand into
additional states. Avalon's business strategy is designed to elevate the Company
into a dominant provider of community correctional services by expanding its
operations through new state and Federal contracts and selective acquisitions.
Avalon owns a 250-bed minimum security facility in Oklahoma City, Oklahoma, a
252-bed minimum security facility in Tulsa, Oklahoma, a 150-bed adult
residential community corrections facility in Tulsa, Oklahoma; a 150-bed medium
security facility in El Paso, Texas; a 300-bed medium security facility in El
Paso, Texas; a 160-bed medium security juvenile facility in Union City,
Oklahoma; a 135-bed halfway house located in Henderson, Colorado; and a 300-bed
multi-use facility in Greeley, Colorado. Avalon also operates a 35-bed halfway
house located in Denver, Colorado, and a day reporting center in Northglen,
Colorado. The Colorado community corrections programs also provide
non-residential services to approximately 800 offenders in the State of
Colorado.
Principles of Consolidation -
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries after elimination of all material intercompany
balances and transactions.
Use of Estimates -
The preparation of the consolidated financial statements requires the use
of management's estimates and assumptions in determining the carrying values of
certain assets and liabilities and disclosures of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts for certain revenues and expenses during the reporting period.
Actual results could differ from those estimated.
Cash and Cash Equivalents -
The Company considers all highly liquid investments with original
maturities of three months or less when purchased and money market funds to be
cash equivalents.
Investments -
The Company accounts for certain investments in debt securities in the
following manner. Debt securities that the Company has a positive intent and
ability to hold to maturity are classified as held-to-maturity securities and
are reported at amortized cost. Debt securities that are bought and held
principally for the purpose of selling in the near term are classified as
trading securities and reported at fair value, with unrealized gains and losses
included in earnings. Debt securities not classified as either held-to-maturity
securities or trading securities are classified as available-for-sale securities
and reported at fair value, with unrealized gains and losses, net of tax
effects, excluded from earnings and reported in other comprehensive income. The
Company has classified its entire debt securities portfolio as held-to-maturity
securities.
Declines in the fair value of individual securities below cost or amortized
cost that are other than temporary result in write-downs included in earnings.
The specific identification method is followed in determining the cost of
securities sold.
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
government agencies. The Company maintains an allowance for doubtful accounts
for potential credit losses. The allowance for doubtful accounts at December 31,
1999 and 1998 was $9,000. Actual bad debt expenses have not been material.
Credit risk on a note receivable by the Company 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
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. Impairment losses
are recognized based upon the estimated fair value of the asset when required.
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
generally earned based upon the number of inmates on a per diem basis at the
Company's correctional facilities. All correctional revenues are received
monthly from various governmental agencies.
Deferred Development Costs -
Pursuant to Statement of Position 98-5 "Reporting on the Costs of Start Up
Activities", the Company began expensing development and new facility opening
costs as incurred. See Note 17.
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 income (loss) per share
has been computed based on the assumption that all dilutive options and warrants
are exercised.
NOTE 2. INVESTMENTS
The amortized cost of debt securities, together with their estimated fair
value, are summarized as follows as of December 31, 1998.
Gross Gross
Cost/ Unrealized Unrealized
Type of Investment Year Amortized Cost Gains Losses Fair Value
- -------------------------------------------------------------------------------
U.S. Treasury Bills 1998 $ 5,919,000 --- --- $ 5,919,000
U.S. Treasury Bills 1999 --- --- --- ---
The Company had no sale or maturities of investments during 1998. All U.S.
Treasury Bills held at December 31, 1998 were sold during 1999.
NOTE 3. PROPERTY AND EQUIPMENT
The elements of property and equipment and related accumulated depreciation
as of December 31, 1999 and 1998 are as follows:
Accumulated
Cost Depreciation
---- ------------
December 31, 1999
Land $ 3,148,000 $ ---
Buildings and Improvements 25,516,000 1,247,000
Furniture and Equipment 1,750,000 726,000
Transportation Equipment 1,488,000 377,000
----------- -----------
$ 31,902,000 $ 2,350,000
=========== ===========
December 31,1998
Land $ 1,388,000 $ ---
Buildings and Improvements 7,586,000 758,000
Furniture and Equipment 933,000 533,000
Transportation Equipment 1,086,000 258,000
Construction in Progress 4,200,000 ---
----------- -----------
$ 15,193,000 $ 1,549,000
=========== ===========
Capitalized interest on construction projects totaled approximately
$221,000 and $71,000 respectively, for the years ended December 31, 1999 and
1998.
