SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
CURRENT REPORT ON FORM 8-K
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report, June 24, 1999
Commission File Number: 0-20307
AVALON CORRECTIONAL SERVICES, INC.
(Exact name of Registrant as
specified in its corporate 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)
<PAGE>
ITEM 2. Acquisition of Assets
On June 9, 1999, Avalon Correctional Services, Inc. acquired The Villa at
Greeley, LLC. 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 over 300 individuals for
residential services and also provides day reporting and non-residential
services to over 560 offenders. Avalon Correctional Services, Inc. also
purchased the buildings and land in Greeley, Colorado where The Villa at
Greeley, LLC, operates. Under 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. Avalon Correctional Services, 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 own the same proportional interest in University Holdings
LLC. Avalon financed $8,461,000 of the purchase price through Avalon's senior
line of credit.
Audited financial statements of the business acquired, The Villa at
Greeley, LLC, are presented in Item 7 below. Additionally, unaudited proforma
combined financial statements are also provided in Item 7 below.
ITEM 7. Financial Statements and Exhibits
a. The audited financial statements of The Villa at Greeley, LLC for the
years ended December 31, 1996, 1997 and 1998.
b. Pro forma combined financial statements of Avalon Correctional Services,
Inc. after the purchase of The Villa at Greeley, LLC, as of March 31,
1999, and for the year ended December 31, 1998 and for the three months
ending March 31, 1999.
Page 1
<PAGE>
AVALON CORRECTIONAL SERVICES, INC. AND SUBSIDIARIES
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date: June 24, 1999 AVALON CORRECTIONAL SERVICES, INC.
By: \s\Jerry Sunderland
---------------------------
Jerry Sunderland, President
Page 2
THE VILLA AT GREELEY, LLC
FINANCIAL STATEMENTS
Years Ended December 31, 1997 and 1996
<PAGE>
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
Independent Auditors' Report..................................................2
BALANCE SHEETS................................................................3
STATEMENTS OF EARNINGS........................................................4
STATEMENTS OF CASH FLOWS......................................................5
STATEMENTS OF EQUITY..........................................................7
NOTES TO FINANCIAL STATEMENTS.................................................8
- -------------------------------------------------------------------------------
-1-
<PAGE>
ANDERSON & WHITNEY, P.C.
Certified Public Accountants and Business advisors
- --------------------------------------------------
1001 Ninth Avenue
Greeley, Colorado 80631-4046
(970) 352-7990 FAX (970) 352-1855
E-mail Address: [email protected]
Independent Auditors' Report
----------------------------
Members and Board of Mangers
The Villa at Greeley, LLC
Greeley, Colorado
We have audited the accompanying balance sheets of The Villa at Greeley,
LLC (a Colorado limited liability corporation) as of December 31, 1997 and 1996,
and the related statements of equity, earnings, and cash flows for the years
then ended. These financial state ments are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the 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 of disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the 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 financial statements referred to above present fairly,
in all material respects, the financial position of The Villa at Greeley, LLC as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended, in conformity with the generally accepted
accounting principles
Anderson & Whitney, P.C.
March 17, 1998
MEMBER OF
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
SEC AND PRIVATE COMPANIES PRACTICE SECTIONS - AICPA DIVISION FOR CPA FIRMS
ACCOUNTING FIRMS ASSOCIATED, INC.
<PAGE>
THE VILLA AT GREELEY, LLC
BALANCE SHEETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
December 31 1997 1996
- ---------------------------------------------------------------------------------------------
ASSETS
Current Assets:
<S> <C> <C>
Cash $ 30,102 $ 3,837
Assets limited as to use 56,651 46,313
Accounts receivable, net of allowance for doubtful
accounts of $-0- 326,659 284,488
Due from Weld County -- 331,595
Prepaid expenses and other 4,639 2,085
- ---------------------------------------------------------------------------------------------
Total Current Assets 418,051 668,318
- ---------------------------------------------------------------------------------------------
Property and Equipment:
Land 347,811 425,318
Furniture and equipment 184,303 192,493
Automobiles 261,332 221,512
Leasehold improvements 413,002 419,975
--------------------------
1,206,448 1,259,298
Less: Accumulated depreciation and amortization 555,232 564,843
- ---------------------------------------------------------------------------------------------
651,216 694,455
Construction in progress 100,541 --
- ---------------------------------------------------------------------------------------------
Total Property and Equipment 751,757 694,455
- ---------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,169,808 $ 1,362,773
=============================================================================================
LIABILITIES
Current Liabilities:
Bank overdraft $ -- $ 3,440
Notes payable 62,000 369,000
Accounts payable 133,246 93,396
Accrued expenses and other 309,262 285,656
Resident and client trust funds 56,651 46,313
Payable to related party 10,824 --
Current portion of long-term debt 75,278 54,628
- ---------------------------------------------------------------------------------------------
Total Current Liabilities 647,261 852,433
Long-Term Debt 458,307 398,201
- ---------------------------------------------------------------------------------------------
Total Liabilities 1,105,568 1,250,634
- ---------------------------------------------------------------------------------------------
EQUITY 64,240 112,139
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $ 1,169,808 $ 1,362,773
=============================================================================================
</TABLE>
See Accompanying Notes to Financial Statements.
