<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark one) FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF l934
For the transition period from to
---------- ----------
Commission File Number 0-16162
CHILDREN'S COMPREHENSIVE SERVICES, INC.
---------------------------------------
(Exact name of registrant as specified in its charter)
Tennessee 62-1240866
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
805 South Church Street, Murfreesboro, Tennessee 37130
------------------------------------------------ ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (615) 896-3100
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $ .01 Par Value, outstanding at July 31, 1995 - 10,711,782
shares.
Index to Exhibits is Found on Page 15
<PAGE> 2
INDEX
CHILDREN'S COMPREHENSIVE SERVICES, INC.
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets--June 30, 1995
and March 31, 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations--
Three months ended June 30, 1995 and 1994 . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows--
Three months ended June 30, 1995 and 1994 . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements--
June 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 2. Management's Discussion and
Analysis of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . 13
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
-2-
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
June 30, March 31,
1995 1995
-------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 690,000 $ 69,000
Accounts receivable, net of allowance
for doubtful accounts of $133,000
at June 30 and at March 31 3,043,000 3,432,000
Prepaid expenses 253,000 266,000
Other current assets 184,000 134,000
----------- -----------
TOTAL CURRENT ASSETS 4,170,000 3,901,000
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $4,290,000 at June 30
and $4,088,000 at March 31 14,710,000 14,866,000
PROPERTY HELD FOR SALE 165,000 165,000
NON-COMPETITION AGREEMENTS, net of accumulated
amortization of $1,812,000 at June 30 and
$1,750,000 at March 31 188,000 250,000
OTHER ASSETS AND DEFERRED CHARGES, at cost,
net of accumulated amortization of
$282,000 at June 30 and $259,000 at
March 31 243,000 267,000
----------- -----------
TOTAL ASSETS $19,476,000 $19,449,000
=========== ===========
</TABLE>
-3-
<PAGE> 4
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Continued)
<TABLE>
<CAPTION>
June 30, March 31,
1995 1995
-------- ---------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 396,000 $ 658,000
Current maturities - long-term debt:
Related Party 61,000 59,000
Other 182,000 177,000
Accrued employee compensation 457,000 716,000
Accrued other expenses 738,000 673,000
Deferred revenue 142,000 127,000
Income taxes payable 108,000 69,000
----------- -----------
TOTAL CURRENT LIABILITIES 2,084,000 2,479,000
DEFERRED TAXES PAYABLE 125,000 125,000
LONG-TERM DEBT:
Related Party 656,000 672,000
Other 6,206,000 6,252,000
OTHER LIABILITIES 465,000 465,000
----------- -----------
TOTAL LIABILITIES 9,536,000 9,993,000
SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00 per
share--10,000,000 shares authorized -0- -0-
Common stock, par value $ .01 per share
--20,000,000 shares authorized; issued
and outstanding 10,711,782 shares at
June 30 and at March 31 107,000 107,000
Additional paid-in capital 25,294,000 25,317,000
Accumulated (deficit) (15,461,000) (15,968,000)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 9,940,000 9,456,000
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 19,476,000 $19,449,000
============ ===========
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE> 5
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
------------------------------
1995 1994
----------- -----------
<S> <C> <C>
Revenues:
Operating revenues $ 5,518,000 $ 5,267,000
Management fee income 106,000 33,000
Other revenue 2,000 1,000
----------- -----------
TOTAL REVENUES 5,626,000 5,301,000
Expenses:
Employee compensation and benefits 3,415,000 3,078,000
Purchased services and other
expenses 1,086,000 1,036,000
Depreciation and amortization 264,000 265,000
Interest:
Banks and other 211,000 264,000
Related parties 29,000 107,000
Provision for bad debts -0- 10,000
Related party rent 25,000 25,000
----------- -----------
TOTAL EXPENSES 5,030,000 4,785,000
----------- -----------
INCOME BEFORE INCOME TAXES 596,000 516,000
Provision for income taxes 89,000 19,000
----------- -----------
NET INCOME $ 507,000 $ 497,000
=========== ===========
Net income per common share:
Primary $ .05 $ .05
=========== ===========
Fully diluted $ .05 $ .05
=========== ===========
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE> 6
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------------
1995 1994
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 507,000 $ 497,000
Adjustments to reconcile net income to
net cash used by operating activities:
Depreciation 202,000 202,000
Amortization 62,000 63,000
Amortization of deferred loan costs 24,000 81,000
Provision for bad debts -0- 10,000
(Gain) on disposition of property
and equipment -0- (1,000)
Changes in operating assets and liabilities:
Decrease in accounts receivable 389,000 828,000
(Increase) decrease in prepaid expenses 13,000 (21,000)
