-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I8ZUzu3VN9/OlBUmuLxjOfWKiUc2G+I6iATE8Hs8wSyrUApxEbGyEbeId18GMyul OBQKd8ub4oKiKH1slRcpDg== 0000872202-99-000030.txt : 19990727 0000872202-99-000030.hdr.sgml : 19990727 ACCESSION NUMBER: 0000872202-99-000030 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990726 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVALON COMMUNITY SERVICES INC CENTRAL INDEX KEY: 0000872202 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-FACILITIES SUPPORT MANAGEMENT SERVICES [8744] IRS NUMBER: 133592263 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20307 FILM NUMBER: 99670375 BUSINESS ADDRESS: STREET 1: 13401 RAILWAY DR STREET 2: P O BOX 57012 CITY: OKLAHOMA CITY STATE: OK ZIP: 73114 BUSINESS PHONE: 4057528802 MAIL ADDRESS: STREET 1: P O BOX 57012 CITY: OKLAHOMA CITY STATE: OK ZIP: 73157 FORMER COMPANY: FORMER CONFORMED NAME: AVALON ENTERPRISES INC DATE OF NAME CHANGE: 19600201 10-Q 1 10-Q FOR THE QUARTER ENDING JUNE 30, 1999 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 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 July 25, 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 . PART I - FINANCIAL INFORMATION AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, December 31, 1999 1998 --------------- -------------- ASSETS (Unaudited) Current assets: Cash and cash equivalents $ 506,000 $ 5,181,000 Restricted cash 799,000 --- Investment in short term U.S. treasury bills --- 5,919,000 Accounts receivable, net 2,271,000 1,348,000 Current maturities of notes receivable 290,000 322,000 Prepaid expenses and other 508,000 100,000 --------------- -------------- Total current assets 4,374,000 12,870,000 --------------- -------------- Property and equipment, net 27,495,000 13,644,000 Other assets 5,516,000 2,234,000 --------------- -------------- Total assets $ 37,385,000 $ 28,748,000 =============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable, accrued liabilities and other $ 1,856,000 $ 2,026,000 Current maturities of long-term debt 449,000 2,201,000 --------------- -------------- Total current liabilities 2,305,000 4,227,000 --------------- -------------- Long-term debt, less current maturities 25,016,000 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 (4,539,000) (4,422,000) --------------- -------------- Total stockholders' equity 2,090,000 2,199,000 --------------- -------------- Total liabilities and stockholders' equity $ 37,385,000 $ 28,748,000 =============== ==============
These accompanying notes are an integral part of these consolidated financial statements. Page 1 AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Revenues $ 3,883,000 $ 1,860,000 $ 6,310,000 $ 3,667,000 ----------- ----------- ----------- ----------- Costs and expenses Direct operating $ 2,498,000 $ 1,131,000 $ 4,002,000 $ 2,251,000 General and administrative 335,000 317,000 671,000 567,000 Development costs 94,000 146,000 311,000 186,000 Depreciation and amortization 243,000 158,000 428,000 310,000 Interest expense 546,000 212,000 998,000 435,000 ----------- ----------- ----------- ----------- Income (loss) from continuing operations before income tax expense (benefit) $ 167,000 $ (104,000) $ (100,000) $ (82,000) Income tax expense (benefit) --- --- --- --- ----------- ----------- ----------- ----------- Income (loss) before extraordinary items and cumulative effect of change in accounting principles 167,000 $ (104,000) $ (100,000) $ (82,000) ----------- ----------- ----------- ----------- Cumulative effect of change in accounting principles --- --- --- (74,000) Extraordinary loss from early retirement of debt --- --- (35,000) --- ----------- ----------- ----------- ----------- Net income (loss) $ 167,000 $ (104,000) $ (135,000) $ (156,000) =========== =========== =========== =========== Basic income (loss) per share: Income (loss) before extraordinary loss and cumulative effect of change in accounting principles $ 0.04 $ (0.03) $ (0.02) $ (0.03) Cumulative effect of change in accounting principles --- --- --- $ (0.02) Extraordinary loss from early retirement of debt --- --- (0.01) --- ----------- ----------- ----------- ----------- Net income (loss) per share, basic $ 0.04 $ (0.03) (0.03) $ (0.05) =========== =========== =========== =========== Weighted average number of common and common equivalent shares outstanding, basic 4,670,630 3,031,360 4,668,000 3,009,963 =========== =========== =========== =========== Diluted income (loss) per share: Income (loss) before extraordinary loss and cumulative effect of change in accounting principles $ 0.03 $ (0.03) $ (0.02) $ (0.03) Cumulative effect of change in accounting principles --- --- --- $ (0.02) Extraordinary loss from early retirement of debt --- --- (0.01) --- ----------- ----------- ----------- ----------- Net income (loss) per share, basic $ 0.03 $ (0.03) (0.03) $ (0.05) =========== =========== =========== =========== Weighted average number of common and common equivalent shares outstanding, diluted 5,086,000 3,031,360 4,668,000 3,009,963 =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. Page 2 AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