-3-
<PAGE>
THE VILLA AT GREELEY, LLC
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Years Ended December 31 1997 1996
- ---------------------------------------------------------------------------------------------
Revenue:
<S> <C> <C>
Restitution Center $ 1,731,254 $ 1,551,660
Residential Treatment Center 1,464,223 1,388,641
Villa Living Center 826,468 940,392
Outpatient 93,676 76,820
Other revenue 97,783 46,808
- ---------------------------------------------------------------------------------------------
Total Operating Revenue 4,213,404 4,004,321
- ---------------------------------------------------------------------------------------------
Operating Expenses:
Restitution Center 1,002,599 912,474
Residential Treatment Center 963,470 1,003,527
Villa Living Center 473,171 348,793
Outpatient 22,712 12,410
General and Administrative 1,669,952 1,635,609
- ---------------------------------------------------------------------------------------------
Total Operating Expenses 4,131,904 3,912,813
- ---------------------------------------------------------------------------------------------
Earnings from Operations 81,500 91,508
- ---------------------------------------------------------------------------------------------
Other Income (Expense):
Gain (loss) on sale of property and equipment (2,342) 3,350
Gain on sale of Del Camino property 205,398 --
Interest income 53,933 --
Miscellaneous income 1,966 5,248
Abandonment loss (30,526) --
Interest expense (61,563) (59,266)
- ----------------------------------------------------------------------------------------------
Total Other Income (Expense) - net 166,866 (50,668)
- ----------------------------------------------------------------------------------------------
NET EARNINGS $ 248,366 $ 40,840
==============================================================================================
</TABLE>
See Accompanying Notes to Financial Statements.
-4-
<PAGE>
THE VILLA AT GREELEY, LLC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Years Ended December 31 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Cash received from residents, clients, and third party payors $ 4,173,199 $ 3,980,829
Cash paid to suppliers and employees (4,023,697) (3,762,860)
Interest received 53,933 --
Interest paid (58,856) (58,929)
- ----------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 144,579 159,040
- ----------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Purchase of property and equipment (86,873) (63,370)
Proceeds from sale of property and equipment 283,156 3,537
Construction in progress (100,541) --
Site development costs (10,755) (43,356)
Reimbursement of site development costs 311,824 --
- ---------------------------------------------------------------------------------------------
Net Cash Provided (Used) by Investing Activities 396,811 (103,189)
- ----------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from:
Notes payable 965,000 1,103,300
Long-term debt 166,298 34,282
Principal payments on:
Notes payable (1,272,000) (1,023,370)
Long-term debt (85,542) (46,478)
Decrease in bank overdraft (3,440) (53,813)
Advances from related party 10,824 --
Contributions from members 1,000 --
Distributions paid (297,265) (68,601)
- ----------------------------------------------------------------------------------------------
Net Cash Used by Financing Activities (515,125) (54,680)
- ----------------------------------------------------------------------------------------------
Net Increase in Cash 26,265 1,171
Cash, Beginning of Year 3,837 2,666
- ----------------------------------------------------------------------------------------------
Cash, End of Year $ 30,102 $ 3,837
==============================================================================================
</TABLE>
Continued on next page.
-5-
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Years Ended December 31 1997 1996
- ---------------------------------------------------------------------------------------------
Reconciliation of Net Earnings to Net Cash
Provided by Operating Activities:
<S> <C> <C>
Net earnings $ 248,366 $ 40,840
Adjustments:
Depreciation and amortization 50,012 82,031
Gain on sale of property and equipment (203,056) (3,350)
Abandonment loss 30,526 --
(Increase) decrease in:
Accounts receivable (42,171) (28,740)
Prepaid expenses and other (2,554) 457
Increase (decrease) in:
Accounts payable 39,850 60,445
Accrued expenses and other 23,606 7,357
- ---------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities $ 144,579 $ 159,040
=============================================================================================
</TABLE>
See Accompanying Notes to Financial Statements.
