C hallenge & D evelopm entc enter of C linton,l ouisiana,l.l.c.and Subsidiary C linton,l ouisiana June 30,2000 J
T able of C ontents IndependentA ccountant's R eport FinancialStalem enls C onsolidated B alance Sheets Consolidated Statem entsof O perations Consolidated Statem entsof M em ber'sequity Consolidated Statem entsof Cash Flow s N otes to Consolidated FinancialStatem ents Rcporton Com pliance and on internalcontroloverfinancial Reporting Based on an A uditof FinancialStatem ents Perform ed in A ccordance w ith G overnm enta uditing:standards Page 3 Page Page Page Page Page Page 12
HAW THO RN,W AYM O UTH & CARRO LL,L.L.P J {:~IA~If~ r'ar{kt[{ [:[~A [HtJI! ~; M tknie;h I I [:I!A AN H IQNy 0 CHI;]INA I C [A [)AV IL J I*fl~tl~;F~ l~g) C f'k CERTIFIED PUBLIC ACCOUNTANTS 8555 UNITED PLAZA BLVD. BATON ROUGE,LOUISIANA 70BOB (285]923-303Q *FAX (225)923-3008 D ecem ber8,2000 IndependentA uditor's R eport Challenge & D evelopm entcenter of Clinton,Louisiana,L.L.C.and Subsidiary C linton,louisiana 70722 G entlem en W e have audited the accom panying consolidated balance sheets of the C hallenge & D evelopm entc enter of C linton,louisiana,l.l.c.and Subsidiary C linton,l ouisiana as of June 30,2000 and June 30,1999,and the related consolidated statem ents of operations, m em ber'sequity and cash flow sforthe yearsthen ended.these consolidated financialstatem ents are the responsibility of the Challenge & D evelopm entcenterof Clinton,Louisiana,L.I,.C.and Subsidiary's m anagem ent. O ur responsibility is to express an opinion on these consolidated financialstatem ents based on ouraudits. W e conducted ourauditsin accordance w ith auditing standardsgenerally accepted in the U nited States of A m erica and G overnm enta u _ diting Standards,issued by the Com ptrollerg eneral of the U nited States. Those standards require that w e plan and perform the audits to obtain reasonable assurance aboutw hether the consolidated financialstatem ents are free of m aterial m isstatem ent.a n auditincludesexam ining,on a testbasis,evidence supporting the am ountsand disclosuresin the consolidated financialstatem ents.a n auditalso includesassessing the accounting principlesused and significantestim atesm ade by m anagem ent,asw ellasevaluating the overall financialstatem entpresentation. W e believe thatourauditsprovide a reasonable basis forour
In ouropinion,the consolidated financialstatem entsreferred to above presentfairly,in all m aterial respects, the financial position of tile C hallenge & D evelopm ent C enter of C linton, I,ouisiana,L.L.C.and Subsidiary asof June 30,2000 and Jtm e 30,1999, and the resultsof their opcrationsand theircash flow sforthe yearsthen ended illconform ity w ith accounting principles generally accepted in lhe U nited Slatesof A m erica. In accordance w ith G overnm entauditing Standar _ d~,w e ha'~'e also issued a reportdated D ecem ber 8,2000,on our consideration of the Challenge & D evelopm ent Center of Clinton, Louisiana,L.L.C.and Subsidiary's internalcontroloverfinancialreporting and ourtcsls of its colnpliancc w itb certain provisionsof law s,regtflations,contracts and grants.
