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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(MARK ONE) FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED MARCH 31, 1996 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF L934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 0-16162
CHILDREN'S COMPREHENSIVE SERVICES, INC.
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(Exact name of registrant as specified in its charter)
Tennessee 62-1240866
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
805 South Church Street, Murfreesboro, Tennessee 37130
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (615) 896-3100
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $ .01
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(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. (X)
The aggregate market value of voting stock held by non-affiliates of the
Company as of June 24, 1996 was $61,542,990.
The number of shares outstanding of the issuer's common stock, par value $ .01
per share, as of June 24, 1996 was 5,494,785.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual meeting of shareholders to be
held August 14, 1996 are incorporated by reference into Part III of this Form
10-K.
Index to Exhibits is Found on Sequentially Numbered Page 56
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PART I
ITEM 1. BUSINESS
GENERAL
Children's Comprehensive Services, Inc. (the "Company") is one of the
largest for-profit providers of youth education and treatment services in the
United States. The Company's programs include a comprehensive array of education
and treatment services in both residential and non-residential settings for
children who are emotionally disturbed, behavior disordered, developmentally
delayed or learning disabled. The Company provides its educational and treatment
services for at risk and troubled youth through the operation and management of
special education schools and both open and secured residential treatment
centers for local, state and federal governmental agencies in Alabama,
California, Florida, Louisiana and Tennessee. As of March 31, 1996, the Company
provided educational and treatment services, directly or through management
contracts, to over 1,800 children through 37 different programs.
The Company conducts a significant portion of its business through its
relationship with Helicon Incorporated ("Helicon"), a 501(c)(3) not-for-profit
company, which also provides educational and treatment services to at risk and
troubled youth. As of March 31, 1996, the Company was providing consulting,
management and marketing services to Helicon at 11 programs. Services
provided to Helicon by the Company include financial, operational, management,
marketing, program design and other support services, including payroll,
budgeting and accounting. For these services, the Company is entitled to a
management fee equal to 6% of the monthly gross revenues of Helicon's programs.
The management fees payable to the Company, however, are subordinated in right
of payment to amounts payable by Helicon to operate its programs. In addition,
Helicon leases certain facilities owned by the Company. See "-Relationship with
Helicon," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note D of Notes to Consolidated Financial Statements.
The Company was incorporated under the laws of the State of Tennessee
in July 1985. In fiscal 1993, the Company terminated its adult corrections
business in order to focus its efforts on the Company's at risk and troubled
youth education and treatment services business, and in fiscal 1994, changed the
Company's name to Children's Comprehensive Services, Inc. Prior to fiscal 1994,
the Company experienced significant net losses. Since such time, the Company has
experienced significant improvement in its results of operations through the
addition and development of new programs and by expanding program offerings and
program capacity at existing programs, resulting in net income of approximately
$2.5 million for the fiscal year ended March 31, 1996.
RECENT DEVELOPMENTS
Since March 31, 1996, the Company has been awarded the right to
operate, or to negotiate contracts for the operation of, the following programs:
Bexar County, Texas. In May 1996, the Company was awarded the right to
negotiate a contract for a juvenile justice alternative school in Bexar County,
Texas. The school, scheduled to open for the 1996-1997 school year, will be
designed to accommodate up to 400 students who have been removed from the
county's public school system for various statutory infractions.
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Riverside, California. In May 1996, the Company initiated an
educational program at a 30-bed, juvenile facility in Riverside County,
California. The Company will also manage the facility's residential treatment
program for Helicon.
Eufaula, Alabama. In June 1996, the Company was awarded the right to
negotiate a contract to operate a residential youth center in Eufaula, Alabama.
The center, scheduled to open in August 1996, is a medium security facility and
is designed to accommodate up to 60 juvenile males who have been committed to
state custody.
THE MARKET FOR THE COMPANY'S SERVICES
The Company believes the population of at risk and troubled youth and
the need for more youth education and treatment services is growing
dramatically. A recent census projection predicts a 12 percent increase in the
total population of the United States by the year 2005. Of this number, the
percentage of adolescents is expected to increase by 21% to nearly 21 million.
The Company believes that the growth in population (particularly the growth in
the percentage of young males who have the highest crime rates) should
significantly increase the demand for education and treatment services for at
risk and troubled youth. Additionally, since the 1980's, the rate of increase in
juvenile violence has grown faster than the rate of increase in the juvenile
population. This increase in juvenile violence is also expected to result in
increased demand for educational treatment services for at risk and troubled
youth. The Company believes that societal factors contributing to the increase
in the rate of youth violence include the ready availability of firearms, the
rate of inner-city drug addiction, violence in the media and the increase in the
number of single parent homes.
The population of troubled youth ranges from youth who have been abused
and neglected to those who are seriously disturbed. At one end of the continuum
are "at risk" youths. These are youths who are not functioning in school or at
home and show such behaviors as aggressive noncompliance with the control of
parents and authority figures, chronic truancy, fighting, running away, and
alcohol or drug abuse. Statistics indicate that almost 20% of three to seventeen
year olds have at least one mental health problem sometime during their youth,
with the frequency of reported problems highest (29%) among males twelve to
seventeen. Statistics also indicate that there were 5.1 million children in
special education programs during the 1992-93 school year. Of this number, 2.4
million were diagnosed as having specific learning disabilities and over 400,000
were considered seriously emotionally disturbed ("SED"). The most recent US
Department of Education Biennial Evaluation Reports (1993-94) indicate that
youth diagnosed as SED and learning disabled have multiple problems that require
specialized treatment and education services. More than half (58%) leave school
before graduating. Additionally, 20% are arrested at least once before they
leave school, and 35% are arrested within a few years of dropping out of school.
At the other end of the continuum of troubled youths are juveniles who
have committed serious and/or violent felonies, including such crimes as sex
offenses, robberies, assaults, and drug trafficking. In 1994, there were 2.7
million arrests of juveniles under 18 years of age. Juveniles accounted for 19%
of all violent crimes and 25% of all property crimes in 1994. Furthermore,
juvenile arrest rates for weapons violations nearly doubled
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between 1987 and 1994. According to the Office of Juvenile Justice and
Delinquency Prevention, if the trends over the past ten years continue,
juvenile arrests for violent crimes will more than double by the year 2010.
The Company believes that the juvenile justice system is already overburdened
and experiencing great difficulty in meeting current needs. A 1994 report from
the US Department of Justice concluded that three of four public facilities for
juveniles provided inadequate, unsafe and crowded conditions.
The federal Individuals with Disabilities Education Act, and
predecessor law, mandate that all children be provided a free and appropriate
education, regardless of physical and mental handicap. Accordingly, Governmental
agencies traditionally have provided education and treatment services for at
risk and troubled youth, directly or indirectly, by contracting with
not-for-profit or for-profit agencies or companies, such as the Company.
Although courts and governmental agencies have long recognized the need for
specialized services for at risk and troubled youth, the Company believes that
many children and youth in the public education and youth correctional system
are not receiving the education and treatment to which they are entitled because
of overburdened and financially constrained public school and correctional
systems. Throughout the United States, there is a growing trend toward
privatization of government services and functions, including education and
treatment services for at risk and troubled youth, as governments of all types
face continuing pressure to control costs and improve the quality of services.
The Company believes that courts and governmental agencies in the
United States are not prepared to provide the necessary services as a result of
the growing population of at risk and troubled youth and the increased need for
special education services. Since education and treatment services for at risk
and troubled youth are viewed as an essential service, fiscal pressures have
caused governments to seek to deliver these services more cost-effectively.
Furthermore, the Company believes that, as juvenile crime and the demand for
special education services for at risk and troubled youth continues to receive
increasing levels of attention from lawmakers and the general public, government
funding for juvenile services will continue to increase. Although the number and
scope of privatized services for at risk and troubled youth has increased
dramatically in recent years, the Company estimates that only a relatively small
percentage of these services are privately managed. Based on the combination of
these demographic and social factors, the Company believes that the demand for
educational and treatment services for the at risk and troubled youth population
will continue to escalate and, increasingly, the private sector will be called
upon to meet the growing demands.
YOUTH SERVICES PROVIDED BY THE COMPANY
The Company, either directly or through contracts with Helicon,
educates and treats at risk and troubled youth through a comprehensive continuum
of services designed to address the specific needs of each youth. The Company's
programs, ranging from non-residential family preservation programs to 24-hour
secure facilities, are designed to provide high quality, consistent,
cost-effective treatment to meet a wide variety of needs of at risk and troubled
youth. The Company believes both consistency and flexibility are critical to the
success of the Company's programs. Accordingly, the Company's programs are
tailored to the specific needs of each locality, each client
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agency, each youth population and, most importantly, to the unique needs of
each student or resident. Management believes that the breadth of the
Company's services make the Company attractive to federal, state and local
governmental agencies that fund programs for special needs children.
The Company intends to continue to develop new programs as necessary to
respond to societal trends and requests for assistance and services from
governmental agencies to fulfill the educational and treatment requirements of
at risk and troubled youth.