-6-
<PAGE>
THE VILLA AT GREELEY, LLC
STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
Stockholders' Equity Members' Equity
---------------------------------- ---------------------------
Additional Undistributed
Common Paid-In Retained Contributed Earnings
Years Ended December 31, 1996 and 1997 Stock Capital Earnings Capital (Loss) Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ 4,000 $ 1,235,572 $ (1,099,672) $ -- $ -- $ 139,900
Distributions paid -- -- (68,601) -- -- (68,601)
Net earnings for the year ended
December 31, 1996 -- -- 40,840 -- -- 40,840
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 4,000 1,235,572 (1,127,433) -- -- 112,139
Distributions paid -- -- (295,000) -- (2,265) (297,265)
Members' cash contribution -- -- -- 1,000 -- 1,000
Conversion from S corporation to limited
liability company effective August 1, 1997 (4,000) (1,235,572) 1,171,855 67,717 -- --
Net earnings (loss) for the year ended
December 31, 1997 -- -- 250,578 -- (2,212) 248,366
- --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $ -- $ -- $ -- $ 68,717 $ (4,477) $ 64,240
================================================================================================================================
</TABLE>
See Accompanying Notes to Financial Statements.
-7-
<PAGE>
THE VILLA AT GREELEY, LLC
NOTES TO FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies:
The accounting and reporting policies of The Villa at Greeley, LLC (the
Company) conform to generally accepted accounting principles. The following
summary of significant accounting policies is presented to assist the reader in
evaluating these financial statements.
Description of Business:
The Company, organized in Colorado in 1984, provides the following
services: The Villa Living Center is a 93-bed health care facility serving
persons of all ages who cannot live safely alone, but who do not need nursing
home care. The Restitution Center is a community-based correctional facility for
minimum risk offenders. The Residential Treatment Center is a drug and alcohol
treatment program for offenders.
Property and Equipment:
Property and equipment are recorded at acquisition cost. Depreciation is
computed using accelerated methods over the estimated useful lives of the
assets.
Operating Revenue:
Operating revenue is reported at the estimated net realizable amounts from
residents, third-party payors, and others for service rendered. Revenue under
third-party payor agreements may be subject to audit and retroactive adjustment.
Provisions for estimated third-party payor settlements are provided in the
period the related services are rendered. Differences between the estimated
amounts accrued and interim and final settlements are reported in operations in
the year of settlement.
Income Taxes:
Effective August 1, 1997, the Company converted from an S corporation to a
Colorado limited liability company (LLC). Limited liability companies are
treated like partnerships for federal income tax purposes. S corporations and
limited liability companies do not pay income taxes on their taxable income.
Instead, the stockholders and/or members each include their respective share of
the taxable income in their individual income tax returns.
-8-
<PAGE>
THE VILLA AT GREELEY, LLC
NOTES TO FINANCIAL STATEMENTS -- Continued
Note 1 - Summary of Significant Accounting Policies - Continued:
Resident and Client Trust Funds:
The Company receives and holds personal funds of residents and clients
residing in its facilities. Personal funds of $56,651 and $46,313 are reported
as assets limited as to use at December 31, 1997 and 1996, respectively.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Note 2 - Notes Payable:
<TABLE>
<CAPTION>
December 31 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Revolving $150,000 line of credit with a bank maturing in
January 1998 (subsequently renewed to January 1999), interest $ 62,000 $ 119,000
payable quarterly at 1.75% over the prime rate quoted by the
Wall Street Journal (actual rate of 10.25% at December 31,
1997 and 10.5% at December 31, 1996), collateralized by
accounts receivable and general intangibles, personally
guaranteed by two members
Revolving $250,000 line of credit with a bank which matured
July 1997, interest payable quarterly at 1.75% over the prime -- 250,000
rate as quoted by the Wall Street Journal (actual rate of 10.5%
at December 31, 1996), without collateral, personally guaranteed
by two members
- ---------------------------------------------------------------------------------------------
$ 62,000 $ 369,000
=============================================================================================
</TABLE>
-9-
<PAGE>
Note 3 - Long-Term Debt:
<TABLE>
<CAPTION>
December 31 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Note payable to a bank in monthly installments of $4,527,
including interest at 9.5%, final payment due in August 2007 $ 341,370 $ 362,264
collateralized by a deed of trust, personally guaranteed by
the members
Various notes payable to financial institutions in monthly
installments including interest from 7.95% to 9.25%, final
payments due from 1998 to 2000, collateralized by vehicles 77,324 90,575
Loan payable to the State of Colorado in monthly installments
of $990, noninterest bearing, final payment due in July 2007
collateralized by facility improvements 114,891 --
- ----------------------------------------------------------------------------------------------
533,585 452,829
Less: Current Portion 75,278 54,628
- ----------------------------------------------------------------------------------------------
$ 458,307 $ 398,201
==============================================================================================
</TABLE>
As of December 31, 1997, annual maturities of long-term debt for each of
the next five years are as follows:
Year Ending Annual
December 31 Maturities
------------------------------------------------------------------------------
1998 $ 75,278
1999 61,483
2000 51,886
2001 42,567
2002 45,283
Note 4 - Operating Leases:
The Company leases its facilities from a related party on a month-to-month
basis for $48,337 per month. The Company is responsible for insurance, property
taxes, utilities, and maintenance on the property. Total rent expense for each
of the years ended December 31, 1997 and 1996 was $580,055.