NOTE 4. ACCOUNTS PAYABLE, ACCRUED LIABILITIES AND OTHER
The elements of accounts payable, accrued liabilities and other as of
December 31, 1999 and 1998 are as follows:
1999 1998
------------ ------------
Trade accounts payable $ 364,000 $ 1,450,000
Accrued interest payable 121,000 154,000
Accrued salary and benefits 501,000 168,000
Other accrued liabilities 409,000 254,000
------------ ------------
$ 1,395,000 $ 2,026,000
============ ============
NOTE 5. CORRECTIONAL CONTRACTS
The Company contracts with various governmental agencies to provide
correctional services. The contracts generally specify for the Company to
provide correctional services including complete residential services and
programming in the Company's facilities ("Residential Services") or specified
correctional programming services in the governmental agency's facilities
("Programming Services"). Compensation paid to the Company for Residential
Services is generally based on a per person, per day basis. Compensation paid to
the Company for Programming Services is generally based upon the units of
service provided. Contract revenues from contracts exceeding 10% of total
Company revenue for the years ending December 31, are as follows:
1999 1998
--------- ---------
Governmental Agency A 25% 49%
Governmental Agency B * 18%
Governmental Agency C * 13%
Governmental Agency D 23% *
Governmental Agency E 19% *
Governmental Agency F 10% *
*Less than 10%
The Company has a fifteen (15) year Residential Services contract with West
Texas Community Supervision and Corrections Department and a four year
Residential Services contract with the Texas Department of Criminal Justice
Parole Department to provide correctional services in El Paso, Texas that extend
through August 31, 2011 and August 31, 2004, respectively. The Company's current
Residential Services contracts with the Oklahoma Department of Corrections
extend through June 30, 2000. The Company's current contracts with the Colorado
Department of Corrections extend through June 30, 2000. The Company's current
contract with the Oklahoma Office of Juvenile Affairs extends through December
1, 2000 with renewal options through December 1, 2003.
NOTE 6. LONG-TERM DEBT
Long-term debt consists of the following:
Year Ended December 31,
1999 1998
----------- -----------
Revolving bank line of credit,
collateralized by accounts
receivable, with interest at
1% over prime (effective rate
of 9.5% at December 31, 1999);
due Feb 2004 ...................... $ 110,000 $ 724,000
Notes payable to banks,
collateralized by equipment
due in installments through
July 1999 with interest at 7.99% .. -- 2,000
Notes payable to banks,
collateralized by transportation
equipment, due in installments
through March 2012 with interest
ranging from 4.90% to 9.49% ....... 822,000 676,000
Notes payable to banks,
collateralized by land, buildings,
and improvements due in installments
through June 2012 with interest
ranging from 8.95% to 11% ......... 15,448,000 4,631,000
Note payable to an individual,
uncollateralized, with interest at
8.5%, due in April 1999 ............ -- 160,000
Note payable to an investment
company, uncollateralized with
interest at 12.5%, due in four
installments beginning in 2005,
including original issue premium ... 10,324,000 10,356,000
----------- -----------
26,704,000 16,549,000
Less - current maturities ........... 1,150,000 2,201,000
----------- -----------
$25,554,000 $14,348,000
=========== ===========
The Company completed a senior credit facility with Fleet Capital
Corporation on February 25, 1999. The Company utilized existing cash reserves in
February 1999 to retire $5,053,000 in existing indebtedness upon the completion
of the senior credit facility. The difference between the Company's carrying
value of debt and the amounts paid to extinguish the debt resulted in an
extraordinary loss of $35,000. The aggregate maturities of long-term debt for
each of the next five years are as follows: 2000: $1,150,000; 2001: $1,834,000;
2002: $1,811,000; 2003: $10,866,000; 2004: $335,000 and $10,708,000 thereafter.
The senior credit facility has certain financial covenants requiring the Company
to maintain certain earnings and financial ratios among other things.
The Company completed a $15,000,000 private placement of debt and equity
with an investment company on September 16, 1998. Pursuant to the terms of the
agreement, the Company tendered an unsecured subordinated note with a face value
of $10,000,000 bearing interest of 12.5% with interest payable in quarterly
installments until December 31, 2005, when the first of four quarterly principal
installments are due. The Company also tendered 1,622,448 shares of redeemable
common stock to the investment company. These shares are subject to repurchase
by the Company under certain circumstances, or beginning September 16, 2003 at
the holders option, at the then current average traded price of the stock. Since
the redemption price is not determinable, the stock is carried at its fair value
at the time of issuance. The financial covenants require the Company, among
other things, to maintain certain earnings and debt coverage ratios.