NON-RESIDENTIAL TREATMENT PROGRAMS
The Company's non-residential youth services are designed to meet the
special needs of at risk and troubled youth and their families, while enabling
the youth to remain in his or her home and community. Non-residential services
provided by the Company include educational day treatment programs, diversionary
education programs, family preservation programs, homebound education and
on-site educational services in emergency shelters. Referral sources for
non-residential services include school districts, juvenile courts, and state
children services departments.
Educational Day Treatment Programs. In its non-residential educational
day treatment programs, the Company provides comprehensive educational programs
for students who have not been successful in traditional public school programs.
Many of the youth in these programs have experienced abuse and neglect and have
long histories of school failure. For these students, traditional public school
programs have not been able to sustain motivation or cooperation, or have not
provided specialized educational services for the emotionally disturbed,
behavior disordered and learning disabled youth. The alternative educational
program services provided by the Company are designed to provide special
education for developmental, behavioral and emotional problems, the opportunity
to remedy deficits in a student's education, and the development of responsible
pro-social behaviors. The Company's non-residential educational programs are
staffed with counselors and teachers with expertise in behavioral management to
provide high quality alternative educational services for at risk and troubled
youth, and include specialized teaching methods, individual and group therapy
provided by licensed clinicians, computer based curriculum and instructional
delivery and designs.
Diversionary Education. The Company's diversionary education programs
provide educational and therapeutic day treatment services to at risk and
troubled youth. Students at these programs include youth whose social function
in school and society has been unsatisfactory, delinquent and status offending
youth, youthful sex offenders and others. These programs are designed to break
the cycle of repeated teen delinquency, to keep families together and to
strengthen the youth's ties and relationships with his or her community. For
example, the Company manages specialized day treatment programs for youth who
are chronically noncompliant and aggressive and have been expelled from public
schools. In addition to individually tailored academic programs, these programs
are designed to provide intensive supervision, individualized special education
and counseling and guidance in an effort to remotivate the student's interest in
school, develop self-discipline and improve social skills and cooperation with
others.
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Family Preservation. The Company's family preservation programs seek to
strengthen and maintain the integrity of the family while promoting the healthy
growth and development of the at risk and troubled youth. The objectives of
these programs are to improve family functioning, to keep the child in the
family and to insure the child's safety. These objectives are accomplished with
a blend of home-based, intensive crisis intervention services to help families
acquire improved coping and living skills.
Homebound Education. The Company's homebound instructional programs
provide educational services to students who are pregnant and unable to attend
school, students who have medical problems that prevent them from attending
school, and suspended special education students. Students in these programs
receive focused one on one instruction and continue with the curriculum of the
local school normally attended by the student.
On-site Educational Services - Shelters/Diagnostic Centers. The
Company's shelter education program provides on-site educational services to at
risk and troubled youth in residence at emergency shelters and diagnostic
centers. The objective of this program is to provide continuity in a student's
education while he or she awaits permanent placement. These programs are
designed to provide approved, comprehensive educational services in a safe and
secure environment that protects the students.
RESIDENTIAL TREATMENT PROGRAMS
The Company's residential treatment programs provide highly structured
therapeutic environments and comprehensive treatment for at risk and troubled
youth. Residential services are typically utilized when structured observation
is necessary, when severe behavior management needs are present or when
containment and safety are required. The Company's residential treatment
programs utilize accepted treatment philosophy and techniques for dealing with
disturbed youths who tend to resist treatment, deny problems and exhibit
aggressive, irresponsible and/or addictive behaviors. These programs are
designed to identify a particular youth's problem areas so that the treatment of
each youth will be specifically tailored to his or her level of social,
emotional and cognitive functioning. Techniques utilized in the Company's
residential treatment programs include computer based educational/vocational
programs and comprehensive programs for behavior change including group,
individual and family counseling, pro-social and independent living skills
training, empathy development, critical thinking and problem solving, anger
management, substance abuse treatment and relapse prevention. These procedures
are designed to increase self-control and effective problem-solving, to teach
youth how to understand and consider other people's values, behaviors and
feelings; to show youth how to recognize how their behavior affects other people
and why others respond to them as they do; and to teach them alternative,
responsible interpersonal behaviors. The Company's residential services include
pre-trial secure residential centers, therapeutic wilderness programs,
residential treatment and psychiatric centers, diagnostic and evaluation
services and group homes. Referral sources for these services include
governmental departments of probation, mental health, social services and youth
corrections.
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Pre-trial Secure Residential. The Company's pre-trial secure detention
centers house youth while such youth await disposition of their cases. While in
detention, youth residents are thoroughly assessed by the Company and the
results of these assessments are used by the courts to help determine placement
of the youth following adjudication. In addition, youth at the Company's
pre-trial detention centers receive educational and treatment services, such as
substance abuse and individual and group counseling to provide these youth with
a meaningful head start in their rehabilitation.
Therapeutic Wilderness Programs. The Company's short-term therapeutic
wilderness programs are designed for relatively low risk youth who have failed
or performed below expectations in community based settings. These programs
generally include a six week regimen of physical activity, including drill and
ceremony training and work projects, as well as educational and counseling
services. The Company believes its wilderness programs are an innovative and
effective method to teach the discipline and self-respect necessary to prevent a
youth from further penetrating the juvenile justice system.
Residential Psychiatric Treatment. The Company's residential
psychiatric treatment center serves behaviorally and emotionally disturbed youth
who typically have serious chemical dependency problems. Services offered
related to chemical dependency issues include drug education, 12-step recovery
meetings, step-study, and therapy groups. A primary goal of the Company's
residential psychiatric center is to develop positive support systems for the
adolescent to allow for discharge to a less structured environment.
Residential Treatment. The Company's residential treatment programs
house behaviorally disturbed youth as well as youth who may have serious
substance abuse problems. Youth referred to these programs typically have
experienced multiple placement failures. While in the Company's residential
treatment centers, youth participate in group, individual and family therapy,
recreation therapy, and on-site educational programming. These programs focus on
teaching more appropriate behavior through cognitive restructuring, contingency
management and counseling.
Diagnostic and Evaluation Services. The Company's diagnostic and
evaluation programs provide evaluation and assessment services, in a staff
secure setting, to youth who are in state custody. Youth referred to these
programs require diagnostic services or behavioral observation.
Group Homes. The Company's group home programs provide shelter
care, transitional services and independent living programs for youth from seven
to seventeen years of age in a family-like setting in residential neighborhoods.
These programs focus on teaching family living and pro-social skills, and
include both individual and group counseling.
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The table below sets forth certain information regarding the Company's
non-residential youth services programs operated by the Company directly or
through management contracts with Helicon:
NON-RESIDENTIAL YOUTH SERVICES PROGRAMS
<TABLE>
<CAPTION>
Average
Facility Population Commencement
Location Program Type Capacity FY 3/31/96 of Operations
-------- ------------ -------- ---------- -------------
<S> <C> <C> <C> <C>
COMPANY PROGRAMS
- ----------------
California:
San Bernardino Educational day treatment 60 31 January l980
Grand Terrace Educational day treatment 179 156 May l985
Beaumont Educational day treatment 40 23 September l985
Banning Educational day treatment 60 23 September l985
Victorville Educational day treatment 40 32 September l987
Mid-Valley Educational day treatment 84 80 June l988
Ramona Educational day treatment 40 28 September 1990
Quail Valley Educational day treatment 40 30 October 1990
Riverside Educational day treatment 132 117 August 1992
Desert Hot Springs Educational day treatment 15 8 September 1992
Barstow Educational day treatment 40 16 April 1994
Chula Vista Educational day treatment 79 36 February 1994
Steele Canyon Educational day treatment 36 31 September 1994
Florida:
Jacksonville Diversionary education 32 9 September 1995
Louisiana:
New Orleans Diversionary education 30 29 November 1991
New Orleans Family preservation N/A 4 February 1994
Tennessee:
Nashville Homebound education N/A 84 November 1991
HELICON PROGRAMS
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Tennessee:
Murfreesboro Family preservation N/A 18 July 1988
Murfreesboro Educational day treatment 20 16 September 1990
Murfreesboro Diversionary education 40 40 February 1994
Nashville Diversionary education 40 40 October 1990
Various On-site educational services in
emergency shelters and diagnostic
centers 403 359 September 1993
Covington Diversionary education 30 29 August 1994
Clarksville Diversionary education 40 40 September 1994
</TABLE>
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The table below sets forth certain information regarding residential
youth services programs operated by the Company directly or through management
contracts with Helicon:
RESIDENTIAL YOUTH SERVICES PROGRAMS
<TABLE>
<CAPTION>
Average
Facility Population Commencement
Location Program Type Capacity FY 3/31/96 of Operations
-------- ------------ -------- ---------- -------------
<S> <C> <C> <C> <C>
COMPANY PROGRAMS
- ----------------
Alabama:
Tuscaloosa Pre-trial secure residential 27 24 September 1989
Tuscumbia Pre-trial secure residential 25 19 October 1992
Jasper Therapeutic wilderness program 20 16 November 1994
Eutaw Therapeutic wilderness program 20 15 May 1995
Selma Therapeutic wilderness program 26 10 February 1996
Tennessee:
Murfreesboro Residential treatment 34 34 July l989
Newbern Residential treatment 32 32 July 1990
Clarksville Diagnostic and evaluation services 25 25 May 1992
Johnson City Pre-trial secure residential 12 9 November 1985
HELICON PROGRAMS
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California:
Mid-Valley Residential treatment 84 81 June l988
Ramona Residential psychiatric treatment 40 36 November 1984
Riverside Residential treatment 120 115 August 1992
Various 6-Bed group homes 36 20 November 1994
</TABLE>
OPERATIONAL PROCEDURES
The Company's programs are designed to provide high quality, consistent
cost effective treatment across a range of services to meet a wide variety of
needs for the various segments of the at risk and troubled youth population. The
Company generally is responsible for the overall operation of its facilities and
programs, including staff recruitment, general administration and security and
supervision of the youth in its programs.