-10-
<PAGE>
THE VILLA AT GREELEY, LLC
NOTES TO FINANCIAL STATEMENTS -- Continued
Note 5 - Retirement Plan:
The Company has a 401(k) profit sharing plan covering substantially all
employees who are at least 21 years old and have completed six months of
service. Employee contributions must be at least 2% and no more than 15% of
eligible compensation and are matched 75% by the Company up to a maximum of 6%
of the employee's compensation per year. Employees are fully vested after five
years of service. The Company's contributions to the plan were $50,329 and
$74,923 for the years ended December 31, 1997 and 1996, respectively.
Note 6 - Concentration of Credit Risk:
Through the Restitution Center and the Residential Treatment Center, the
Company provides various services for the State of Colorado under
annually-renewable contracts. For the year ended December 31, 1997 and 1996, the
Company recorded revenue of $2,730,886 and $2,538,285, respectively, under these
contracts. Funding for the Villa Living Center and other programs is provided
from other sources, including Medicaid and federal programs.
At December 31, 1997, the Company had accounts receivable of $233,017 from
the State of Colorado. The Company's policy is to not obtain collateral on
accounts receivable.
Note 7 - Abandoned Project:
The Company purchased land in the Del Camino area during 1995 to be the
site of a new prison prerelease facility. Costs incurred in preparing for
construction, consisting of architectural design, attorney fees, and land
excavation, were capitalized as site development costs to be included in the
cost of the new facility when completed.
Although Weld County commissioners had approved the project, opposition
from the citizenry petitioned to require the project to be approved by the
voters. The project was defeated in November 1996, at which time the Company
abandoned the project and, in accordance with state vested rights statutes,
filed a claim with Weld County for reimburse ment of costs incurred. The
receivable from Weld County reported at December 31, 1996 was $331,595. In June
1997, Weld County reimbursed the Company $311,824 plus accrued interest of
$53,933. Unreimbursed costs of $30,526 are reported as an abandonment loss in
1997.
During 1997, the architect for the abandoned prerelease facility filed
claim with Weld County and the Company for costs incurred on the project. The
claim was settled in February 1998. The Company's share of the settlement,
$25,650, is included in accrued expenses at December 31, 1997.
-11-
THE VILLA AT GREELEY, LLC
FINANCIAL STATEMENTS
Year Ended December 31, 1998
<PAGE>
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
Independent Auditors' Report..................................................2
BALANCE SHEET.................................................................3
STATEMENT OF OPERATIONS AND MEMBERS' EQUITY...................................4
STATEMENT OF CASH FLOWS.......................................................5
NOTES TO FINANCIAL STATEMENTS.................................................8
- -------------------------------------------------------------------------------
-1-
<PAGE>
ANDERSON & WHITNEY, P.C.
Certified Public Accountants and Business advisors
- --------------------------------------------------
1001 Ninth Avenue
Greeley, Colorado 80631-4046
(970) 352-7990 FAX (970) 352-1855
E-mail Address: [email protected]
Independent Auditors' Report
----------------------------
Members and Board of Mangers
The Villa at Greeley, LLC
Greeley, Colorado
We have audited the accompanying balance sheet of The Villa at Greeley,
LLC (a Colorado limited liability corporation) as of December 31, 1998, and the
related statements of operations and members' equity, and cash flows for the
year ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with the generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 of disclosures in the financial statements. An audit also includes
assessing the accounting principles used and the 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 financial statements referred to above present fairly,
in all material respects, the financial position of The Villa at Greeley, LLC as
of December 31, 1998, and the results of its operations and its cash flows for
the year then ended, in conformity with the generally accepted accounting
principles.