The Company obtained an independent fair value appraisal of the debt and
equity instruments reflecting a fair value allocation of the debt of $10,365,000
and the fair value allocation of the redeemable common stock of $4,635,000. The
original issue premium of $365,000 is being accreted as a reduction of interest
expense over the term of the debt instrument. Debt issue costs of $1,654,000
(including $266,000 representing the fair value of warrants issued to financial
advisors) have been allocated to the debt and redeemable common stock based upon
their fair values. Costs of $511,000 allocated to the redeemable common stock
have reduced its book value to $4,124,000. Costs of $1,143,000 allocated to the
debt instrument are included in other assets and are being amortized to interest
expense over the life of the debt instrument using the effective interest
method.
NOTE 7. CONVERTIBLE DEBENTURES
The Company completed a private placement of $4,150,000 of convertible
debentures on September 12, 1997. The convertible debentures bear interest at
7.5% and mature on September 12, 2007. The convertible debentures may be
redeemed by the Company at any time after May, 2000 at 106.5% of principal,
declining to 100% at maturity. The convertible debentures are convertible into
common stock at $3.00 per share at any time until their maturity. The
convertible debenture holders signed agreements to subordinate the debentures to
the $10,000,000 face value note issued on September 16, 1998. The Company
redeemed $300,000 of convertible debentures at face value in September 1998.
NOTE 8. STOCKHOLDERS' EQUITY
The Company completed a private placement in August 1994, of 1,000,000
shares of common stock and 1,000,000 Class C stock purchase warrants and an
additional 100,000 shares of common stock and 100,000 Class C stock purchase
warrants were reserved for underwriters. The Company issued an additional 25,000
and 165,000 Class C stock purchase warrants, respectively, in 1997 and 1996. The
Company has issued 452,500 shares of common stock upon the exercise of the Class
C stock purchase warrants through December 31, 1999 and has a total of 837,500
Class C stock purchase warrants outstanding.
The Class C stock purchase warrants provide for the purchase of the
Company's common stock at any time until their expiration at March 31, 2000. The
exercise price of the Class C stock purchase warrants is $3.19 per share as of
December 31,1999. 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 December
31,1999. The warrants may be redeemed by the Company upon certain events for
$.01 per share.
The Company issued Class E Warrants to purchase 79,000 shares of Common
Stock in September 1997, in connection with the private placement of Convertible
Debentures. The Company recognized $148,000 of cost based upon the difference in
the exercise price of the Class E warrants and the current market price of the
common stock on the date of issuance. This cost was recorded as debenture issue
costs and is classified in other assets on the balance sheet. The debenture
issue cost is amortized to expense over the term of the 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
August 2, 2001. 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 at September 2002. The exercise price of the
warrants is $3.75 per share as of December 31,1999. 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 an option to issue 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. Management believes that the
warrants had no economic value when granted, and accordingly, no amount has been
assigned to such warrants in the financial statements.
NOTE 9. 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. The Company amended its stock option plan on December 1,
1996, increasing the number of shares available under the Plan to 600,000.
Non-statutory options have been granted providing for the issuance of 342,560
shares of Class A common stock at exercise prices ranging from $1.50 to $4.25
per share. Options providing for the issuance of 202,446 shares were exercisable
at December 31, 1999.
During 1999, the Company offered holders of options with exercise prices
exceeding $1.75 per share an exchange of their options for a reduced number of
options with an exercise price of $1.75 per share, no change in vesting terms,
and extension of the expiration date to ten years from the conversion date. At
December 31, 1999, 368,900 options were cancelled and 203,020 options were
reissued pursuant to this offer.
The Company uses the intrinsic value method to account for its stock option
plan in which compensation is recognized only when the fair value of each option
exceeds its exercise price at the date of grant. Accordingly, no compensation
cost has been recognized for the options issued. Had compensation cost been
determined based on the fair value of the options at the grant dates, the
Company's net loss per share would have been increased to the pro forma amounts
indicated below.
1999 1998
----------- -----------
Net Income (Loss)
As reported .......... $ 83,000 $ (450,000)
Pro forma ............ (147,000) (760,400)
Income (Loss) per share,
basic and diluted
As reported .......... $ 0.02 $ (0.13)
Pro forma ............ (0.03) (0.22)
These pro forma amounts may not be representative of future disclosures
because they do not take into effect pro forma compensation expense related to
grants made before 1995. The fair value of each grant is estimated on the date
of grant using the Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in 1999 and 1998, respectively: no
expected dividends; expected volatility of 76% and 85%; risk-free interest rate
of 5.9% and 5.9%; and expected lives of ten years.
The Black-Scholes options valuation model was developed for use in
estimating the fair value of traded options with no vesting restrictions and are
fully transferable. Option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. The
Company's employee stock options have characteristics significantly different
from those of traded options, and changes in the subjective input assumptions
can materially affect the fair value estimate. It is management's opinion that
the existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
A summary of the status of the Company's stock option plan as of December
31, 1999 and 1998, and changes during the years ending on those dates is
presented below.