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Staff Recruitment and Training. The Company has assembled an
experienced team of managers, counselors and staff that blends program expertise
with significant business and financial experience in each area of the Company's
operations. Company personnel include educators, mental health professionals,
juvenile justice administrators, human resource specialists and financial and
marketing professionals. The Company prefers to recruit direct care staff who
have pursued undergraduate or graduate studies in education and in the
behavioral or social sciences.
Under laws applicable to the Company's programs, as well as the
Company's internal training policy, the Company's teachers, counselors, security
and other personnel are required to complete extensive training. Core training
includes courses in the major Company program components such as behavior change
education, positive peer culture, discipline and limit setting, anger management
and the teaching of pro-social skills. Annual continuing education also is
required for all direct care staff. In addition, the Company demonstrates its
commitment to its employees' professional development by offering lectures,
classes and training programs as well as tuition reimbursement benefits.
The Company believes that its recruitment, selection and training
programs provide quality personnel experienced in the Company's approach to
providing behavior change and education programs. The Company also believes that
these programs provide the Company with management depth and consistency, which,
in turn, creates flexibility in managing the Company's personnel resources as
the number and location of programs expand.
Quality Assessment. The Company has developed a model of ongoing
program evaluation and quality management which provides critical feedback to
insure qualitative performance of its various programs. The Company implemented
its Periodic Service Review system ("PSR") at certain of its programs in 1994,
and is in the process of completing implementation at the Company's remaining
programs. The PSR system provides regular feedback on percentage achievement of
standards to measure whether a program is achieving its performance objectives.
The quality of care standard data is computer scanned on a weekly or monthly
basis and graphs are developed which show ongoing visual representations of
progress towards meeting standards. Feedback is then provided to the Company's
administrators, corporate managers and all staff so that each team member is
aware on a timely basis if program standards are being met. Management believes
the PSR system is a vital management tool to evaluate the success of its
programs, and has been useful as a marketing tool to promote the Company's
programs since it provides more meaningful and significant data than is usually
provided by routine contract licensing monitoring of programs. To expand the
scope of the PSR system, the Company is attempting to develop a computer based
program which correlates client characteristics and program achievements with
recidivism data after youth are released from the Company's various programs.
Security. The Company realizes that, in the operation of programs for
at risk and troubled youth, a primary mission is to protect the safety of the
community within a facility, as well as the community outside. Thus, the
Company's programs emphasize good security, risk assessment and close
supervision by responsible, alert and well-trained staff.
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MARKETING
The Company's marketing activities are directed primarily toward local
and state governmental entities responsible for juvenile justice, children
services, education, and mental health, as well as school districts and juvenile
courts responsible for special programs for troubled youth. Marketing efforts
are conducted and coordinated by the Company's Vice President of Business
Development and other senior management personnel with the aid, where
appropriate, of certain independent consultants. In 1993-94, the Company
conducted an extensive survey of governmental agencies responsible for services
to at risk and troubled youth. Based on responses to this survey, the Company
determined to focus its near term marketing efforts on approximately twenty
states to explore business opportunities for the Company's services. The Company
continues to evaluate these and other states for their market potential.
The Company generally pursues its business opportunities in one of two
ways. The Company follows either the traditional competitive route where a
Request for Proposals ("RFP") or a Request for Qualifications ("RFQ") is issued
by a government agency, with a number of companies responding, or the Company
receives unsolicited requests, generally from local school districts, for the
operation of special education programs. When the Company receives inquiries
from or on behalf of governmental agencies or local school districts, the
Company determines whether there is an existing need for the Company's services,
assesses the legal and political climate, as well as the availability of funding
and competition, and then conducts an initial cost analysis to further determine
program feasibility.
Generally, governmental agencies responsible for juvenile justice or
children's education and treatment services procure services through RFPs or
RFQs. Most of the Company's activities in the area of securing new business are
in the form of responding to RFP's. As part of the Company's process of
responding to RFPs, management meets with appropriate personnel from the agency
making the request to best determine the agency's distinct needs. If the project
fits within the Company's strategy, the Company will then submit a written
response to the RFP. A typical RFP requires bidders to provide detailed
information, including, but not limited to, the service to be provided by the
bidder, its experience and qualification, and the price at which the bidder is
willing to provide the services. The Company has, and intends to in the future,
engage independent consultants to assist it in responding to RFPs. Based on the
proposals received in response to an RFP, the agency will award a contract to
the successful bidder. In addition to issuing formal RFPs, local jurisdictions
may issue an RFQ. In the RFQ process, the requesting agency selects a firm
believed to be most qualified to provide the requested services and then
negotiates the terms of the contract with that firm, including the price at
which its services are to be provided.
The Company also attends and promotes its services at key conferences
throughout the United States where potential government clients are present. Key
management staff are requested by governmental agencies to make presentations at
such conferences or to provide professional training at the request of
governmental entities.
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RELATIONSHIP WITH HELICON
The Company conducts a significant portion of its business through its
relationship with Helicon, a 501(c)(3) not-for-profit company, which also
provides educational and treatment services for at risk and troubled youth. As
of March 31, 1996, the Company was providing consulting, management and
marketing services to Helicon at 11 programs. In addition, Helicon also leases
two facilities owned by the Company to operate its programs. Pursuant to a
Consulting and Marketing Agreement, effective as of August 1992, by and between
Helicon and the Company (the "Helicon Agreement"), the Company is entitled to
receive for these services management fee income in an amount equal to 6% of the
monthly gross revenues of Helicon's programs. The payment of these management
fees, however, is subordinated in right of payment to amounts payable by Helicon
to fund its programs. For each of the fiscal years ended March 31, 1996, 1995
and 1994, the Company did not recognize all the management fee income to which
it was entitled due to the inability of Helicon to pay these amounts. The
Helicon Agreement expires September 1, 1999. Any material loss of revenue by
Helicon, the inability of Helicon to pay the management fees or the loss or
renewal on less favorable terms of the Helicon Agreement, would have a material
adverse impact on the Company. See "Managements Discussion and Analysis of
Financial Conditions and Results of Operations" and Note D of Notes to
Consolidated Financial Statements."
MAJOR CUSTOMERS
During the fiscal year ended March 31, 1996, the Company earned
approximately 23% of its operating revenues under contracts with the Riverside
County Office of Education, Riverside, California, and approximately 15% of its
operating revenues under contracts with the State of Tennessee.
The Company's contract with Riverside County Office of Education
requires that the Company provide special education and related services, such
as transportation, counseling and language and speech therapy, to those
individuals requiring such services who are referred to one of the Company's
schools by Riverside County. The contract is renewable annually for the period
July 1 through June 30. The Company's contractual relationship with Riverside
County has been in place for a period in excess of five years, and the Company
currently expects to renew its contract with Riverside County Office of
Education when the current contract expires.
The Company's contracts with the State of Tennessee require that the
Company provide education, treatment, assessment and evaluation services. These
contracts are renewable annually for the period July 1 through June 30. Certain
of the Company's contracts with the State of Tennessee have been in place for
periods in excess of five years, and the Company currently expects to renew all
contracts with the State of Tennessee upon their current expiration.
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SEASONALITY
Revenues from providing youth education services are generally seasonal
in nature, fluctuating with the academic school year. Revenues are at their
lowest during the summer school months, and at their peak during the fall,
winter and spring months when school is in full session. Additionally, spring
vacation generally affects one of two quarters (either the quarter ending March
31 or the quarter ending June 30), depending on when the Easter holiday falls.
REGULATIONS
The industry in which the Company operates is subject to federal, state
and local regulations which are administered by various regulatory authorities.
Prospective providers of youth education and treatment services must comply with
a variety of applicable state and local regulations. The Company's contracts
typically include extensive reporting requirements and may require supervision
and on-site monitoring by representatives of contracting governmental agencies.
State law also typically requires teachers, counselors and other personnel to
meet certain training standards as well as certain credential and license
requirements. In addition, many state and local governments are required to
enter into a competitive bidding procedure before awarding contracts for
products or services. The failure to comply with any applicable laws, rules or
regulations and the loss of any required license could have a material adverse
effect on the Company's financial condition and results of operation.