Anderson & Whitney, P.C.
February 25, 1999
MEMBER OF
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
SEC AND PRIVATE COMPANIES PRACTICE SECTIONS - AICPA DIVISION FOR CPA FIRMS
ACCOUNTING FIRMS ASSOCIATED, INC.
-2-
<PAGE>
THE VILLA AT GREELEY, LLC
BALANCE SHEET
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
December 31 1998
- ---------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Current Assets:
Cash $ 33,627
Assets limited as to use 64,367
Accounts receivable, net of allowance for doubtful
accounts of $-0- 383,404
Prepaid expenses and other 28,342
- ----------------------------------------------------------------------------------------------
Total Current Assets 509,740
- ----------------------------------------------------------------------------------------------
Property and Equipment:
Land 317,811
Furniture and equipment 197,678
Automobiles 262,935
Leasehold improvements 558,600
--------------
1,337,024
Less: Accumulated depreciation and amortization 587,750
- ----------------------------------------------------------------------------------------------
749,274
Construction in progress 3,299
- ----------------------------------------------------------------------------------------------
Total Property and Equipment 752,573
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,262,313
==============================================================================================
LIABILITIES
Current Liabilities:
Note payable $ 150,000
Accounts payable 56,307
Accrued expenses and other 383,051
Resident and client trust funds 64,367
Current portion of long-term debt 82,639
- ----------------------------------------------------------------------------------------------
Total Current Liabilities 736,364
Long-Term Debt 438,052
- ----------------------------------------------------------------------------------------------
Total Liabilities 1,174,416
- ----------------------------------------------------------------------------------------------
MEMBERS' EQUITY 87,897
- ----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND MEMBERS' EQUITY $ 1,262,313
==============================================================================================
</TABLE>
See Accompanying Notes to Financial Statements.
-3-
<PAGE>
THE VILLA AT GREELEY, LLC
STATEMENT OF OPERATIONS AND MEMBERS' EQUITY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Year Ended December 31 1998
- ---------------------------------------------------------------------------------------------
<S> <C>
Revenue:
Restitution Center $ 2,138,026
Residential Treatment Center 1,467,830
Villa Living Center 823,644
Transitional Center for Women 121,202
Outpatient 80,181
Other revenue 129,588
- ---------------------------------------------------------------------------------------------
Total Operating Revenue 4,760,471
- ---------------------------------------------------------------------------------------------
Operating Expenses:
Restitution Center 1,894,208
Residential Treatment Center 1,477,272
Villa Living Center 1,156,435
Transitional Center for Women 104,440
Outpatient 24,249
- ---------------------------------------------------------------------------------------------
Total Operating Expenses 4,656,604
- ---------------------------------------------------------------------------------------------
Earnings from Operations 103,867
- ---------------------------------------------------------------------------------------------
Other Income (Expense):
Gain on sale of property and equipment 52,400
Miscellaneous income 1,702
- ---------------------------------------------------------------------------------------------
Total Other Income (Expense) - net 54,102
- ---------------------------------------------------------------------------------------------
NET EARNINGS 157,969
Members' Equity, January 1, 1998 64,140
Distributions paid (134,212)
- ----------------------------------------------------------------------------------------------
Members' Equity, December 31, 1998 $ 87,897
=============================================================================================
</TABLE>
See Accompanying Notes to Financial Statements.
-4-
<PAGE>
THE VILLA AT GREELEY, LLC
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Year Ended December 31 1998
- ----------------------------------------------------------------------------------------------
<S> <C>
Cash Flows from Operating Activities:
Cash received from residents, clients, and third party payors $ 4,705,428
Cash paid to suppliers and employees (4,566,575)
Interest paid (53,452)
- ----------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 85,401
- ----------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Purchase of property and equipment (132,771)
Proceeds from sale of property and equipment 90,742
Construction in progress (6,191)
- ----------------------------------------------------------------------------------------------
Net Cash Used by Investing Activities (48,220)
- ----------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from:
Note payable 518,000
Long-term debt 77,698
Principal payments on:
Note payable (430,000)
Long-term debt (90,592)
Repayment of advances from related party (10,824)
Cash distributions paid (97,938)
- ----------------------------------------------------------------------------------------------
Net Cash Used by Financing Activities (33,656)
- ----------------------------------------------------------------------------------------------
Net Increase in Cash 3,525
Cash, Beginning of Year 30,102
- ----------------------------------------------------------------------------------------------
Cash, End of Year $ 33,627
=============================================================================================
</TABLE>
Continued on next page.
