FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
TURLEY CORRECTIONAL FACILITY
June 30, 1997 and 1996
Report of Independent Certified Public Accountants
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Board of Directors
Avalon Community Services, Inc.
We have audited the accompanying statements of net assets acquired of the Turley
Correctional Facility, as of June 30, 1997 and 1996, and the related statements
of direct revenues and operating expenses for the years then ended. These
financial statements are the responsibility of management. Our responsibility is
to express an opinion on these 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 financial statements referred to above present fairly, in
all material respects, the net assets acquired of the Turley Correctional
Facility, as of June 30, 1997 and 1996, and its direct revenues and operating
expenses for the years then ended in conformity with generally accepted
accounting principles.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
April 2, 1998
Turley Correctional Facility
STATEMENTS OF NET ASSETS ACQUIRED
June 30,
-------------------- September 30,
1996 1997 1997
-------- -------- -------------
(Unaudited)
Property and equipment, net $597,771 $581,611 $574,497
-------- -------- --------
Net assets $597,771 $581,611 $574,497
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The accompanying notes are an integral part of these statments.
Turley Correctional Facility
STATEMENTS OF DIRECT REVENUES AND OPERATING EXPENSES
Three months
Year ended June 30, ended
-------------------- September 30,
1996 1997 1997
-------- --------- -------------
(Unaudited)
Direct revenues
State contract $ 640,386 $ 885,594 $ 221,721
Federal contracts, including client fees 384,796 412,275 122,562
Miscellaneous income 2,196 7,124 2,200
--------- --------- ---------
Total direct revenues 1,027,378 1,304,993 346,483
Operating expenses
Direct operating 753,829 891,195 214,206
General and administrative 259,850 313,127 87,478
Depreciation and amortization 30,512 38,743 9,261
--------- --------- ---------
Total operating expenses 1,044,191 1,243,065 310,945
--------- --------- ---------
Direct revenues in excess of (less
than) operating expenses (16,813) 61,928 35,538
Net assets acquired, beginning of period 453,622 597,771 581,611
Net increase (decrease) in net assets
arising from intracompany transactions 160,902 (78,088) (42,652)
--------- --------- ---------
Net assets acquired, end of period $ 597,711 $ 581,611 $ 574,497
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The accompanying notes are an integral part of these statements.
Turley Correctional Facility
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES
A summary of significant accounting policies applied in the preparation of the
accompanying financial statements follows.
1. Basis of Presentation
---------------------
On October 2, 1997, Avalon Community Services, Inc. ("Avalon") purchased the
operations and certain assets of the Turley Correctional Facility (the
"Facility"), a 150-bed adult residential correctional facility located in Tulsa,
Oklahoma which was operated by Freedom Ranch, Inc. ("Freedom Ranch"), a
nonprofit organization. The Facility's revenues are primarily from contracts
with the Oklahoma Department of Corrections and the Federal Bureau of Prisons.
Avalon did not assume any debt or liabilities of the Facility. The accompanying
financial statements present the net assets acquired by Avalon and the direct
revenues and operating expenses of the Facility.
2. Property and Equipment
----------------------
Property and equipment are recorded at cost. The cost of maintenance and repairs
is charged to expense as incurred; significant renewals and betterments are
capitalized. Depreciation and amortization are provided using the following
methods and useful lives:
Category Method Useful life
----------------------- --------------- ------------
Furniture and equipment Straight-line 5-10 years
Building improvements Straight-line 16 years
Vehicles Straight-line 5 years
Buildings Straight-line 30 years
3. Revenue Recognition
-------------------
The Facility recognizes revenues as services are provided. Revenues are earned
based upon the number of inmates on a per diem basis. All correctional revenues
are received monthly from various governmental agencies.
4. Interim Financial Information
-----------------------------
In the opinion of management, the unaudited financial statements as of September
30, 1997 and for the three months then ended include all adjustments, consisting
of normal recurring accruals, necessary to present fairly the Facility's net
assets acquired and the direct revenues and operating expenses of the Facility
for the three months ended September 30, 1997.
5. Accounting Estimates
--------------------
The preparation of financial statements requires the use of management's
estimates and assumptions in determining the carrying values of certain assets
and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts for certain revenues and expenses during the
reporting period; accordingly, actual results could differ from those estimates.
Turley Correctional Facility
NOTES TO FINANCIAL STATEMENTS - CONTINUED
June 30, 1997 and 1996
NOTE B - ALLOCATION OF OVERHEAD
Freedom Ranch charged overhead and fees to the Facility to offset the cost of
certain management and administrative expenses. Such overhead charges and fees
have been allocated to the Facility using various bases, including proportional
percentages of revenues and salaries of individual components, and aggregated
$265,735 and $197,287 for the years ended June 30, 1997 and 1996, respectively.
Interest expense has not been allocated to the Facility since no debt was
transferred with the Facility. Income taxes have not been provided since Freedom
Ranch is an organization exempt from taxes under Section 501(c)(7) of the
Internal Revenue Code. Management believes that overhead, fees, insurance costs,
and other administrative costs incurred by Freedom Ranch have been allocated to
the Facility on a reasonable basis.
NOTE C - PROPERTY AND EQUIPMENT
The elements of property and equipment and related accumulated depreciation as
of June 30, 1997 and 1996 are as follows:
Accumulated
Cost depreciation
-------- ------------
June 30, 1997
Land $100,000 $ -
Buildings and improvements 478,935 39,992
Furniture and equipment 75,538 54,742
Vehicles 32,933 11,061
Computer equipment 3,198 3,198
-------- --------
$690,604 $108,993
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June 30, 1996
Land $100,000 $ -
Buildings and improvements 466,385 18,572
Furniture and equipment 67,843 45,754
Vehicles 32,258 4,564
Computer equipment 3,198 3,023
-------- ---------
$669,684 $ 71,913
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