Furthermore, the current and future operations of the Company may be subject to
additional regulations as a result of, among other factors, new statutes and
regulations and changes in the manner in which existing statutes and regulations
are or may be interpreted or applied. Any such additional regulations could have
a material adverse effect on the Company's financial condition and results of
operation.
COMPETITION
The Company competes primarily on the basis of the quality, range and
price of services offered, its experience in managing facilities, and the
reputation of its personnel. The business in which the Company engages is one
that other entities may easily enter without substantial capital investment or
experience in management of education or treatment facilities. Some of the
Company's competitors have greater resources than the Company. The Company also
competes in some markets with smaller local companies that may have a better
understanding of the local conditions and may be better able to gain political
and public acceptance. In addition, the Company competes with governmental
agencies that are responsible for youth education and/or treatment facilities.
EMPLOYEES
At March 31, 1996, the Company had 476 full-time employees and 222
part-time employees, none of whom were represented by a union. Of these 698
employees, 44 were corporate or regional administrative staff and 654 were
involved in program and facility operation and management. Management believes
that its relations with its employees are good.
-13-
<PAGE> 14
INSURANCE
The Company maintains an $11,000,000 general liability insurance policy
for all of its operations. To date, no material payments have been made under
the Company's general liability insurance policies because of any action brought
as a result of the operation of any of its programs. The Company also maintains
insurance in amounts it deems adequate to cover property and casualty risks,
workers' compensation and directors and officers liability. There can be no
assurance that the aggregate amount and kinds of the Company's insurance are
adequate to cover all risks it may incur or that insurance will be available in
the future.
Each of the Company's contracts and the statutes of certain states
require the maintenance of insurance by the Company. The Company's contracts
provide that in the event that the Company does not maintain such insurance, the
contracting agency may terminate its agreement with the Company. The Company
believes it is in compliance in all material respects with respect to these
requirements.
RISK FACTORS
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company is including the following
additional cautionary statements identifying important factors that could cause
the Company's actual results to differ materially from those projected in
forward looking statements made by, or on behalf of, the Company.
Dependence on Certain Customers. During the fiscal year ended March 31,
1996, the Company earned approximately 23% of its revenues under a contract with
the Riverside County Office of Education, Riverside, California, and
approximately 15% of its revenues under contracts with the State of Tennessee.
These contracts are renewable annually. The termination or non-renewal of a
significant number of these contracts would have a material adverse affect on
the Company, and it would be difficult for the Company to replace the revenues
from these contracts. The existing contracts with Riverside County and the
State of Tennessee expire on June 30, 1996. There can be no assurance that all
or any of the contracts with Riverside County or the State of Tennessee will be
renewed upon their expiration.
Relationship with Helicon. The Company conducts a significant portion
of its business through its relationship with Helicon, a 501(c)(3)
not-for-profit company, which also provides educational and treatment services
to at risk and troubled youth. As of March 31, 1996, the Company was providing
consulting, management and marketing services to Helicon at 11 programs. In
addition, Helicon also leases two facilities owned by the Company to operate its
programs. Pursuant to the Helicon Agreement, the Company is entitled to receive
for these services management fee income in an amount equal to 6% of the
monthly gross revenues of Helicon's programs. The payment of these management
fees, however, is subordinated in right of payment to amounts payable by
Helicon to fund its programs. For each of the fiscal years ended March 31,
1996, 1995 and 1994, the Company did not recognize all the management fee
income to which it was entitled due to the
-14-
<PAGE> 15
inability of Helicon to pay these amounts. The Helicon Agreement expires on
September 1, 1999. Any material loss of revenue by Helicon, the inability of
Helicon to pay the management fees or the loss or renewal on less favorable
terms of the Helicon Agreement, would have a material adverse impact on the
Company.
Dependence on Governmental Agencies. Virtually all of the Company's
revenues are attributable to contracts with state and local government and
governmental agencies. The Company's cash flow is subject to the receipt of
sufficient funding and timely payment by applicable governmental entities. If
the appropriate governmental agency does not receive sufficient appropriations
to cover its contractual obligations, a contract may be terminated or the
Company's compensation may be deferred or reduced. Any delays in payment could
have an adverse effect on the Company's cash flow. In addition, the Company is
dependent on government agencies for referral of a sufficient number of youth to
fill the Company's programs. A failure to do so may have a material adverse
effect on the Company's financial condition and results of operations.
Contract Renewal. The Company's contracts are typically subject to
renewal annually. The renewal of a contract, and the ability of the Company to
obtain new contracts, is affected by the quality and type of services provided
by the Company and the financial terms of each contract can be affected by
governmental budget constraints. Several state and local governments have
experienced fiscal difficulties. Renewals of the Company's contracts also can be
affected by changes in government or agency personnel and priorities or
philosophies of governments or agencies with respect to youth services.
Government and agency contracts generally are subject to audits, reviews and
investigations. These audits, reviews and investigations typically involve a
review of the contractor's performance under the contract, its pricing practices
and its compliance with applicable laws and regulations. In addition, some
contracts are subject to competitive bidding. The loss, or renewal on less
favorable terms, of a substantial number of contracts, or the Company's failure
to obtain new contracts, could have a material adverse effect on the Company.
Revenue and Profit Growth Dependent on Expansion. The Company's growth
is dependent upon its ability to obtain contracts to manage new youth education
and treatment programs and to retain existing management contracts. The
Company's potential for growth will depend on a number of factors, including the
number of at risk and troubled youth requiring the Company's services,
governmental and public acceptance of the concept of privatization, the number
of programs available for privatization, and the Company's ability to obtain
awards for contracts and to integrate new programs into its management structure
on a profitable basis. There can be no assurance that the Company will be able
to obtain additional contracts to develop or manage new facilities on favorable
terms.
-15-
<PAGE> 16
Risks Associated with Expansion. The Company intends to grow internally
through obtaining contracts to manage additional programs, as well as through
possible strategic acquisitions. Although the Company has no current commitments
or understandings with respect to the acquisition of any entity, the Company has
explored and continues to explore strategic acquisition alternatives. There can
be no assurance that the Company will be able to identify, acquire or profitably
manage acquired companies or successfully integrate such operations into the
Company without substantial costs, delays or other problems. In addition, there
can be no assurance that companies acquired in the future will be profitable at
the time of their acquisition or will achieve levels of profitability that
justify the investment therein. Acquisitions may involve a number of special
risks, including adverse short-term effects on the Company's reported operating
results, diversion of management's attention, dependence on retaining, hiring
and training key personnel, and risks associated with unanticipated problems or
legal liabilities, some or all of which could have a material adverse effect on
the Company's financial condition and results of operation.
Limited History of Profitability. Prior to fiscal 1994, the Company
experienced significant net losses and negative or limited cash flow from
operations. Although the Company has reported net income for each quarter since
the fiscal year ended March 31, 1993, there can be no assurance that the Company
will continue to be profitable or that it will generate sufficient cash from
operations to fund its business. The Company's ability to continue to operate
profitably will depend upon, among other things, the successful continuation of
its contracts and programs. In addition, because the Company's operating
revenues are generated under the terms of contracts that generally provide for
hourly, daily or fixed rates that are negotiated periodically, the Company's
ability to estimate and control its costs with respect to these contracts is
critical to profitability.
Acceptance of Privatized Youth Education and Treatment Programs.
Management of youth education schools and treatment centers by private entities
has not achieved complete acceptance by either governments or the public. Some
sectors of the federal government and some state and local governments are
legally unable to delegate their traditional management responsibilities for
education and treatment facilities to private companies. The operation of
education and treatment services by private entities is not widely understood by
the public and the industry has encountered resistance from certain groups that
believe youth education and treatment programs should be conducted by
governmental agencies. Such resistance may cause a change in public and
government acceptance of privatized youth education and treatment programs. In
addition, changes in dominant political parties in any of the markets in which
the Company operates could result in significant changes to previously
established views of privatization in such market.
Opposition to Program Location and Adverse Publicity. The Company's
success in obtaining new contracts may depend, in part, upon its ability to
locate facilities that can be leased or acquired, on favorable terms, by the
Company. Some locations may be in or near populous areas and, therefore, may
generate legal action or other forms of opposition from residents in areas
surrounding a proposed site. The Company's business also is subject to public
scrutiny and, consequently, could be significantly affected by negative
publicity, negative public reaction or governmental investigations with respect
to the Company's policies or operations or the actions of children
-16-
<PAGE> 17
under its care. The Company's reputation is very important to the retention
and procurement of government and governmental agency contracts. Negative
publicity or a governmental investigation with respect to the Company's
policies or operations or the actions of children under its care could have a
material adverse effect on the Company's financial condition and results of
operations.
Potential Legal Liability. The Company's management of youth education
and treatment programs exposes it to potential third-party claims or litigation
by participants or other persons for wrongful death, personal injury or other
damages resulting from contact with Company-managed facilities, programs,
personnel or participants. In addition, the Company's management contracts
generally require the Company to indemnify the governmental agency against any
damages to which the governmental agency may be subject in connection with such
claims or litigation. The Company maintains an insurance program that provides
coverage for certain liability risks faced by the Company, including wrongful
death, personal injury, bodily injury, death or property damage to a third
party where the Company is found to be negligent. There can be no assurance,
however, that the Company's insurance will be adequate to cover potential
third-party claims.