-5-
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Year Ended December 31 1998
- ----------------------------------------------------------------------------------------------
<S> <C>
Reconciliation of Net Earnings to Net Cash
Provided by Operating Activities:
Net earnings $ 157,969
Adjustments:
Depreciation and amortization 63,430
Gain on sale of property and equipment (52,400)
(Increase) decrease in:
Accounts receivable (56,745)
Prepaid expenses and other (23,703)
Increase (decrease) in:
Accounts payable (76,939)
Accrued expenses and other 73,789
- ----------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities $ 85,401
==============================================================================================
Supplemental Disclosures of Noncash Financing
and Investing Activities:
Distributions of vehicles to members $ 36,374
==============================================================================================
</TABLE>
See Accompanying Notes to Financial Statements.
-6-
<PAGE>
THE VILLA AT GREELEY, LLC
NOTES TO FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies:
The accounting and reporting policies of The Villa at Greeley, LLC (the
Company) conform to generally accepted accounting principles. The following
summary of significant accounting policies is presented to assist the reader in
evaluating these financial statements.
Description of Business:
The Company, organized in Colorado in 1984, provides the following
services: The Villa Living Center is a 72-bed health care facility serving
persons of all ages who cannot live safely alone, but who do not need nursing
home care. The Restitution Center is a community-based correctional facility for
minimum risk offenders. The Residential Treatment Center is a drug and alcohol
treatment program for offenders.
The Transitional Center for Women is a transitional "pre-community
corrections" program for high-needs female offenders.
Resident and Client Trust Funds:
The Company receives and holds personal funds of residents and clients
residing in its facilities. Personal funds of $64,367 are reported as assets
limited as to use at December 31, 1998 with an offsetting liability entitled
resident and client trust funds.
Property and Equipment:
Property and equipment are recorded at acquisition cost. Depreciation is
computed using accelerated methods over the estimated useful lives of the
assets.
Operating Revenue:
Operating revenue is reported at amounts billed to residents, third-party
payors, and others for service rendered. Revenue under third-party payor
agreements may be subject to audit and retroactive adjustment.
Allocation of Expenses:
The Company allocates all general and administrative expenses to its
programs in order to provide management with the total costs for each program.
-7-
<PAGE>
Note 1 - Summary of Significant Accounting Policies - Continued:
Income Taxes:
Effective August 1, 1997, the Company converted from an S corporation to a
Colorado limited liability company (LLC). Limited liability companies are
treated like partnerships for federal income tax purposes and do not incur
income taxes. Instead, its earnings and losses are included in the personal tax
returns of the members and taxed depending on their personal tax situations.
Accordingly, the financial statements do not reflect a provision for income
taxes.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Note 2 - Note Payable:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
December 31 1998
- ----------------------------------------------------------------------------------------------
<S> <C>
Revolving $150,000 line of credit with a bank maturing in March 1999
(subsequently renewed to March 2000), interest payable quarterly at 1% over the
prime rate quoted by the Wall Street Journal (actual rate of 9.5% at December
31, 1998), collateralized by accounts receivable and general intangibles,
personally guaranteed by two members $ 150,000
==============================================================================================
</TABLE>
Note 3 - Long-Term Debt:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
December 31 1998
- ----------------------------------------------------------------------------------------------
<S> <C>
Note payable to a bank in monthly installments of $4,527, including
interest 9.5%, final payment due in August 2007, collateralized by a deed of
trust, personally guaranteed by the members $ 318,000
Various notesto financial institutions in monthly installments interest
from 8.5% to 9.5%, final payments due from 1999 to 2001, collateralized by
vehicles $ 99,185
Loan payable to the State of Colorado in monthly installments of $990,
noninterest bearing, final payment due in July 2007, collateralized by
facility improvements $ 103,006
- ----------------------------------------------------------------------------------------------
520,691
Less: Current Portion 82,639
- ----------------------------------------------------------------------------------------------
$ 438,052
==============================================================================================
</TABLE>
-8-
<PAGE>
THE VILLA AT GREELEY, LLC
NOTES TO FINANCIAL STATEMENTS -- Continued
Note 3 - Long-Term Debt - Continued:
As of December 31, 1998, annual maturities of long-term debt for each of
the next five years are as follows:
- -------------------------------------------------------------------------------
Year Ending Annual
December 31 Maturities
- -------------------------------------------------------------------------------
1999 $ 82,639
2000 79,084
2001 56,236
2002 45,288
2003 48,603
Thereafter 208,841
Note 4 - Operating Lease:
The Company leases its facilities from a related party at $7.04 per square
foot on a month-to-month basis for $54,478 per month. The Company is responsible
for insurance, property taxes, utilities, and maintenance on the property. Total
rent expense for 1998 was $637,843.