1999 1998
-------------------- --------------------
Weighted Weighted
average average
exercise exercise
Shares price Shares price
------- -------- ------- --------
Outstanding at
beginning of year ......... 492,900 $ 3.18 477,330 $ 3.11
Granted ................ 281,920 1.98 85,830 3.11
Exercised .............. (6,302) 1.86 (17,480) 1.67
Forfeited .............. (57,058) 3.56 (52,780) 2.95
Cancelled .............. (368,900) 3.56 -- --
------- -------- ------- --------
Outstanding at
end of year ............... 342,560 1.73 492,900 3.18
Options exercisable
at year end ............... 202,466 1.69 216,690 2.64
-------- --------
Weighted average
fair value of
options granted
during the year ........... $ 1.54 -- $ 3.29
======== ========
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1999.
Options outstanding Options exercisable
-------------------------------- --------------------
Weighted
Number average Weighted Number Weighted
outstanding remaining average outstanding average
at contractual exercise at exercise
12/31/99 life price 12/31/99 price
-------- ------ ------- -------- -------
$1.50 to $2.25 ..... 338,560 8.32 $ 1.71 201,966 $ 1.68
$2.26 to $3.39 ..... 2,000 9.58 $ 2.44 -- --
$3.40 to $4.25 ..... 2,000 8.00 $ 4.00 500 $ 4.00
-------- --------
$1.50 to $4.25 ..... 342,560 202,466
======== ========
NOTE 10. ACQUISITIONS AND CONTRACT AWARDS
The Company was awarded a five year contract in March 1998 with the
Oklahoma Office of Juvenile Affairs. The contract is to site, design, build, and
operate a facility to provide services for 80 youthful delinquent male offenders
ages 13 to 19. The contract is expected to generate revenues of $18,800,000 over
a five year period. The Company completed construction of the facility and
commenced operations under this 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 sited, designed, and constructed a new 300 bed secure facility in El
Paso, Texas. The El Paso Multi Purpose Facility was completed and became
operational in the second quarter of 1999.
The Company acquired the management contract and correctional contracts of
Adams Community Corrections Program, Inc. (ACCP) from CSC, Inc. on April 30,
1999. The purchase price was allocated $1,515,000 to contract rights and
$1,450,000 to real estate. The management contract provides for fees, overhead
and direct expense reimbursement from ACCP. The revenues and expenses of the
contracts subsequent to April 30, 1999 are included in operations of the
Company. The contract rights are amortized over their expected lives of fifteen
years and resulted in amortization expense of approximately $67,000 in 1999.
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.
The Company 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. The Company 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. The Company 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, and equipment
and contracts with various state and local government agencies and legal rights.
The purchase price was allocated $7,100,000 to real estate, $147,000 to property
and equipment, $12,000 to other assets, and $1,576,000 to contract rights.
Contract rights are amortized over their estimated lives of fifteen years and
resulted in amortization expense of approximately $57,000 in 1999.
The following summarized pro forma unaudited information assumes the acquisition
of The Villa at Greeley, LLC had occurred on January 1, 1998: Year ended
December 31,
1999 1998
------------ ------------
Revenues $ 18,989,000 $ 11,899,000
Net income (loss) $ 217,000 $ (202,000)
Income (loss) per share, basic $ 0.05 $ (0.06)
Income (loss) per share, diluted $ 0.04 $ (0.06)
The above amounts are based upon certain assumptions and estimates the
Company believes are reasonable. The pro forma results do not necessarily
represent results that would have occurred if the business combination had taken
place at the date and on the basis assumed above.
NOTE 11. EARNINGS PER SHARE
The following table sets forth the computation of earnings per share and
earnings per share assuming dilution.