Dependence on and Competition for Key Personnel. The Company depends to
a great extent on the efforts of each of its executive officers and certain
other key personnel to renew and obtain contracts, operate and develop programs
and administer the Company's business. The Company does not generally have
employment contracts with its officers or employees and does not maintain life
insurance with respect to any of such persons. The loss of one or more of the
Company's key personnel could have a material adverse effect on the Company's
business. The Company's ability to successfully expand its business and at the
same time maintain the quality of its services also will depend, in part, on its
ability to attract, train and retain additional qualified personnel. There is
significant competition for qualified teachers, counselors, program managers and
other key personnel, and there can be no assurance that the Company will be
successful in recruiting, training or retaining employees to enable the Company
to successfully expand its business and maintain the quality of its services.
Any significant reduction in the quality of its services could hurt the
Company's ability to renew existing contracts and to grow.
-17-
<PAGE> 18
ITEM 2. PROPERTIES
The table below sets forth certain information regarding the Company's
properties:
<TABLE>
<CAPTION>
Number of Aggregate
State Nature of Occupation Facilities Capacity
----- -------------------- ---------- --------
<S> <C> <C> <C>
Non-Residential:
- ----------------
California Own 3 351
California Lease 10 405
Florida Lease 1 32
Louisiana Lease 1 30
Tennessee Lease 1 n/a
Residential:
- ------------
Alabama Right to occupy (1) 5 118
Tennessee Own 2 66
Tennessee Right to occupy (1) 2 37
</TABLE>
- ---------------
(1) The Company acquired a right to occupy the facilities indicated
rent-free for the duration of the Company's contracts to provide these
programs.
Except for its non-residential office and educational treatment center
in Grand Terrace, California, its educational treatment centers in Victorville
and Riverside, California, and its residential treatment centers in Murfreesboro
and Newbern, Tennessee, the Company leases facilities on a short-term basis
(generally one to five years) in the particular locality where it conducts its
programs. For the fiscal year ended March 31, 1996, the Company's total rental
expense was approximately $445,000. In addition, the Company also has obtained a
right to occupy certain facilities rent-free during the effectiveness of the
Company's contracts to provide residential treatment programs in Alabama and
Tennessee. The Company owns real estate and improvements in Riverside and
Ramona, California which it leases to Helicon pursuant to lease agreements which
expire July 31, 2019 and December 31, 1997, respectively.
The Company also owns its corporate headquarters office building
located in Murfreesboro, Tennessee. This office building contains approximately
8,800 square feet of office space. The Company believes its facilities are
suitable for its current operations and programs.
-18-
<PAGE> 19
ITEM 3. LEGAL PROCEEDINGS
In October 1995, a civil action was filed in the Circuit Court of
Colbert County, Alabama, against the Company and certain of the Company's
employees in connection with the circumstances surrounding the alleged wrongful
death of a juvenile enrolled at the Company's wilderness program in Jasper,
Alabama. The Company's investigation indicates that the juvenile had physical
impairments prior to his enrollment in the wilderness program, which may have
contributed to his death. The complaint, among other things, alleges negligence
and civil rights violations on the part of the Company and certain of its
employees, and seeks an unspecified amount of damages. The action has been
removed from the Circuit Court of Colbert County to the United States District
Court for the Northern District of Alabama, Northwestern Division. While
management believes the allegations are without merit and intends to defend the
litigation vigorously, management is unable at this time to estimate the effect
of any settlement or adverse judgment on the results of operations or financial
condition of the Company. The Company has, therefore, made no accrual for any
such settlement, adverse judgment, or costs of adjudication.
In December 1992, the Company received an audit report from the
California Department of Social Services alleging overpayments of approximately
$315,000 at its 6-bed group homes for the years 1991 and 1992. The Company is
contesting this determination and filed a rate protest with the Department of
Social Services in February 1993. An informal hearing was concluded in October
1995, and in April 1996, the Company filed a request for a formal hearing. The
Department of Social Services has established August 6, 1996 as the hearing
date. A provision for liability of approximately $201,000 is included in accrued
other expenses at March 31, 1996.
The Company is involved in various other legal proceedings, none of
which are expected to have a material effect on the Company's financial position
or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of the shareholders of the Company was held on March
21, 1996. The only order of business was to vote upon an amendment to the
Company's Restated Charter to decrease the number of authorized shares of the
Company's Common Stock from 20 million to 10 million and to concurrently effect
a one for two reverse stock split. As of the record date for the meeting, there
were 10,757,532 shares of the Company's Common Stock outstanding. 8,410,799
shares were represented at the meeting and were voted as follows:
<TABLE>
<S> <C>
For the charter amendment: 7,885,750
Against the charter amendment: 209,770
Abstain from voting: 19,815
Broker non-votes: 295,464
</TABLE>
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<PAGE> 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock trades on The Nasdaq Stock Market's National
Market under the symbol "KIDS". The following table sets forth the high and low
sale prices for each full quarter within the Company's past two fiscal years,
restated to reflect the Company's 1 for 2 reverse stock split of the Common
Stock effected March 21, 1996.
<TABLE>
<CAPTION>
Year Ended March 31, l996 High Low
------------------------- ---- ---
<S> <C> <C>
Quarter Ended: March 31 11 7/8 6 7/8
December 31 8 5 3/4
September 30 7 1/2 4 1/2
June 30 5 1/2 4 1/2
Year Ended March 31, 1995
-------------------------
Quarter Ended: March 31 6 1/4 3 3/4
December 31 6 1/4 2 1/2
September 30 6 5/8 3 7/8
June 30 4 1/4 3 1/4
</TABLE>
HOLDERS
As of June 24, 1996 the Company had approximately 352 shareholders of
record of its Common Stock.
DIVIDENDS
The Company has never declared or paid a cash dividend on its Common
Stock. It is the present policy of the Company's Board of Directors to retain
all available earnings to support operations; therefore, the Company does not
anticipate declaring or paying cash dividends on its Common Stock for the
foreseeable future. The declaration and payment of cash dividends in the future
will be determined based on a number of factors, including the Company's
earnings, financial condition, liquidity requirements, restrictions in financing
agreements and other factors deemed relevant by the Board of Directors. The
Company's current revolving credit agreement prohibits the Company from paying
any cash dividends on its Common Stock.
-20-
<PAGE> 21
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information for the years ended March
31, 1996, 1995, 1994, 1993 and 1992 has been derived from the financial
statements of the Company and should be read in conjunction with the financial
statements, the related notes thereto and other financial information included
elsewhere herein.
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands of dollars, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Operating revenue(1) $ 23,630 $ 20,575 $18,849 $ 24,541 $30,331
Management fee income 1,036 367 -0- -0- -0-
-------- -------- ------- -------- -------
Total revenue 24,666 20,942 18,849 24,541 30,331
-------- -------- ------- -------- -------
Operating Expenses:
Employee compensation and benefits 15,010 12,676 11,619 16,605 21,000
Purchased services and other
expenses 4,590 3,886 3,601 7,235 7,612
Depreciation and amortization 1,025 1,080 1,277 2,072 1,820
Other operating expenses 139 184 193 595 607
-------- -------- ------- -------- -------
Total operating expenses 20,764 17,826 16,690 26,507 31,039
-------- -------- ------- -------- -------
Income (loss) from operations 3,902 3,116 2,159 (1,966) (708)
Interest expense, net 833 1,187 1,397 1,136 147
Other (income) expense, net -0- (44)(2) 455(3) 7,674(4) 2,508(5)
-------- -------- ------- -------- -------
Income (loss) before income taxes
and extraordinary item 3,069 1,973 307 (10,776) (3,363)
Provision for income taxes 491 69 -0- -0- -0-
-------- -------- ------- -------- -------
Income before extraordinary item 2,578 1,904 307 $(10,776) (3,363)
Extraordinary item 54 -0- -0- -0- -0-
-------- -------- ------- -------- -------
Net income (loss) $ 2,524 $ 1,904 $ 307 $(10,776) $(3,363)
======== ======== ======= ======== =======
Net income (loss) per share:
Fully diluted(6) $ .44 $ .37 $ .08 $ (3.52) $ (1.10)
Balance Sheet Data:
Working capital (deficit) 3,904 1,422 (9,847) (11,279) (7,233)
Total assets 22,122 19,449 20,146 21,330 30,606
Long term debt and capital
lease obligations 6,052 6,924 8 1,312 1,359
Shareholders' equity $ 12,032 $ 9,456 $ 5,786 $ 4,788 $15,564
</TABLE>
- ---------------
(1) The Company's exit from the adult corrections business in fiscal 1993
and the transfer, effective January 1, 1993, of its California
residential treatment operations to Helicon are the principal reasons
for the decline in operating revenue for fiscal 1994 compared to fiscal
1993 and for fiscal 1993 compared to fiscal 1992.