For the six months ended June 30, 1999 1998 --------------- ---------------- OPERATING ACTIVITIES: Net loss $ (135,000) $ (82,000) Adjustments to reconcile net loss to net cash provided by (used for) operating activities Depreciation and amortization 428,000 310,000 Amortization of debt issue costs 104,000 --- Writeoff of development and acquisition costs 4,000 128,000 Extraordinary loss on early retirement of debt 35,000 --- Changes in operating assets and liabilities: Decrease (increase) in - Accounts receivable (827,000) (134,000) Prepaid expenses and other (409,000) (179,000) Increase (decrease) in accounts payable, accrued liabilities and other 1,060,000 66,000 -------------- ----------------- Net cash provided by operating activities $ 260,000 $ 109,000 -------------- ----------------- INVESTING ACTIVITIES: Proceeds from maturity of certificate of deposit $ --- 500,000 Proceeds from sales and maturities of securities 5,919,000 --- Capital expenditures (8,125,000) (536,000) Payment for purchase of businesses (10,977,000) --- Proceeds from payments on notes receivable 31,000 4,000 --------------- ---------------- Net cash used in investing activities $ (13,152,000) $ (32,000) --------------- ---------------- FINANCING ACTIVITIES: Payment of loan fees and deferred costs $ (678,000) $ --- Repayment of borrowings (7,231,000) (2,874,000) Proceeds from borrowings 16,118,000 2,914,000 Proceeds from warrant and option exercise 8,000 149,000 --------------- ---------------- Net cash provided by financing activities $ 8,217,000 $ 189,000 --------------- ---------------- Net increase (decrease) in cash $ (4,675,000) $ 266,000 Cash, beginning of period 5,181,000 1,458,000 --------------- ---------------- Cash, end of period $ 506,000 $ 1,724,000 =============== ================
The accompanying notes are an integral part of these consolidated financial statements. Page 3 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 an Oklahoma based corporation specializing in operating private correctional facilities and providing correctional programming. The Company currently operates in Oklahoma, Texas and Colorado with plans to significantly expand into additional states. 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 and Cash Equivalents - The Company considers all highly liquid investments with original maturities of three months or less when purchased and money market funds to be cash equivalents. Concentrations of Credit Risk - Financial instruments potentially subjecting the Company to concentrations of credit risk consist principally of temporary cash investments, accounts receivable and notes receivable. The Company places its temporary cash investments with high credit quality financial institutions and money market funds and limits the amount of credit exposure to any one institution or fund. 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 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. Page 4 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 loss per share has been computed on the basis of weighted average shares outstanding during each period. Diluted loss per share for the six months ended June 30, 1999 and 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 June 30, 1999 has been adjusted for dilutive effects of options and warrants that were not anti-dilutive during the three month period. Interim Financial Statements - The consolidated balance sheet as of June 30, 1999 and the statements of operations for the three months and six months ended June 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 six months ended June 30, 1999, are not necessarily indicative of the results that may be expected for the entire year ended December 31, 1999. Page 5 NOTE 2. LONG-TERM DEBT Long-term debt consists of the following:
June 30, December 31, 1999 1998 ------------- ------------ Revolving senior line of credit $ 12,142,000 $ 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% 683,000 676,000 Notes payable to banks, collateralized by land, buildings and improvement due in installments through June 2012 with interest ranging from 9.75% to 11% 12,141,000 4,631,000 Note payable to state government, collateralized by accounts receivable, non-interest bearing, due in installments through August 2007 158,000 --- 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 10,341,000 10,356,000 ------------- ------------ 25,465,000 16,549,000 Less - current maturities 449,000 2,201,000 ------------- ------------ $ 25,016,000 $ 14,348,000 ============= ============
Avalon Correctional Services Inc. closed a senior credit facility with the Fleet Capital Corporation on February 25, 1999. The new 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 8.25%) 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 new 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 June 30, 1999 was $12,142,000. Page 6 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 June 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 June 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 June 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 December 31,1998. 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. 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. Page 7 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 532,940 shares of Class A common stock at exercise prices ranging from $1.50 to $4.25 per share. Options providing for the issuance of 268,408 shares were exercisable at June 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 first 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 six months ended June 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 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 The Villa at Greeley, LLC including all real estate and contract rights for approximately $8,600,000. The real estate was acquired from University Holdings, LLC, a related party 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 8 NOTE 9. CORPORATE NAME CHANGE The Company's Board of Directors approved a corporate name change to Avalon Correctional Services, Inc. in July 1998. The Company began conducting business under the new name immediately. The