(Increase) in other current assets (50,000) (337,000)
(Decrease) in accounts payable (262,000) (429,000)
(Decrease) in accrued employee compensation (259,000) (252,000)
Increase in accrued expenses 65,000 129,000
Increase in income taxes payable 39,000 19,000
Increase in deferred revenue 15,000 -0-
----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 745,000 789,000
----------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment (46,000) (199,000)
(Increase) in other assets -0- (35,000)
Proceeds from sale of property and equipment -0- 5,000
----------- -----------
NET CASH (USED) BY
INVESTING ACTIVITIES $ (46,000) $ (229,000)
----------- -----------
</TABLE>
-6-
<PAGE> 7
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
---------------------------
1995 1994
---------- -----------
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds from revolving lines of credit $ 1,417,000 $ 2,150,000
Principal payments on revolving lines of
credit and long-term borrowings (1,458,000) (2,202,000)
Principal payments on long-term
borrowings - related parties (14,000) -0-
Stock issue/registration costs (23,000) -0-
----------- -----------
NET CASH (USED) BY
FINANCING ACTIVITIES (78,000) (52,000)
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 621,000 508,000
Cash and cash equivalents at
beginning of period 69,000 178,000
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 690,000 $ 686,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
-7-
<PAGE> 8
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1995
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Certain reclassifications have been
made in the consolidated financial statements for the three month period ended
June 30, 1994, to conform to the presentation of the financial statements for
the three month period ended June 30, 1995. Operating results for the three
month period ended June 30, 1995 are not necessarily indicative of the results
that may be expected for the year ended March 31, 1996. For further
information, refer to the financial statements and footnotes thereto for the
year ended March 31, 1995.
NOTE B -- EARNINGS PER COMMON SHARE
Net income per share has been computed on the basis of the weighted average
number of shares outstanding and common stock equivalents, consisting of
dilutive stock options and warrants.
NOTE C -- RESTATEMENT OF FINANCIAL STATEMENTS
In its consolidated financial statements for its fiscal year ended March 31,
1993, the Company established a provision for restructuring expenses that
included an $880,000 accrual for the expenses expected to be incurred in
connection with the Company's planned refinancings. These financings were
completed in September 1993 and September 1994 and the related costs incurred,
primarily loan acquisition fees and legal expenses, were charged against the
accrual provided at March 31, 1993.
In January 1995, the Company reached the decision that the more appropriate
accounting treatment for the refinancing costs would have been to capitalize
those costs as incurred and to amortize them over the terms of the related
loans. The consolidated financial statements for the years ended March 31,
1993 and 1994 and subsequent periods have been restated to reflect this
decision.
-8-
<PAGE> 9
NOTE C -- RESTATEMENT OF FINANCIAL STATEMENTS (continued)
The restatements resulted in the following impact on the Company's
consolidated financial statements:
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1994
------------------
<S> <C>
Net income as previously reported $ 576,000
Adjustments (79,000)
----------
Restated net income $ 497,000
==========
Net income per common share
Primary
As previously reported $ .06
Impact of adjustments (.01)
----------
As restated $ .05
==========
Fully diluted
As previously reported $ .06
Impact of adjustments (.01)
----------
As restated $ .05
==========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1994
-------------
<S> <C>
Shareholders' equity as previously
reported $5,737,000
Adjustments 546,000
----------
Restated shareholders' equity $6,283,000
==========
</TABLE>
-9-
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, operating
revenues from youth services and the amounts and percentage of certain items
relative to total revenues:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-----------------------------------------
1995 1994
------------------- ------------------
<S> <C> <C> <C> <C>
Operating revenues $ 5,518,000 98.1% $ 5,267,000 99.4%
=========== ===== =========== =====
Management fee income $ 106,000 1.9% $ 33,000 .6%
=========== ===== =========== =====
Employee compensation and benefits $ 3,415,000 60.7% $ 3,078,000 58.1%
=========== ===== =========== =====
Purchased services and other expenses $ 1,086,000 19.3% $ 1,036,000 19.5%
=========== ===== =========== =====
Depreciation and amortization $ 264,000 4.7% $ 265,000 5.0%
=========== ===== =========== =====
Interest $ 240,000 4.3% $ 371,000 7.0%
=========== ===== =========== =====
</TABLE>
Results of Operations
Three Months Ended June 30, 1995 and June 30, 1994
Total operating revenues for the three months ended June 30, 1995
increased by $251,000 or 4.8% over the same period in the prior fiscal year.