(2) Amount consists of write down of property of $122, net of other income
of $166.
(3) Amount consists of write off of advances to Helicon of $1,024, net of
other income of $569.
(4) Amount consists of write off of advances to Helicon of $1,145, write
off of costs in excess of net assets of purchased businesses of $5,188,
write off of deferred costs of $567, provision for restructuring
expenses of $759 and loss on disposition of property of $15.
(5) Amount consists of write down of property of $328, other related party
expense of $154, litigation settlement of $1,000, write off of deferred
costs of $808 and loss on disposition of property of $218.
(6) Net income (loss) per share--fully diluted--for fiscal 1995, 1994, 1993
and 1992 has been retroactively adjusted to reflect the 1 for 2
reverse split of the Comnpany's Common Stock effected March 21, 1996.
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<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and this Annual Report on Form 10-K contains
forward-looking statements and should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere herein.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes", "anticipates", "plans", "expects"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause the Company's actual
results to differ materially from those indicated by such forward-looking
statements. These factors include, without limitation, those set forth above
under "Business--Risk Factors."
GENERAL
As of March 31, 1996, the Company was providing education and treatment
services to approximately 1,800 at risk and troubled youth pursuant to contracts
with governmental agencies, directly or through contracts with Helicon, to
manage 37 programs in 5 states. Revenues under these contracts are recognized as
services are rendered. The Company's programs are delivered in both
non-residential and residential settings, with the majority of the Company's
revenues currently generated by non-residential programs. The Company's
nonresidential programs, which historically have generated higher operating
margins than the Company's residential facilities, generally receive revenues
based on per diem rates. The Company's residential facilities generally receive
revenues under either fixed fee contracts or at per diem rates.
The Company receives management fee income from Helicon for consulting,
management and marketing services rendered pursuant to the Helicon Agreement. As
of March 31, 1996, the Company was providing consulting, management and
marketing services to Helicon at 11 programs. In addition, Helicon also leases
two facilities owned by the Company to operate its programs. Pursuant to the
Helicon Agreement, the Company is entitled to receive for these services
management fee income in an amount equal to 6% of the monthly gross revenues of
Helicon's programs. The payment of these management fees, however, is
subordinated in right of payment to amounts payable by Helicon to fund its
programs. For each of the fiscal years ended March 31, 1996, 1995 and 1994, the
Company did not recognize all of the management fee income to which it was
entitled due to the inability of Helicon to pay these amounts. The Helicon
Agreement expires September 1, 1999. At March 31, 1996, unpaid management fees,
lease payments and advances, plus interest, due the Company from Helicon totaled
$6,531,000. The Company has fully reserved this amount. Future payments received
from Helicon on these amounts, if any, will be recognized by the Company on the
cash basis.
Employee compensation and benefits include facility and program
payrolls and related taxes, as well as employee benefits, including insurance
and worker's compensation coverage. Employee compensation and benefits also
includes general and administrative payroll and related benefit costs, including
salaries and supplemental compensation of officers.
Purchased services and other expenses include all expenses not
otherwise presented separately in the Company's statements of operations.
Significant components of these expenses at the operating level include items
such as food, utilities, supplies, rent and insurance. Significant components of
these expenses at the administrative level include legal, accounting, investor
relations, marketing, consulting and travel expense.
The Company's effective tax rate is less than the statutory rate
because of the utilization of tax net operating loss carryforwards for which no
tax benefit had previously been recognized. Utilization of the net operating
loss carryforwards are subject to annual limitations pursuant to the provisions
of Internal Revenue Code Section 382.
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<PAGE> 23
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage relationship to the Company's total revenues of certain items in the
Company's statements of operations:
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Operating revenues 95.8% 98.2% 100.0%
Management fee income 4.2 1.8 --
----- ----- -----
Total revenues 100.0% 100.0% 100.0%
===== ===== =====
Employee compensation and benefits 60.9% 60.5% 61.6%
----- ----- -----
Purchased services and other expenses 18.6% 18.6% 19.1%
----- ----- -----
Depreciation and amortization 4.2% 5.2% 6.8%
----- ----- -----
Income from operations 15.8% 14.9% 11.5%
----- ----- -----
Interest expense 3.5% 5.7% 7.5%
----- ----- -----
Write-off of advances to Helicon -- -- 5.4%
----- ----- -----
Other income -- .8% 3.0%
----- ----- -----
Provision for income taxes 2.0% .3% --
----- ----- -----
Net income 10.2% 9.0% 1.6%
----- ----- -----
</TABLE>
FISCAL 1996 VERSUS FISCAL 1995
Total revenues for fiscal 1996 increased by $3,724,000 or 17.8% to
$24,666,000, as compared to $20,942,000 for fiscal 1995. Total operating
revenues for fiscal 1996 increased by $3,055,000 or 14.8% to $23,630,000, as
compared to $20,575,000 for fiscal 1995. The increase in operating revenues
results primarily from the opening of three new programs during fiscal 1996,
from the opening of two programs during fiscal 1995 which were in operation
throughout all of fiscal 1996, and from significant increases in student
enrollment at four of the Company's programs. Additionally, an increase in the
per diem rate at the Company's California campuses, effective in July 1995,
generated approximately 8% of the increase in operating revenues.
Management fee income recognized under the Helicon Agreement for fiscal
1996 increased $669,000, or 182.3%, to $1,036,000, as compared to $367,000 for
fiscal 1995. Additional management fee income of $217,000 for fiscal 1996 and
$703,000 for fiscal 1995 was not recognized by the Company due to the inability
of Helicon to pay these amounts.
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<PAGE> 24
Employee compensation and benefits for fiscal 1996 increased
$2,334,000, or 18.4%, to $15,010,000, as compared to $12,676,000 for fiscal
1995. As a percentage of total revenues, employee compensation and benefits
increased to 60.9% for fiscal 1996 from 60.5% for fiscal 1995. The increase in
employee compensation and benefits over the same period in the prior year
results primarily from the opening in fiscal 1996 of three new programs, from
the impact of two programs opened during fiscal 1995 which were in operation
throughout all of fiscal 1996 and from increased staffing requirements at
certain other programs. The Company also increased corporate and regional
personnel costs in fiscal 1996, primarily for operations support, business
development and quality assurance to support the growth and expansion of the
Company's operations.
Purchased services and other expenses for fiscal 1996 increased
$704,000, or 18.1%, to $4,590,000, as compared to $3,886,000 for fiscal 1995. As
a percentage of total revenues, purchased services and other expenses was 18.6%
for both fiscal 1996 and fiscal 1995. The increase in purchased services and
other expenses over the same period in the prior year results primarily from
the opening of three new programs, from the impact of two programs opened
during fiscal 1995 which were in operation throughout all of fiscal 1996, from
significant expansion at one of the Company's programs, and from increases in
consulting, business development, legal, investor relations and travel expense.
Depreciation and amortization decreased $55,000, or 5.1%, to $1,025,000
for fiscal 1996 from $1,080,000 for fiscal 1995. Depreciation and amortization
for fiscal 1996 and 1995 includes amortization expense of $250,000 under the
Company's non-competition agreements. These agreements were completely amortized
at March 31, 1996.
Income from operations increased $786,000, or 25.2%, to $3,902,000 for
fiscal 1996 from $3,116,000 for fiscal 1995, and increased as a percent of total
revenues to 15.8% for fiscal 1996 from 14.9% for fiscal 1995, as a result of
the factors described above.
Interest expense decreased $319,000, or 26.9%, to $869,000 for fiscal
1996 from $1,188,000 for fiscal 1995. The decrease in interest expense is
attributable primarily to a reduction in the average balance of debt outstanding
and to a decrease in the amortization of deferred loan costs.
Other income during fiscal 1996 decreased by $166,000, or 100.0%, to
$-0-, as compared to $166,000 for fiscal 1995. Other income for fiscal 1995
consisted primarily of $150,000 received by the Company pursuant to a settlement
of certain workers compensation litigation.
Provision for income tax expense increased $422,000 to $491,000 for
fiscal 1996 from $69,000 for fiscal 1995. The Company's effective tax rate is
significantly less than the statutory tax rate because of the utilization of tax
net operating loss carryforwards for which no tax benefit had previously been
recognized. 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.
-24-
<PAGE> 25
In fiscal 1996, the Company also incurred a loss on the early
extinguishment of debt of $64,000 before the related income tax benefit of
$10,000, resulting from the writeoff of deferred loan costs.
FISCAL 1995 VERSUS FISCAL 1994
Total revenues for fiscal 1995 increased by $2,093,000 or 11.1% to
$20,942,000, as compared to $18,849,000 for fiscal 1994. Total operating
revenues for fiscal 1995 increased $1,726,000, or 9.2%, to $20,575,000, as
compared to $18,849,000 for fiscal 1994. The increase in operating revenues
resulted primarily from additional revenues generated due to a significant
increase in student enrollment at one of the Company's programs, from the
opening of five new programs, and from the benefit of recognition of revenues of
approximately $857,000 generated by the Company's leases with Helicon, net of
the impact resulting from the transfer of certain of the Company's programs to
Helicon and from decreases in student enrollment at three of the Company's
programs.