1999 1998
----------- -----------
Numerator
Net income (loss) before cumulative
changes in accounting principles $ 118,000 $ (376,000)
----------- -----------
Denominator for earnings per share
Weighted average shares
outstanding - basic $ 4,670,333 $ 3,499,403
Effect of dilutive securities
- stock options 127,541 ---
- stock warrants 327,459 ---
----------- -----------
Denominator for earnings per share
assuming dilution 5,125,333 3,499,403
=========== ===========
Earnings (loss) per share, basic $ 0.03 $ (0.11)
=========== ===========
Earnings (loss) per share
assuming dilution $ 0.02 $ (0.11)
=========== ===========
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the Company's financial
instruments, none of which were held for trading purposes, were as follows:
Year Ended December 31,
1999 1998
------------------------ ------------------------
Estimated Estimated
Carrying fair Carrying fair
amount value amount value
----------- ----------- ----------- -----------
Financial Assets
Cash and cash equivalents $ 601,000 $ 601,000 $ 5,181,000 $ 5,181,000
Short-term investments .. -- -- 5,919,000 5,919,000
Notes receivable ........ 31,000 31,000 322,000 322,000
Financial liabilities
Variable rate debt ...... 110,000 110,000 724,000 724,000
Fixed rate debt ......... 26,594,000 26,270,000 15,825,000 15,998,000
Convertible debentures .. 3,850,000 3,850,000 3,850,000 3,933,000
Redeemable common stock . 4,124,000 2,069,000 4,124,000 4,470,000
The fair values presented represent management's best estimates and may not
be substantiated by comparisons to independent markets and, in many cases, could
not be realized in immediate settlement of the instruments. Certain financial
instruments and all nonfinancial instruments are not required to be disclosed;
therefore, the aggregate fair value amounts presented do not purport to
represent the underlying fair value of the Company.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
Cash and Cash Equivalents and Short-Term Investments - The carrying amounts
reported in the accompanying consolidated balance sheets for cash and cash
equivalents and short-term investments approximate fair value due to the highly
liquid nature of the instruments.
Notes Receivable - The carrying value of notes receivable approximates fair
value because effective rates approximate current rates for loans to borrowers
with similar maturities and credit risk.
Variable Rate Debt - The carrying value of variable rate debt approximates
fair value due to the variable rate nature of the instruments.
Fixed Rate Debt - Fair values of fixed rate debt were calculated using
interest rates in effect as of each year end with the other terms of the debt
unchanged.
Convertible Debentures - Fair value of convertible debentures was
calculated using interest rates in effect as of each year end with the other
terms unchanged.
Redeemable Common Stock - Fair value of redeemable common stock is
calculated assuming exercise of the purchase option under the terms of the stock
purchase agreement at December 31, 1999 and 1998.
NOTE 13. INCOME TAX
The difference between the tax basis of assets and liabilities and their
financial reporting amounts that give rise to significant portions of deferred
income tax assets and liabilities are: assets - net operating loss
carry-forwards and nondeductible accruals and allowances; liabilities,
accelerated tax depreciation. The Company has approximately $2,294,000 of net
operating loss carry forwards at December 31, 1999, expiring through 2019.
The following is a reconciliation of the provision for (benefit from)
income taxes from continuing operations computed by applying the Federal
statutory rate of 34% and the effective income tax rate for the years ended
December 31, 1999 and 1998:
Year ended December 31,
1999 1998
----------- -----------
Provision for (benefit from) income taxes
at statutory rate .......................... $ 28,000 $ (128,000)
Nondeductible expenses ....................... 12,000 9,000
State income taxes ........................... 3,000 (18,000)
Change in valuation allowance ................ (381,000) 118,000
Change in prior year estimate ................ 338,000 19,000
----------- -----------
Total provision for (benefit from)
income taxes ............................. $ -- $ --
=========== ===========
Deferred tax assets and liabilities
are as follows:
Deferred tax assets
Net operating loss carry forward ........... $ 918,000 $ 1,058,000
Nondeductible accruals and allowances ...... 393,000 338,000
Other ...................................... 1,000 1,000
----------- -----------
$ 1,312,000 $ 1,397,000
Less: Valuation allowance .................. (677,000) (1,058,000)
----------- -----------
Deferred tax assets .................. 635,000 339,000
=========== ===========
Deferred tax liabilities:
Property and equipment ..................... (569,000) (273,000)
----------- -----------
Deferred tax liabilities ............. (569,000) (273,000)
----------- -----------
Net deferred tax asset ............. $ 66,000 $ 66,000
=========== ===========
The valuation allowance on tax assets increased (decreased) ($381,000) in
1999 and $421,000 in 1998, including ($381,000) and $396,000 related to
continuing operations in 1999 and 1998, respectively. The increase in valuation
allowance for 1998 was a result of an increase in prior year operating loss of
$188,000 and increase in the tax basis of assets of $63,000. The decrease in
valuation allowance in 1999 was primarily the result of a change in prior year
estimate.
NOTE 14. RELATED PARTY TRANSACTIONS
The Company entered into agreements with affiliated entities in 1995 and
1996 to develop and manage two assisted living centers. The Company received a
15% equity interest in each assisted living center and has an investment of
approximately $183,000 at December 31, 1999. The Company sold one facility in
1997 and plans to sell its interest in the remaining facility. The Company
believes it will recover its investment from sales proceeds. Facility debt of
$1,925,000 is guaranteed by the Company at December 31, 1999.