C hallenge & D evelopm entc enter of C linton,l ouisiana,l.l.c.and Subsidiary C onsolidated B alance Sheets June 3(I,2000 and June 3071999 C urrenta ssets Cash A ccountsreceivable Trade Em ployee Prepaid expenses D eferred tax asset Totalcurrentassets A s s e t s 2000 1999 $209,476 $105,922 139,086 4,694 159,116 21 4,949 6,015 353,256 276,023 Property and E quipm ent N etof accum ulated depreciation Totalassets 766,423 1,119,679 792 ~ 925 1,968~ _948 L iab ilities an d M em bers' E qu ity (Deficit) C urrentl iabilities A ccounts payable A ccrucd expenses N otespayable -related parties D eferred Incom e T axes M em bers'equity (Deficit) Totalliabilitiesand m em bers'eouitv (defic 1,769 46,702 978,592 1,027,063 30,677 61,939 1,119,679 31,900 81,790 _978,592 1,092,282 _ ~ (23,334~ 1 _,_068,948 The accom panying notesare an integralpartof these statem ents
C hallenge & I)evelopm entc enter of C linton,louisiana,l.l.c.and Subsidiary C onsolidated Statem entsof O perations Y ears E nded June 30,2000 and June 30,1999 ]~evenne N ettraince revenue Food services O ther Totalrevenue 2000 1999 $1,159,881 57,606 12,306 L229,793 $1,063,401 64,0(19 33,394 ~ 60~ 04 E xpenses Salaries Contracted services Supplies G eneraland adm inistrative Plantoperationsand m aintenauce lnstlrance D epreciation M iscellaneous TotaloDeratin~,ext~enses 718,858 33,430 116,861 150,959 33,883 50,167 3,391 1,107,549 762,294 2,422 20,196 129,110 137,646 24,361 45,660 _ 20~ 51 L ]42,540 O ther E xpenses Intercst B ad debts Totalotherexpenses 279 279 6,432 44.112 Totalexpenses Incom e (Loss)BeforeIncom etax l'rovision Provision for Incom e T axes 1,107,828 121,965 36,692.L1 186,652 (25,848) Incom e T ax B enefit 6.015 Nethleom e (Loss) 85,273 = (19,833) The accom panying notesare alintegralpartof these statem ents 6
C hallenge & D evelopm eutc enter of C linton~louisiana,l.i,.c.and SubsidialT C onsolidated Statem enlsof M em bers'equity Y earse nded June 30,2000 and June 30,1999 B alance,beginning of year Netincome (Joss) Ending balance 2000 ($23,334) 85,273 619~ 39 _ 1999 ($3,501) ~ 9,833) ~23,334~ The accom panying notesare an integralpartof these statem ents 7
C hallenge & D evelopm entc enter of C linton,l ouisiana,l.l.c. and Subsidiary C onsolidated Statem ents of C ash Flow s Y ears E nded June 30,2000 and June 30, 1999 C ash Flow s From O perating A ctivities Netincome(loss) Adjustmentsto reconcilechangein netlossto netcash provided by operating activities B ad debts D epreciation (Increase)Decreasein accountsreceivable-irade D ecrease in otherreceivables D ecrease in prepaid expenses (Increase)Decrease in deferred taxes (Decrease)in accrued expenses (Decrease)in loansfrom officers Increase (Decrease)in accountspayable C ash Flow s From Investing A ctivities Purchases of fixed assets activities NetIncrease(Decrease)in Cash and Cash Equivalents C ash and C ash E quivalents, beginning of year C ash and C ash E quivalents, end of year Supplem entald isclosure of C ash Flow Inform ation Cash paid during the yearfor: Taxes ]n~erest 2000 $85,273 50,167 20,030 21 255 36,692 (35,088) (30,13Ll 127,21 _ 9_9 (23,665j (23,6651 103,554 105,922 209,476 N o le 1999 ($19,833) 37,680 45,660 (76,683) 69,233 1,740 (6,015) (37,936) (25). 3~9 993 4 7,814 (_16,090) (,_16,090) 1,724 _10~4 t98 _105~ 922 N o le $6,432 Tim accom panying notes are an integralpartof these statem ents. 8
C hallenge & D evelopm entc cnter of C linton,l ouisiana,l.l.c.and Subsidiary N otes to C onsolidated FinancialStatem ents June 30,2000 N ote 1-SignificantA ccounting Policies A. N ature of Operations The Challenge & D evelopm entcenterof Clinton,Louisiana L.L.C.providesa highly m ilitary structured,residentialprogram thatprovides 24-hour supervision,appropriate role m odels, consistency,education and therapy to addressand treattoday'stroubled adolescentm alesw ho have a history of defiantbehaviorand conductdisorders.the C hallenge & D evelopm entc enter of C linton,louisiana L.L.C.isa taxable corporation forfederaland state incom e tax purposes. The Feliciana A ltern ative School,a subsidiary of the Center,w as established to provide educationalfacilitiesand training to persons,prim arily children and adolescentsof undeveloped faculties,orsuffering from m entaldistressorsubstance addiction,w ho are in need of special m cthods of training and instruction. 