name was changed to reflect the Company's focus on the business of private corrections, since all non correctional operations have been divested or are held for sale. The name change was approved by the Company's shareholders at this year's annual meeting on May 26, 1999. The amendment of the name change in the articles of incorporation was made effective after approval of the shareholders. Page 9 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 private 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 June 30, 1999 was $2,069,000 representing a current ratio of 1.86:1, 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 Purpose Facility. The Union City Juvenile Center was completed and became operational in the first quarter of 1999, and the El Paso Multi Purpose Facility was completed and became operational in the second quarter of 1999. The Company had approximately $500,000 cash and approximately $2 million of available credit on its revolving line of credit for new projects at June 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 will enable 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 to be y2k compliant as of June 30, 1999. Final testing and operational usage of the new software will occur during the third quarter of 1999. The Company's major customers are State and Federal correctional agencies. An effort is being made to confirm y2k compliance of each agency and how this may impact the Company. The Company has no reason to believe that its contracts with State and Federal government agencies will have an adverse effect because of y2k compliance. Results of Operations - Three Months Ended June 30, 1999 Compared to the Three Months Ended June 30, 1998- Total revenues increased by 109% to $3.88 million for the three months ended June 30, 1999 from $1.86 million for the three months ended June 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, and the acquisition of the Villa at Greeley in June 1999. Revenues in the second quarter of 1999 were enhanced by the Union City Juvenile Center providing $945,000 of revenues, Adams Community Corrections Program providing $510,000 of revenues, and the Villa at Greeley providing $434,000 of revenues. The Company had net income for the three months ended June 30, 1999 of $167,000 or $.03 diluted earnings per share, as compared to a net loss for the three months ended June 30, 1998 of $104,000 or $.03 basic and diluted loss per share. The Company's net income was the result of the new Union City Juvenile Center and the acquisitions of the Villa at Greeley and Adams Community Corrections Program. Page 10 Operating income, before interest, depreciation, and income taxes, increased 246% for the three months ended June 30, 1999 to $956,000 compared to $276,000 for the three months ended June 30, 1998. The increase in operating income was a result of the Company's continuing expansion efforts. Direct operating expenses increased by 120% for the three months ended June 30, 1999 over the three months ended June 30, 1998, primarily as a result of the new Union City Juvenile Center and the acquisitions of the Villa at Greeley and Adams Community Corrections Program. The profit margin was 36% for the three months ended June 30, 1999 from 38% for the three months ended June 30, 1998. Corporate. General and administrative expenses increased by 6% to $335,000 for the three months ended June 30, 1999 from $317,000 for the three months ended June 30, 1998. General and administrative expenses increased primarily due to increased staffing to prepare for growth of new facilities contract and acquisitions. increase in interest expense of $334,000 for the three months ended June 30, 1999 over the second 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. Six months ended June 30, 1999 compared to the six months ended June 30, 1998 - Net loss for the six months ended June 30, 1999 was $135,000 or $.03 per share as compared to a loss of $156,000 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-purpose facility. The Union City Juvenile Center became operational in the first quarter of 1999 and the El Paso Multi-purpose 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 six month period ended June 30, 1999. Income from continuing operations, before interest, depreciation and income taxes, was $1,325,000 in 1999 as compared to $680,000 in 1998. Revenues increased by 72% in 1999 or by $2,643,000 compared to 1998. Revenue was $6,310,000 in 1999 compared to $3,667,000 in 1998. The increases in income from operations and revenue are 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. General and administrative expenses increased by $104,000 or 18% in 1998. This increase was due to staffing and development costs associated with the Company's growth plan. Interest expense increased approximately $563,000 due to 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 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. a) Exhibits Exhibit 27. Financial Data Schedule. b) Reports on Form 8-K - (i) Filed a Form 8-K on April 14, 1999, re: Acquisition of Adams Community Corrections Program, Inc. (ii) Filed a Form 8-K on June 24, 1999, re: Acquisition of The Villa at Greeley, LLC Page 12 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: July 26, 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 EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1999 JUN-30-1999 1,305,000 0 2,280,000 9,000 0 4,374,000 29,362,000 1,887,000 37,385,000 2,305,000 3,850,000 0 0 3,000 6,211,000 37,385,000 0 3,883,000 0 2,927,000 243,000 0 546,000 167,000 0 167,000 0 0 0 167,000 0.04 0.03
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