NOTE 15. COMMITMENTS AND CONTINGENCIES
Total lease expense was $67,000 and $58,000 for 1999 and 1998,
respectively, under all operating leases. The future minimum lease payments are
as follows: 2000 - $67,000, 2001 - $59,000 , 2002 - $26,000, and 2003 - $6,000.
The Company executed three-year employment agreements with the Company's
CEO and President in 1997. The agreements provide for compensation at a base
rate and increases to be determined on an annual basis by the Board of
Directors. The agreements also contain provisions for severance pay and
disability payments, as well as non-compete agreements preventing them from
engaging in a business deemed similar to that of the Company. The Company has a
Retirement Compensation Plan with its CEO and President. The unfunded accrual
for this plan of $94,000 is included in accrued liabilities at December 31,
1999.
NOTE 16. 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 17. 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". Prior to January 1, 1998, development and new
facility opening costs had been deferred and amortized over the life of the
contract. 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. The effect
of the change in 1998 was to increase net loss before the cumulative effect of
change in accounting principles by approximately $207,000 or $0.06 per share.
Pursuant to the pronouncement, presentation of the pro forma effects of
retroactive application are not required.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
MANAGEMENT -
Name Age Position(s) with the Company
Donald E. Smith ........... 47 Chief Executive Officer, Director
Jerry M. Sunderland ....... 63 President, Director
Tim West .................. 51 Vice President of Operations
Ronald Champion............ 45 Vice President of Operations
Randall J. Wood .......... 41 Corporate Secretary and Counsel
Tiffany Smith.............. 33 Vice President of Corporate Communications
Lloyd Lovely .............. 50 Vice President of Finance
Shawn Sunderland........... 36 Vice President of Operations
Eric Gray.................. 43 Vice President and Counsel
Robert O. McDonald ........ 61 Director
Mark S. Cooley ........... 42 Director
James P. Wilson ........... 41 Director
Directors and Officers of the Company -
The following is a brief description of the business experience during the
past five years of each of the above-name persons:
Donald E. Smith is the founder of the Company's corrections operations and
has served as the Chief Executive Officer of Avalon and its subsidiaries since
their inception. Mr. Smith has owned, managed and developed a number of private
corporations since 1985 to provide private corrections, health care and other
related services. Mr. Smith received a Bachelor of Science degree in 1974 from
Northwestern State College. Mr. Smith was employed by Arthur Andersen & Co. for
seven years prior to founding the Company.
Jerry M. Sunderland joined the Company in 1988 and has served as President
of Avalon since June 1995. Mr. Sunderland also serves as a Director of Avalon
and its subsidiaries. Mr. Sunderland has in excess of 38 years of experience in
developing and operating quality programs and facilities for adult offenders.
Mr. Sunderland was employed by the Oklahoma Department or Corrections for
sixteen years including ten years as warden of maximum security prison. Mr.
Sunderland also served as an agent for the Oklahoma State Bureau of
Investigation for twelve years. Mr. Sunderland has a Bachelors degree in
Sociology and a Masters degree in Corrections.
Tim West joined Avalon as Vice President of Operations in May 1998 and was
promoted to Senior Vice President of Operations in February 1999. Mr. West has
in excess of 25 years of experience designing, developing, and operating
correctional institutions. Mr. West is jointly responsible for Avalon's
correctional operations, including recruitment and training of personnel,
maintaining accreditation by the American Correctional Association, and
compliance with contractual requirements. Mr. West has served in numerous
capacities in the Texas criminal justice system, most recently as the Senior
Warden at the Mark W. Stiles Unit in Huntsville, Texas. Mr. West also served as
the project director for the "Michael Prototype" in the Texas prison system. Mr.
West received a Bachelors and Masters Degree in Contemporary Corrections from
the Institute for Contemporary Corrections and the Behavioral Sciences at Sam
Houston University.
Ron Champion was appointed as Vice President of Operations in July 1999.
Mr. Champion has been engaged in the corrections industry for 25 years with
special skills in facility operations in community corrections and adult secure
institutions. Mr. Champion's experience includes serving as a superintendent of
a work release center and a supervisor of two adult correctional institutions.
Mr. Champion served as warden of a medium security prison in Oklahoma for 11 1/2
years prior to joining Avalon. His administrative responsibilities have ranged
from day-to-day management including supervision, administration, and quality
assurance, formulating policies and procedures, hiring, training, and
supervising staff. His leadership is recognized in accreditation through the
American Correctional Association throughout his administrative tenure.