Note 5 - Retirement Plan:
The Company has a 401(k) profit sharing plan covering substantially all
employees who are at least 21 years old and have completed six months of
service. Employee contributions must be at least 2% and no more than 15% of
eligible compensation and are matched 75% by the Company up to a maximum of 6%
of the employee's compensation per year. Employees are fully vested after five
years of service. The Company's contribution to the plan was $93,636 for 1998.
Note 6 - Concentration of Credit Risk:
Through the Restitution Center and the Residential Treatment Center, the
Company provides various services for the State of Colorado under
annually-renewable contracts. For the year ended December 31, 1998, the Company
recorded revenue of $3,020,851 under these contracts. Funding for the Villa
Living Center and other programs is provided from other sources, including
Medicaid and federal programs.
At December 31, 1998, the Company had accounts receivable of $299,740 from
the State of Colorado. The Company's policy is to not obtain collateral on
accounts receivable.
Note 7 - Interest Expenses:
The amount of interest expense incurred in 1998 was $52,641, all of which
was charged to operations.
-9-
Avalon Correctional Services, Inc. and Subsidiaries
Pro Forma Combined Financial Statements
(Unaudited)
The unaudited pro forma combined financial statements give effect to the
acquisition of The Villa at Greeley, LLC ("Villa") by Avalon Correctional
Services, Inc. and Subsidiaries ("Avalon"), which has been accounted for using
the purchase method of accounting. The pro forma combined financial statements
are presented for illustrative purposes only and are not necessarily indicative
of the operating results that would have occurred if the transactions given pro
forma effect herein had been consummated as of the time reflected herein, nor
are they necessarily indicative of the future operating results or financial
position of Avalon. The pro forma adjustments are based upon available
information and certain assumptions that Avalon believes are reasonable. This
information should be read in conjunction with the historical financial
statements and related notes of Avalon and the financial statements of Villa.
<PAGE>
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
March 31, 1999
<TABLE>
<CAPTION>
Historical Pro Forma
-------------------- -------------------------------
Avalon Villa Adjustments Combined
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 1,208,000 $ 54,000 $ (54,000) (1) $ 1,208,000
Other current assets 2,791,000 502,000 (627,000) (1) 2,666,000
Property and equipment, net 17,301,000 776,000 6,697,000 (2) 24,774,000
Other assets 2,715,000 2,000 1,226,000 (1,2) 3,943,000
--------------------------------------------------------------
Total assets $24,015,000 $1,334,000 $7,242,000 $32,591,000
==============================================================
Current liabilities $ 1,310,000 $ 447,000 $ (332,000) (1) $ 1,425,000
Long-term debt 12,809,000 757,000 7,704,000 (1,2) 21,270,000
Convertible debentures 3,850,000 --- --- 3,850,000
Redeemable common stock 4,124,000 --- --- 4,124,000
Stockholders' equity/Capita1 1,922,000 130,000 (130,000) 1,922,000
--------------------------------------------------------------
Total liabilities and equity $24,015,000 $1,334,000 $7,242,000 $32,591,000
==============================================================
</TABLE>
See accompanying notes to pro forma financial statements
<PAGE>
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
For the year ended December 31, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
-------------------- ----------------------------
Avalon Villa Adjustments Combined
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 7,686,000 $4,815,000 $ --- $12,501,000
Costs and expenses
Direct operating 4,692,000 4,657,000 (994,000)(3,4,5) 8,355,000
General and administrative 1,091,000 --- --- 1,091,000
Development Costs 336,000 --- --- 336,000
Loss on property held for sale 91,000 --- --- 91,000
Depreciation and amortization 628,000 --- 269,000 (3,6) 897,000
Interest expense 1,224,000 --- 698,000 (3,7) 1,922,000
--------------------------------------------------------------
8,062,000 4,657,000 (27,000) 12,692,000
--------------------------------------------------------------
Income (loss) before
income tax (376,000) 158,000 27,000 (191,000)
Income tax expense --- --- --- ---
--------------------------------------------------------------
Income (loss) before cumulative
effect of change in accounting
principle (376,000) 158,000 27,000 (191,000)
Cumulative effect of change in
accounting principle (74,000) --- --- (74,000)
--------------------------------------------------------------
Net Income (loss) (450,000) 158,000 27,000 (265,000)
==============================================================
Basic and diluted loss per share
Continuing Operations $ (0.11) $ (0.05)
Cumulative effect of change
in accounting principle (0.02) (0.02)
------------- ------------