Management fee income for fiscal 1995 increased $367,000 or 100.0%, to
$367,000, from $-0- for fiscal 1994. Additional management fee income of
$703,000 for fiscal 1995 and $771,000 for fiscal 1994 was not recognized by the
Company due to the inability of Helicon to pay these amounts.
Employee compensation and benefits for fiscal 1995 increased
$1,057,000, or 9.1%, to $12,676,000, as compared to $11,619,000 for fiscal 1994.
As a percentage of total revenues, employee compensation and benefits decreased
to 60.5% for fiscal 1995 from 61.6% for fiscal 1994. The increase in employee
compensation and benefits over the prior year resulted primarily from the
opening of five new programs, and an increase in corporate compensation expense
due to expansion of the Company's business development efforts and increased
staffing requirements for Company operations, net of the reduction in
compensation expense due to the transfer of certain of the Company's operations
to Helicon.
Purchased services and other expenses for fiscal 1995 increased
$285,000, or 7.9%, to $3,886,000, as compared to $3,601,000 for fiscal 1994. As
a percentage of total revenues, purchased services and other expenses decreased
to 18.6% for fiscal 1995 from 19.1% for fiscal 1994. The increase in purchased
services and other expenses over the prior year is attributable primarily to the
opening of five new programs, net of a decrease in legal expense incurred by the
Company over the same period in the prior year in connection with the worker's
compensation litigation referred to below and the reduction in expenses due to
the transfer of certain of the Company's operations to Helicon.
Depreciation and amortization decreased $197,000, or 15.4%, to
$1,080,000 for fiscal 1995 from $1,277,000 for fiscal 1994. This decrease is
primarily the result of the decrease in amortization of deferred pre-opening
costs related to the Company's Helicon Youth Center in Riverside, California and
reduced depreciation expense at the Company's corporate headquarters.
-25-
<PAGE> 26
Income from operations increased $957,000, or 44.3%, to $3,116,000 for
fiscal 1995 from $2,159,000 for fiscal 1994, and increased as a percent of total
revenues to 14.9% for fiscal 1995 from 11.5% for fiscal 1994, as a result of the
factors described above.
Interest expense decreased $229,000, or 16.2%, to $1,188,000 for fiscal
1995 from $1,417,000 for fiscal 1994. The decrease in interest expense compared
to the prior year is attributed primarily to a reduction in the average balance
of debt outstanding.
Advances made to Helicon decreased to $-0- during fiscal 1995 from
$1,024,000 during fiscal 1994. Advances to Helicon in fiscal 1994 reflected the
Company's commitment to the operations of Helicon, as the majority of youth in
Helicon youth treatment programs were also involved in the Company's educational
treatment programs. Due to the level of operations maintained by Helicon, no
advances were required during fiscal 1995. Advances made during fiscal 1994,
while due and payable to the Company by Helicon, were charged to operations when
made because of the absence of any sustained operating history of Helicon and
because of Helicon's inability to repay the advances at that time.
Other income during fiscal 1995 decreased $403,000, or 70.8%, to
$166,000, as compared to $569,000 for fiscal 1994. Other income for fiscal 1995
consisted primarily of $150,000 received by the Company pursuant to a settlement
of certain litigation relating to an action filed by the Company following the
fiscal 1993 alleged misappropriation of Company funds by the Company's insurance
broker responsible for obtaining worker's compensation insurance for the
Company's California operations. Other income for fiscal 1994 consisted
primarily of the recovery of approximately $534,000 of insurance deposits
previously deemed uncollectible and written off during fiscal 1993.
Write down of property of $122,000 in fiscal 1995 was due to the
writedown, to net realizable value, of idle property held for sale by the
Company.
Provision for income tax expense increased to $69,000 for fiscal 1995
from $-0- for fiscal 1994. The Company's effective tax rate was significantly
less than the statutory tax rate because of the utilization of tax net operating
loss carryforwards for which no tax benefit had previously been recognized.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for fiscal 1996 was $3,461,000 on
net income of $2,524,000 as compared to $2,218,000 for fiscal 1995 on net income
of $1,904,000. Working capital at March 31, 1996 was $3,904,000, as compared to
$1,422,000 at March 31, 1995.
Cash used by investing activities was $232,000 for fiscal 1996 as
compared to $577,000 for fiscal 1995. The reduction in fiscal 1996 as compared
to fiscal 1995 is due primarily to reductions in cash outlays for the purchase
of property and equipment and for the incurrence of deferred loan fees. Cash
used by financing activities was $871,000 for fiscal 1996 as compared to
$1,750,000 in fiscal 1995. The reduction in fiscal 1996 as compared to fiscal
1995 is due primarily to the fact that in fiscal 1996 the Company utilized its
positive cash flow to increase cash balances, after having reduced outstanding
debt balances as much as practicable, whereas in fiscal 1995 the Company used
its positive cash flow primarily to reduce outstanding debt balances.
-26-
<PAGE> 27
In September 1994, the Company executed agreements with National Health
Investors, Inc. ("NHI") and T. Rowe Price Strategic Partners Fund II, L.P. ("T.
Rowe Price"). 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. During fiscal 1996, the Company made unscheduled principal
payments of approximately $708,000 towards the T. Rowe Price term loan,
resulting in the retirement of the remaining obligation under that loan. The
Company wrote off deferred loan costs of approximately $64,000 in connection
with the early extinguishment of the T. Rowe Price loan.
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, as
calculated pursuant to a formula based on the net operating income of such
facilities during the period of the loan, will not be payable until the
repayment of the NHI loan. At March 31, 1996 there were no amounts due under the
equity participation agreement. The agreement with NHI also gives NHI a 5%
interest in any increases in gross revenues of the Company generated by the
Company's operations at the Helicon Youth Center and Grand Terrace School. At
March 31, 1996, the amount due under the revenue participation agreement was
approximately $18,000. The agreement with NHI also requires 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. Security
under the NHI agreement consists primarily of a first priority lien on
substantially all of the Company's real estate, improvements and equipment.
In September 1994, the Company also obtained a $2.5 million one-year
revolving line of credit from First American National Bank ("FANB"). This line
of credit, which was renewed in September 1995 for a term of one year, bears
interest at prime + 3/4% (9% as of March 31, 1996) and is secured primarily by a
first priority lien on the Company's accounts and notes receivable. In January
1996, the Company's line of credit was reduced to $2.0 million, in order to
facilitate Helicon's obtaining a $500,000 line of credit from FANB. As a further
condition to Helicon's line of credit, which was obtained in January 1996, the
Company agreed to guarantee Helicon's performance under such line of credit. No
advances have been made under Helicon's line of credit.
Availability under the Company's line of credit is limited to the
lesser of $2.0 million or eighty-five percent of eligible accounts receivable of
the Company. Additionally, availability under the line of credit has been
reduced by approximately $460,000 as the issuance of the letter of credit in
favor of NHI for the debt service reserve referred to above reduced the
Company's available credit by a like amount. As there were no borrowings
outstanding under the line of credit at March 31, 1996, availability under the
line of credit was approximately $1,540,000.
The credit agreement with NHI 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
-27-
<PAGE> 28
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.
Capital expenditures during fiscal 1997 are expected to include the
replacement of existing capital assets as necessary, as well as the costs
associated with the opening of new programs and facilities, including the
possible purchase of certain real estate and improvements. The Company also may
consider possible strategic acquisitions, including acquisitions of existing
programs and other companies engaged in the youth services business. The
Company, however, has no agreements, arrangements or commitments with respect to
any such acquisitions.
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 line of credit. Management believes that operations and amounts
available under its 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
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of."
This statement imposes stricter criteria for long-term assets by requiring that
such assets be probable of future recovery at each balance sheet date. The
Company anticipates adopting SFAS 121 effective April 1, 1996, and does not
expect that adoption will have a material impact on the results of operations,
financial condition or cash flows of the Company.
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation." This statement requires new disclosures in the notes to the
financial statements about stock-based compensation plans based on the fair
value of equity instruments granted. Companies also may base the recognition of
compensation cost for instruments issued under stock-based compensation plans on
these fair values. The Company anticipates adopting SFAS 123 effective April 1,
1996, but does not plan to change the method of accounting for these plans.
-28-
<PAGE> 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-29-
<PAGE> 30
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Children's Comprehensive Services, Inc.