Randall J. Wood joined Avalon in 1995 and serves as Corporate Secretary and
Counsel for the Company. Prior to joining the Company in 1996, Mr. Wood's
practice was focused primarily in the field of real property and commercial
litigation. Mr. Wood practiced with the firm of Stack & Barnes, P.C. for ten
years, and was with the firm of Hammons, Vaught, & Conner prior to joining the
Company. Mr. Wood is a member of the Oklahoma Bar Association and is authorized
in Oklahoma Federal Courts and the Tenth Circuit Court of Appeals. Mr. Wood is
responsible for the duties of the Corporate Secretary, management of legal
matters, and compliance with government regulations for the Company and its
subsidiaries. Mr. Wood received his law degree from the University of Oklahoma
in 1983.
Tiffany Smith joined the Company in 1994 as the Public Information Officer
and was promoted to Assistant Corporate Secretary for the Company in 1997 and to
Vice President of Corporate Communications in 1999. Ms. Smith served for four
years as marketing manager for Eagle Picher Industries, a New York Stock
Exchange listed company, prior to joining Avalon. Ms. Smith has developed and is
responsible for directing the Company's Corporate Communications and Public
Relations department and implementing marketing strategies. Ms. Smith is the
primary contact for the Company's shareholders and investors. Ms. Smith received
a Bachelors Degree in Business Administration, Marketing and Management from
Missouri Southern State College. Ms. Smith is the spouse of Donald Smith, Chief
Executive Officer.
Lloyd Lovely was appointed Vice President of Finance in March, 2000. Mr.
Lovely has overall responsibility for administration of the financial reporting
functions for the Company and subsidiaries. Mr. Lovely is also responsible for
administration of the Company's human resources department, and other
administrative functions including GAAP and SEC compliance. Mr. Lovely's
business experience includes retailing, manufacturing, and medical industries.
Mr. Lovely received his degree in Accounting from Central State University, a
Masters degree from Central State University, and is a Certified Public
Accountant.
Shawn Sunderland joined the Company in 1997 and was promoted to Vice
President of Operations in February 1999. Mr. Sunderland has been engaged in the
corrections and law enforcement industry for more than 9 years and has served as
Vice President of Business Development for the Company since 1997. Mr.
Sunderland's responsibilities as Vice President of Business Development included
project development including site development, lease negotiation, proposal
development, facility design and program implementation. Mr. Sunderland was
responsible for the planning, development, construction and opening of the Union
City Juvenile Center and the construction of the El Paso Multi Purpose Facility.
Mr. Sunderland received his Bachelors Degree in Organizational Leadership from
Southern Nazarene University. Mr. Sunderland is the son of Jerry Sunderland,
President.
Eric Gray joined Avalon as a Vice President in June 1999. Mr. Gray serves
as Corporate Counsel for the Company and is responsible for various
administrative functions. Mr. Gray's responsibilities include pending litigation
matters, contract review and State law compliance issues. Mr. Gray is also
responsible for administering and directing the Company's activities regarding
implementation of the Oklahoma Community Sentencing Act, Oklahoma nighttime and
weekend incarceration, and Oklahoma mandated prison transition legislation. Mr.
Gray has also directed the Company's school contract negotiations for the Union
City Juvenile Center.
Robert O. McDonald was appointed as a Director of Avalon in October, 1994.
Mr. McDonald is Chairman of the Board of Directors of Capital West Securities
and its parent holding company, Affinity Holding Corp. Mr. McDonald started his
investment career in 1961 with Allen and Company and left in 1967 to form
McDonald Bennahum and Co., which later joined with Ladenburg Thalmann and Co.
where Mr. McDonald was a Senior Partner. Mr. McDonald joined Planet Oil Mineral
Corporation in 1971 and became president in 1973. From 1975 until 1993, Mr.
McDonald was affiliated with Stifel Nicolaus & Company and headed its municipal
syndicated effort. Mr. McDonald received a Bachelors Degree in Finance from the
University of Oklahoma in 1960. He also served as an Officer in the United
States Army and Army Reserve.
Mark S. Cooley was appointed as a Director of Avalon in January 1998. Mr.
Cooley is a Principal of Cooley & Company and Pro Trust Equity Partners. Mr.
Cooley was with Citicorp and Chemical Bank for twelve years in their Corporate
Finance Divisions in New York and Denver. Mr. Cooley received his Bachelors
degree in Economics from DePauw University and an MBA in Finance from Indiana
University.
James P. Wilson was appointed as a Director-elect of Avalon in September
1998, and was approved by shareholders at the 1999 annual meeting. Mr. Wilson is
a managing partner in the investment firm of Rice, Sangalis, Toole & Wilson.
Prior to founding Rice, Sangalis, Toole & Wilson, Mr. Wilson was a vice
president with First Texas Merchant Banking Group, and was also an audit manager
with Arthur Young & Co. Mr. Wilson received a BBA degree from Texas A&M
University, and is a Certified Public Accountant.