Net loss per share: $ (0.13) $ (0.07)
============= ============
Weighted average common
shares outstanding, basic and
diluted 3,499,403 3,499,403
============= ============
</TABLE>
See accompanying notes to pro forma financial statements
<PAGE>
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
For the three months ended March 31, 1999
<TABLE>
<CAPTION>
Historical Pro Forma
------------------- ------------------------------
Avalon Villa Adjustments Combined
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 2,427,000 $1,254,000 $ --- $ 3,681,000
Costs and expenses
Direct operating 1,505,000 1,178,000 ( 269,000)(3,4,5) 2,414,000
General and administrative 330,000 --- --- 330,000
Development Costs 222,000 --- --- 222,000
Depreciation and amortization 185,000 --- 67,000 (3,6) 252,000
Interest expense 452,000 --- 175,000 (3,7) 627,000
--------------------------------------------------------------
2,694,000 1,178,000 (27,000) 3,845,000
--------------------------------------------------------------
Income (loss) before
income tax (267,000) 76,000 27,000 (164,000)
Income tax expense --- --- --- ---
--------------------------------------------------------------
Income (loss) before
extraordinary items (267,000) 76,000 27,000 (164,000)
Extraordinary loss from early
retirement of debt (35,000) --- --- (35,000)
--------------------------------------------------------------
Net Income (loss) (302,000) 76,000 27,000 (199,000)
==============================================================
Basic and diluted loss per share
Continuing Operations $ (0.05) $ (0.04)
Extraordinary loss from early
retirement of debt (0.01) (0.01)
-------------
Net loss per share: $ (0.06) $ (0.05)
============= =============
Weighted average common
shares outstanding, basic and
diluted 4,665,790 4,655,790
============= =============
</TABLE>
See accompanying notes to pro forma financial statements
<PAGE>
Avalon Correctional Services, Inc. and Subsidiaries
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
On June 9, 1999, Avalon Correctional Services Inc, acquired The Villa at
Greeley, LLC including all real estate and contract rights for approximately
$8,600,000. The accompanying pro forma combined balance sheet has been presented
as if the acquisition occurred on March 31, 1999 and the accompanying pro forma
combined statements of operations for the year ended December 31, 1998 and the
three months ended March 31, 1999 have been prepared as if the acquisition was
consummated on January 1, 1998.
NOTE B - PRO FORMA ADJUSTMENTS
Pro forma adjustments are necessary to reflect the assumed effect of the
combination on the balance sheet as of March 31, 1999 and the statements of
operations assuming the acquisition was consummated on January 1, 1998. The
accompanying pro forma balance sheet and statements of operations reflect the
following adjustments:
(1) All assets other than property, plant and equipment and contract rights
were retained by the former ownership of The Villa at Greeley, LLC. Some items
such as prepaid insurance and accrued absences were transferred to Avalon and
the purchase price adjusted properly.
(2) Avalon financed $8,461,000 of the purchase price through Avalon's
senior line of credit.
(3) Depreciation and interest expense of The Villa at Greeley were included
in operations expense in the financial statements of The Villa. The amounts are
properly reclassified in the pro forma statement of operations.
(4) The Villa at Greeley, LLC, leased the real estate in operations from
University Holdings, LLC, a related party company. Avalon purchased this real
estate from the related party company as part of the $8,600,000 purchase price.
Accordingly, rent expense that will be avoided by owning the real estate is
excluded from operating expenses.
(5) Owners of The Villa at Greeley, LLC, were paid certain compensation and
fringe benefits. Operating expenses have been reduced for these amounts paid to
the owners.
(6) Depreciation of the real estate and amortization of the intangible
assets acquired in the transaction are reflected in the pro forma adjustments.
The purchase price was allocated based upon the fair values of the assets
acquired. The real estate was appraised at $8,390,000. The contracts fair value
was estimated at $1,379,000 based upon the future expected net revenues of those
contracts discounted to present value. Therefore, 86% of the purchase price was
allocated to real estate and 14% of the purchase price was allocated to
intangible contract rights. The amount allocated to the building will be
depreciated on a straight-line method over a forty year life. The intangible
contract rights will be amortized on a straight-line basis over a fifteen year
life.
(7) Avalon financed $8,461,000 of the purchase price and therefore,
interest expense attributable to the transaction has been reflected in the pro
forma adjustments. The line of credit used to finance the acquisition has a
current interest rate of 8.25%. This rate was used to compute interest expense
in the pro forma adjustments.