13. Consolidation Policy. The accom panying consolidated financial statenrents include the C enter and its subsidiary, Feliciana A lternative School.Intercom pany transactionsand balances have been elim inated in consolidation. C. U se of Estim ates The preparation of financial statem ents in conform ity w ith generally accepted accounting principles requires m anagem entto m ake estim ates and assum ptions thataffectthe reported am ountsof assetsand liabilitiesatthe date of the financialstatem entsand the reported mnounts of revenue and expensesduring the reporting period. A ctualresultscould differfrom those estim ates. D. C ash and Cash EQuivalents Forpurposesof the statem entof cash flow s,the corporation considers allhighly liquid debt instrum entspurchased w ith a m at urity of three m onlhsorlessto be cash equivalents. E. Fixcd A ssets Fixed assetsarc recorded atcostand depreciated usizag the straight-line m ethod of depreciation overtheirusefullives.
C hallenge & D evelopnw ntc enter of C linton,l ouisiana,l.l.c.and SubsidiaW N otesto C onsolidated FinancialStatem ents June 30,2000 Note1-SignificautAccounting Policies(Conlinued) F. A ccounts Receivable The Centerconsidersaccountsreceivable to be fully collectible;accordingly,no allow ance lbr doubtful accounts is required. If am ounts becom e uncollectible,they w ill be charged to operations w hen thatdeterm ination is m ade. G. N ettrainee Service R evenue Trainee Service Revenue is reported m the estim ated netrealizable am ountsfrom patients,thirdparty payors,and othersforservicesrendered. II. Incom e Taxes Incom e tax expense isbased on reported earn ingsbefore incom e taxes. D eferred incom e taxes reflectthe tem porary difference between assetsand liabilitiesrecognized forfinancialreporting and such anaounts recognized for tax purposes w hich requires recognition of deferred tax liabililiesand assets.d eferred tax liabilitiesand assetsare determ ined based on the differences betw een the tinancialstatem entand tax basisof assetsand liabilitiesusing enacted tax ratesin effectforthe yearin w hich the differences are expected to reverse. A valuation allow ance is recognized if itisanticipated thatsom e orallof a deferred tax assetm ay notbe realized. 1. A dvertising A dvertising costsare charged to operationsw hen incurred. A dvertising expense forthe years ended June 30,2000 and June 30,1999 w as$792 and $2,062,respectively. N ote 2-P roperty and E quipm ent Property and equipm entare as follow s Fixed assets Land Buildings Furniture and equipm ent Transportation equipm ent Less accum ulated depreciation 2000 1999 $10,000 716,116 244,874 5~220 976,210 209,787 $10,000 710,346 226,979 5,220 952,545 159,620
C hallenge & D evelopm entc enter of C linton,louisiana,l.l.c.and Subsidiary N otesto C onsolidated FinancialStatem ents Jnne 30,2000 N ote 3-R elated Parties Unsecured dem and note to a party related to the trustwhich ownsthe Center,totaling $834,888, atjune 30,2000 and June 30, 1999,respectively. The notes w ere restructured to becom e nonintercstbearing asof July 1,1998. A tjune 30,1999,interestw asat9%. U nsecured dem and note to a com pany in w hich a party related to the trustw hich ow ns the Center,is the majority owner,totaling $143,729 atjune 30,2000 and June 30, 1999, respectively. The notesw ere restructured to becom e nonintercstbearing asof July 1,1998. N ote 4-Incom e T axes The Com pany filesitsincom e tax return on a calendaryearbasis.d eferred incom e taxesreflect the tax effectof tem porary differences betw een carrying am ounts of assets and liabilities for financialreporting purposesand the am ounts forincom e tax purposes. Thedeferredtax asset(liability)consistsofthefollowing O perating loss carryforw ard D epreciation V acation Im puted interest Netdeferred tax asset(liability) 2000 $32,310 (32,357) 6,015 (36,645) (30,677) 1999 $78,509 (35,849) ~ 64~ 6,015 The Com pany hasavailable atjune 30,2000,$95,031of unused operating losscarryforw ards thatlnay be applied againstfuture taxable incom e.the carryforw ardsexpire in 2018 and 2019. N ote 5-C oncentration of C reditr isk A t various lim es during the year,cash and cash equivalenls on deposit w ith one banking institution exceeded the $100,000 insured by the Federal D eposit Insurance Corporation. M anagem entm onitorsthe financialcondition of the institution on a regularbasis,along w ith theirbalances in cash and cash equivalents,to m inim ize this potentialrisk.
