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.
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEET
(UNAUDITED)
March 31, 1999
Historical Pro Forma
-------------------- -------------------------------
Avalon Villa Adjustments Combined
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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
==============================================================
See accompanying notes to pro forma financial statements
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
For the year ended December 31, 1998
Historical Pro Forma
-------------------- ----------------------------
Avalon Villa Adjustments Combined
--------------------------------------------------------------
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
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Income (loss) before
income tax (376,000) 158,000 27,000 (191,000)
Income tax expense --- --- --- ---
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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
============= ============
See accompanying notes to pro forma financial statements
AVALON COMMUNITY SERVICES, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
For the three months ended March 31, 1999
Historical Pro Forma
------------------- ------------------------------
Avalon Villa Adjustments Combined
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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
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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
============= =============
See accompanying notes to pro forma financial statements
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.