ITEMS 10, 11 and 12.
The information required by these Items has been incorporated by Reference from
the Company's definitive proxy statement which will be filed with the Commission
not later than 120 days after December 31, 1999.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
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 Certificate of Corporate Resolutions, dated
December 13, 1993, regarding authorization of Class B Common Stock
and Amendment to Articles (3)
vi Consent of Board of Directors authorizing extension of expiration
dates of Class "C" Redeemable Warrants (11)
1. i Form of Stock Certificate (1)
ii Form of Class "C" Redeemable Warrant (4)
iii Form of Class "C" Warrant Agreement (4)
iv Form of Class "D" Redeemable Warrant (5)
v Form of Class "D" Warrant Agreement (5)
vi Form of Class "E" Warrant Agreement (6)
vii Form of Convertible Debenture Agreement (6)
10. i Contract between Southern Correction Systems, Inc. and the Oklahoma
Department of Corrections for halfway house services for the
year ended June 30, 2000. (11)
ii Stock Option Plan adopted by Board of Directors on August 16, 1994
(4)
iii Change of Control Agreement between Donald E. Smith and Avalon
Community Services, Inc. dated August 25, 1997. (5)
iv Employment Agreement with Donald E. Smith dated August 8, 1997. (5)
v Employment Agreement with Jerry M. Sunderland dated August 8,
1997 (5)
vi Contract with State of Oklahoma Office of Juvenile Affairs for
80-bed medium security residential treatment center for youthful
offenders; one year contract with options to renew for three
additional years. (11)
vii Agreement dated June 1, 1998 between Southern Corrections Systems,
Inc. and the Texas Department of Criminal Justice. (8)
viii Financing agreement between Avalon Community Services, Inc., and
Fleet Capital Corporation dated February 25, 1999. (9)
ix Amended and Restated Loan and Security Agreement between Avalon
Correctional Services, Inc., et al., and Fleet Capital Corporation,
dated December 9, 1999. (11)
x Agreement dated September 16, 1998, between Avalon Community
Services, Inc., and RSTW Partners III. (10)
xi Contract between Southern Corrections Systems, Inc., and Adams
County Board of County Commissioners dated July 1, 1999 (11)
xii Contract between The Villa at Greeley and Weld County Community
Corrections Board, dated July 1, 1999. (11)
21. i Subsidiaries of Registrant (5)
(b) Reports on Form 8-K
i Form 8-K dated October 17, 1997 re: Acquisition of Assets from
Freedom Ranch, Inc.
ii Form 8-K dated March 19, 1998 re: Award from the Oklahoma Office of
Juvenile Affairs.
iii Form 8-K dated October 1, 1998 re: Financing agreement with Rice,
Sangalis, Toole & Wilson.
ix Form 8-K dated March 10, 1999 re; Financing agreement with Fleet
Capital Corporation.
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 Form 10-KSB for the
fiscal year ended December 31, 1993 and dated March 24, 1994.
4) Incorporated herein by reference to the Registrant's Registration Statement
on Form SB-2 dated September 13, 1995 and amended.
5) Incorporated herein by reference to the Registrant's Registration Statement
on Form S-2 Amendment No. 1, dated April 16, 1996 and amended.
6) Incorporated herein by reference to the Registrant's Form S-2 dated
December 22, 1997.
7) Incorporated herein by reference to the Registrant's Form 8-K dated March
19, 1998.
8) Incorporated herein by reference to the Registrant's Registration Statement
on Form S-2 dated September 14, 1998.
9) Incorporated by reference to the Registrant's Form 8-K dated March 10,
1999. 10) Incorporated by reference to the Registrant's Form 8-K dated
October 1, 1998.
11) Incorporated by reference to the Registrant's Registration Statement on
Form S-2 dated March 24, 2000
Item 14. Signatures
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, there unto duly authorized.
By: Donald E. Smith
---------------
Donald E. Smith
Chief Executive Officer and Director Dated: March 23, 2000
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
By: Donald E. Smith
---------------
Donald E. Smith
Chief Executive Officer and Director Dated: March 23, 2000
By: Jerry M. Sunderland
-------------------
Jerry M. Sunderland
President and Director Dated: March 23, 2000
By: Robert O. McDonald
------------------
Robert O. McDonald
Director Dated: March 23, 2000
By: Mark S. Cooley
--------------
Mark S. Cooley
Director Dated: March 23, 2000
By: James Wilson
------------
James Wilson
Director Dated: March 23, 2000
By: Lloyd Lovely
------------
Lloyd Lovely
Vice President of Finance Dated: March 23, 2000
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