H AW THO RN,W AYM O UTH G"C A RRO LL,L.L.P.i CFqAf~LfS r,ar~krn.e:r A IflL]I!;C: M [KNIE~H] I.C RA ANIItfINY J C;[IIE;]INIA Iḷ C R A CHAFIL[~;f~ PLVEY Jrl C R A [)AVID J BFIE)OSSAFID C R A CERTIFIED PUBLIC ACCOUNTANTS B555 UNITED PLAZA BLVD BATON ROUGE,LOUISIANA 70809 f225)923 3000 ~FAX (225)923-3008 D ecem ber 8,2000 R eporton C om pliance and on InternalC ontrolover Financial R eporting based on an A uditof FinancialStatem ents Perform ed in A ccordance W ith G overnm enta uditing Standards Challenge & D evelopm entcenterof Clinton, Louisiana,L.L.C.and Subsidiary Clinton,Louisiana 70722 G entlem en W e have audited the consolidated financialstatem entsof the Challenge & D evelopm entcenter of Clinton,Louisiana,L.L.C.and Subsidiary as of and forthe year ended June 30,2000. W e conducted ourauditin accordance w ith auditing standardsgenerally accepted in the U nited Slates of A m erica and the standards applicable to financialaudits contained in Governm enta udiling Standards,issued by the C om ptrollerg eneralof the U nited States. Com pliance A spartof obtaining reasonable assurance aboutw hetherthe Challenge & D evelopm entcenter of Clinton,Louisiana,L.L.C.and Subsidiary'sconsolidated financialstatem entsare free of m aterial m isslatem ent,w e perform ed tests of its com pliance w ith certain provisions of law s,regulations, contracts and grants,noncom pliance w ith w hich could have a directan d m aterialeffccton the determ ination of consolidated financialstatem entam ounts, H ow ever,providing an opinion on compliancewith thoseprovisionswasnotan objectiveofourauditand,accordingly,wedo not express such an opinion.the results of ourtestsdisclosed no instancesof noncom pliance thatare required to be reported underg overnm enta uditing Standards
InternalControlO verfinancialrenortinu In planning and perform ing ouraudit,w e considered the Challenge & D evelopm entcenterof C linton,louisiana,l.l.c.and Subsidiary's internalcontrolover financialreporting in orderto deter,nine ourauditing proceduresforthe purpose of expressing ouropinion on the consolidated financialstatem ents and notto provide assurance on the internalcontroloverfinancialreporting. O urconsideration of the internalcontroloverfinancialreporting w ould notnecessarily disclose all m attersin the internalcontroloverfinancialreporting thatm ightbe m aterialw eaknesses.a m aterial w eakness is a condition in w hich the design oroperation of one orm ore of the internalconlrol com ponents does notreduce to a relatively low levelthe risk thatm isstatem ents in am ounts that w ould be m aterialin relation to the consotidatcd financialstatem entsbeing audited m ay occurand notbe detected w ithin a tim ely period by em ployees in the norm alcourse of perform ing their assigned functions.w e noted no m attersinvolving the internalcontroloverfinancialreporting and itsoperation thatw e considerto be m aterialw eaknesses. Thisreportin intended forthe inform ation of the auditcom m ittee,m anagem entand pass-through entities,and isnotintended to be and should notbe used by anyone otherthan these specified parties.