The increase in operating revenues over the same period in the prior year
results primarily from the impact of programs opened in Jasper and Eutaw,
Alabama and Steele Canyon, California, and from census increases at the
Company's Grand Terrace and Barstow, California campuses, net of decreases in
revenues at the Company's San Bernardino, California and Nashville, Tennessee
campuses due to census decreases and at the Company's Riverside, California
campus due to a change in the mix between special education and regular
education students.
Management fee income under the Company's management contract with
Helicon, Incorporated increased from $33,000 for the three months ended June
30, 1994 to $106,000 for the three months ended June 30, 1995. Additional
management fee income of $217,000 for the three months ended June 30, 1995 and
$167,000 for the three months ended June 30, 1994 was not recognized by the
Company due to the inability of Helicon, Incorporated to pay these amounts.
Future payments, if any, of these amounts will be recognized by the Company on
the cash basis.
Employee compensation and benefits during the three months ended June 30,
1995 totaled $3,415,000, as compared to $3,078,000 for the three months ended
June 30, 1994, an increase of 10.9%. When expressed as a percentage of total
revenues, employee compensation and benefits increased from 58.1% for the
three months ended June 30, 1994 to 60.7% for the three months ended June 30,
1995. The increase in employee compensation and benefits over the same period
in the prior year results primarily from the opening of new programs at Jasper
and Eutaw, Alabama and Steele Canyon, California, increased staffing
requirements at certain other programs and an increase in corporate personnel
costs incurred for operations and business development.
-10-
<PAGE> 11
Purchased services and other expenses for the three months ended
June 30, 1995 totaled $1,086,000, as compared to $1,036,000 for the three
months ended June 30, 1994, an increase of 4.8%. When expressed as a
percentage of total revenues, purchased services and other expenses decreased
from 19.5% for the three months ended June 30, 1994 to 19.3% for the three
months ended June 30, 1995. The increase in purchased services and other
expenses over the same period in the prior year is attributed primarily to the
opening of new programs at Jasper and Eutaw, Alabama and Steele Canyon,
California, net of reductions in legal and auditing expense.
Depreciation and amortization totaled $264,000 for the three months ended
June 30, 1995 as compared to $265,000 for the three months ended June 30, 1994.
Interest expense decreased from $371,000 for the three months ended June
30, 1994 to $240,000 for the three months ended June 30, 1995, a decrease of
$131,000, or 35.3%. The decrease in interest expense is attributed primarily
to a reduction in the average balance of debt outstanding and to a decrease in
the amortization of deferred loan costs.
Provision for income tax expense increased from $19,000 for the three
months ended June 30, 1994 to $89,000 for the three months ended June 30,
1995, an increase of $70,000. The Company's effective tax rate is
significantly less than the statutory tax rate because of the presence, at
March 31, 1995, of tax loss carryforwards of $7,030,000. The increase in the
Company's effective tax rate over the same period in the prior year results
from the presence of annual limitations on the utilization of the net
operating loss carryforwards pursuant to Internal Revenue Code Section 382.
Liquidity and Capital Resources
Cash provided by operating activities decreased from $789,000 for the
three months ended June 30, 1994 on net income of $497,000 to $745,000 for the
three months ended June 30, 1995 on net income of $507,000. Working capital
at June 30, 1995 was $2,086,000, as compared to $1,422,000 at March 31, 1995.
Cash used by investing activities decreased from $229,000 for the three
months ended June 30, 1994 to $46,000 for the three months ended June 30,
1995, due primarily to a reduction in cash outlays for the purchase of
property and equipment. Cash used by financing activities increased from
$52,000 for the three months ended June 30, 1994 to $78,000 for the three
months ended June 30, 1995, primarily due to cash outlays for certain stock
issuance and registration costs.
In September 1994, the Company executed agreements with National Health
Investors, Inc. ("NHI"), T. Rowe Price Strategic Partners Fund II, L.P. ("T.
Rowe Price") and First American National Bank ("FANB"). Under the terms of
these agreements, the Company refinanced all of its existing short-term
obligations through five-year term loans from NHI and T. Rowe Price for $6.5
million (at 11.5% per annum) and $1.0 million (at 12% per annum),
respectively. The agreement with NHI gives NHI a 25% interest in any
increases in the equity of the Company's operations at the Helicon Youth
Center in Riverside, California and Grand Terrace School in Grand Terrace,
California. Any amounts due NHI under the provisions of the equity
participation agreement will not be payable until the repayment of the loan.
-11-
<PAGE> 12
At June 30, 1995, the amount due under the equity participation agreement was
$-0-. The agreement with NHI also required the Company to provide a debt
service reserve equal to six months payments of principal and interest, an
amount which totals approximately $460,000. This reserve was established
through the execution of an irrevocable letter of credit through FANB. The
NHI agreement is secured primarily by a first priority lien on substantially
all of the Company's real estate, improvements and equipment. The T. Rowe
Price agreement is secured by the same assets but is subordinate to the NHI
agreement.
At the same time, the Company obtained through FANB a $2.5 million
one-year revolving line of credit. This line of credit bears interest at
prime + 1% (10.0% as of June 30, 1995) and is secured primarily by a first
priority lien on the Company's accounts and notes receivable. There were no
borrowings outstanding under the line of credit at June 30, 1995.
Availability under the line of credit at June 30, 1995 was approximately
$2,040,000, as the issuance of the letter of credit of approximately $460,000
in favor of NHI for the debt service reserve referred to above reduced the
Company's available credit by a like amount. The Company expects to renew
this line of credit in September, 1995.
The credit agreements with NHI and T. Rowe Price and the FANB line of
credit require the Company to comply with certain restrictive covenants with
respect to its business and operations and to maintain certain financial
ratios that become more stringent over time. The restrictive covenants under
these agreements prohibit the Company, without the prior consent of its
lenders, from entering into major corporate transactions, such as a merger,
tender offer or sale of its assets, incurring additional indebtedness, and,
under the FANB line of credit, declaring cash dividends.
The Company is obligated under no significant commitments. Capital
expenditures are expected to be minimal during fiscal 1996, limited to
replacement of existing capital assets as necessary. Current obligations,
typically due within thirty days or less, are expected to be funded with cash
flow from operations and borrowings under the Company's working capital line
of credit. Management believes that operations and amounts available under
its working capital line of credit will provide sufficient cash flow for the
next twelve months and that long-term liquidity requirements will be met from
cash flow from operations and outside financing sources.
Inflation
Inflation has not had a significant impact on the Company's results of
operation since inception. Certain of the Company's existing contracts
provide for annual price increases based upon changes in the Consumer Price
Index.
Impact of Accounting Changes
There are no pending accounting pronouncements that, when adopted, are
expected to have a material effect on the Company's results of operations or
its financial position.
-12-
<PAGE> 13
Item 6. Exhibits and Reports on Form 8-K:
(a) The following exhibits are included herein:
(11) Statement re: computation of earnings per share.
(27) Financial Data Schedule (SEC use only)
(b) Reports on Form 8-K:
There were no reports on Form 8-K for the three months ended June 30,
1995.
-13-
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHILDREN'S COMPREHENSIVE SERVICES, INC.
---------------------------------------
(Registrant)
Date: August 11, 1995 /s/WILLIAM J BALLARD
---------------------------------------
William J Ballard
Chairman, Chief Executive Officer
and President
Date: August 11, 1995 /s/DONALD B. WHITFIELD
---------------------------------------
Donald B. Whitfield
Vice President - Finance
-14-
<PAGE> 15
Exhibit Index
Exhibit No.
11 Computation of Per Share Earnings
27 Financial Data Schedule (SEC use only)
-15-
<PAGE> 1
EXHIBIT 11--STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
PRIMARY
Average shares outstanding 10,711,782 7,377,623
Net effect of dilutive stock
options and warrants--based
on the treasury stock method
using average market price 401,985 2,626,957
------------ ------------
TOTAL 11,113,767 10,004,580
============ ============
Net income $ 507,000 $ 497,000
============ ============
Per share amount $ .05 $ .05
============ ============
FULLY DILUTED
Average shares outstanding 10,711,782 7,377,623
Net effect of dilutive stock
options and warrants--based
on the treasury stock method
using the higher of ending
or average market price 401,985 2,774,841
------------ ------------
TOTAL 11,113,767 10,152,464
============ ============
Net income $ 507,000 $ 497,000
============ ============
Per share amount $ .05 $ .05
============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 690,000
<SECURITIES> 0
<RECEIVABLES> 3,176,000
<ALLOWANCES> 133,000
<INVENTORY> 0
<CURRENT-ASSETS> 4,170,000
<PP&E> 19,000,000
<DEPRECIATION> 4,290,000
<TOTAL-ASSETS> 19,476,000
<CURRENT-LIABILITIES> 2,084,000
<BONDS> 6,862,000
<COMMON> 107,000
0
0
<OTHER-SE> 9,833,000
<TOTAL-LIABILITY-AND-EQUITY> 19,476,000
<SALES> 5,518,000
<TOTAL-REVENUES> 5,626,000
<CGS> 4,501,000
<TOTAL-COSTS> 4,501,000
<OTHER-EXPENSES> 289,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 240,000
<INCOME-PRETAX> 596,000
<INCOME-TAX> 89,000
<INCOME-CONTINUING> 507,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 507,000
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