We have audited the accompanying consolidated balance sheets of Children's
Comprehensive Services, Inc. as of March 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended March 31, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with 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 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Children's Comprehensive Services, Inc. at March 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended March 31, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
Ernst & Young LLP
Nashville, Tennessee
May 15, 1996
-30-
<PAGE> 31
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
---------
1996 1995
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 2,427,000 $ 69,000
Accounts receivable, net of allowance
for doubtful accounts of $146,000
in 1996 and $133,000 in 1995 4,468,000 3,432,000
Prepaid expenses 303,000 266,000
Other current assets 254,000 134,000
----------- -----------
TOTAL CURRENT ASSETS 7,452,000 3,901,000
PROPERTY AND EQUIPMENT, net 14,306,000 14,866,000
PROPERTY HELD FOR SALE -0- 165,000
NOTE RECEIVABLE 217,000 -0-
NON-COMPETITION AGREEMENTS, net of accumulated
amortization of $2,000,000 in 1996 and
$1,750,000 in 1995 -0- 250,000
OTHER ASSETS AND DEFERRED CHARGES, at cost,
net of accumulated amortization of
$332,000 in 1996 and $259,000 in 1995 147,000 267,000
----------- -----------
TOTAL ASSETS $22,122,000 $19,449,000
=========== ===========
</TABLE>
-31-
<PAGE> 32
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
March 31,
---------
1996 1995
---- ----
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 658,000 $ 658,000
Current maturities - long term debt:
Related party -0- 59,000
Other 201,000 177,000
Income taxes payable 311,000 69,000
Accrued employee compensation 1,570,000 716,000
Accrued other expenses 648,000 673,000
Deferred revenue 160,000 127,000
------------ ------------
TOTAL CURRENT LIABILITIES 3,548,000 2,479,000
DEFERRED TAXES PAYABLE 125,000 125,000
LONG TERM DEBT:
Related Party -0- 672,000
Other 6,052,000 6,252,000
OTHER LIABILITIES 365,000 465,000
------------ ------------
TOTAL LIABILITIES 10,090,000 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
--10,000,000 shares authorized; issued
and outstanding 5,378,726 shares in 1996
and 5,355,891 shares in 1995 54,000 54,000
Additional paid-in capital 25,422,000 25,370,000
Accumulated (deficit) (13,444,000) (15,968,000)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 12,032,000 9,456,000
------------ ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 22,122,000 $ 19,449,000
============ ============
</TABLE>
See notes to consolidated financial statements.
-32-
<PAGE> 33
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Operating revenues $ 23,630,000 $ 20,575,000 $ 18,849,000
Management fee income 1,036,000 367,000 -0-
------------ ------------ ------------
TOTAL REVENUES 24,666,000 20,942,000 18,849,000
------------ ------------ ------------
Operating expenses:
Employee compensation and benefits 15,010,000 12,676,000 11,619,000
Purchased services and other expenses 4,590,000 3,886,000 3,601,000
Depreciation and amortization 1,025,000 1,080,000 1,277,000
Related party rent 101,000 101,000 101,000
Provision for bad debts 38,000 83,000 92,000
------------ ------------ ------------
TOTAL OPERATING EXPENSES 20,764,000 17,826,000 16,690,000
------------ ------------ ------------
Income from operations 3,902,000 3,116,000 2,159,000
Other (income) expense:
Interest:
Banks and other 820,000 968,000 1,138,000
Related parties 49,000 220,000 279,000
Interest income (36,000) (1,000) (20,000)
Write-off of advances to Helicon -0- -0- 1,024,000
Write down of property -0- 122,000 -0-
Other income -0- (166,000) (569,000)
------------ ------------ ------------
TOTAL OTHER (INCOME) EXPENSE, NET 833,000 1,143,000 1,852,000
------------ ------------ ------------
Income before income taxes and
extraordinary item 3,069,000 1,973,000 307,000
Provision for income taxes 491,000 69,000 -0-
------------ ------------ ------------
Income before extraordinary item 2,578,000 1,904,000 307,000
Extraordinary item:
Loss on early extinguishment of debt,
net of income tax benefit of $10,000 54,000 -0- -0-
------------ ------------ ------------
NET INCOME $ 2,524,000 $ 1,904,000 $ 307,000
============ ============ ============
Earnings per common share:
Income before extraordinary item $ .46 $ .38 $ .10
Extraordinary item (.01) -0- -0-
------------ ------------ ------------
NET INCOME $ .45 $ .38 $ .10
============ ============ ============
Earnings per common share-
assuming full dilution:
Income before extraordinary item $ .45 $ .37 $ .08
Extraordinary item (.01) -0- -0-
------------ ------------ ------------
NET INCOME $ .44 $ .37 $ .08
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
-33-
<PAGE> 34
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock, Additional Total
$.01 par value Paid-In Accumulated Shareholders'
---------------------------
Shares Amount Capital (Deficit) Equity
------ ------ ------- --------- ------
<S> <C> <C> <C> <C> <C>
Balance at April 1, 1993 3,069,241 $ 31,000 $ 22,936,000 $(18,179,000) $ 4,788,000
Stock issued:
Employee stock purchase
plan 59,580 -0- 33,000 33,000
Conversion of debt 385,290 4,000 474,000 478,000
Exercise of options 2,500 -0- 7,000 7,000
Refinancing 172,200 2,000 171,000 173,000
Net income for the year 307,000 307,000
--------- ------------ ------------ ------------ ------------
Balance at March 31, 1994 3,688,811 37,000 23,621,000 (17,872,000) 5,786,000
Stock issued:
Exercise of warrant 1,662,080 17,000 1,831,000 1,848,000
Exercise of options 5,000 -0- 10,000 10,000
Stock registration costs (92,000) (92,000)
Net income for the year 1,904,000 1,904,000
--------- ------------ ------------ ------------ ------------
Balance at March 31, 1995 5,355,891 54,000 25,370,000 (15,968,000) 9,456,000
Stock issued:
Exercise of options 22,875 63,000 63,000
Stock redeemed:
Fractional shares from
one for two reverse split (40)
Warrant adjustment 16,000 16,000
Stock registration costs (27,000) (27,000)
Net income for the year 2,524,000 2,524,000
--------- ------------ ------------ ------------ ------------
5,378,726 $ 54,000 $ 25,422,000 $(13,444,000) $ 12,032,000
========= ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
-34-
<PAGE> 35
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------
1996 1995 1994
---------- ---------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $2,524,000 $1,904,000 $ 307,000
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 775,000 830,000 858,000
Amortization 250,000 250,000 419,000
Amortization of deferred loan costs 74,000 163,000 220,000
Provision for bad debts 38,000 83,000 92,000
Write down of property -0- 122,000 -0-
Other 19,000 (16,000) -0-
Loss on early extinguishment of debt 64,000 -0- -0-
Changes in operating assets and liabilities:
(Increase) in accounts receivable (1,074,000) (289,000) (484,000)
(Increase) decrease in prepaid expenses (37,000) 62,000 11,000
(Increase) in other current assets (120,000) (51,000) (36,000)
(Decrease) in accounts payable -0- (99,000) (727,000)
Increase (decrease) in accrued employee
compensation 854,000 (290,000) 202,000
(Decrease) in accrued restructuring
expenses:
Related party -0- -0- (421,000)
Other -0- -0- (141,000)
(Decrease) in accrued other expenses (25,000) (451,000) (288,000)
Increase in income taxes payable 242,000 69,000 -0-
Increase (decrease) in deferred revenue (23,000) 31,000 6,000
Increase (decrease) in other liabilities (100,000) (100,000) 65,000
---------- ---------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 3,461,000 2,218,000 83,000
---------- ---------- -----------
INVESTING ACTIVITIES
Purchase of short-term investments - restricted -0- -0- (3,196,000)
Purchase of long-term investments - restricted -0- -0- (784,000)
Sale of short-term investments -0- -0- 29,000
Sale of short-term investments - restricted -0- -0- 3,196,000
Sale of long-term investments - restricted -0- -0- 1,563,000
Purchase of property and equipment (252,000) (359,000) (201,000)
Proceeds from sale of property and equipment 38,000 15,000 15,000
(Increase) in other assets (18,000) (233,000) (243,000)
---------- ---------- -----------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES $ (232,000) $ (577,000) $ 379,000
----------- ---------- -----------
</TABLE>
-35-
<PAGE> 36
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------
1996 1995 1994
----------- ------------ -----------
<S> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from revolving lines of credit
and long-term borrowings $ 3,436,000 $ 15,246,000 $ 6,200,000
Proceeds from notes payable - related
parties -0- -0- 1,500,000
Principal payments on revolving lines of
credit, long-term borrowings and capital
lease obligations (3,612,000) (16,265,000) (8,100,000)
Principal payments on notes payable and
long-term borrowings - related parties (731,000) (1,197,000) -0-
Principal payments on mortgage notes
payable -0- (1,300,000) -0-
Proceeds from issuance of Common Stock 63,000 1,858,000 40,000
Stock registration costs (27,000) (92,000) -0-
----------- ------------ -----------
NET CASH (USED) BY
FINANCING ACTIVITIES (871,000) (1,750,000) (360,000)
----------- ------------ -----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 2,358,000 (109,000) 102,000
Cash and cash equivalents at
beginning of year 69,000 178,000 76,000
----------- ------------ -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 2,427,000 $ 69,000 $ 178,000
=========== ============ ===========
SUPPLEMENTAL INFORMATION
Income taxes paid $ 239,000 $ -0- $ -0-
Interest paid 793,000 956,000 1,174,000
</TABLE>
See notes to consolidated financial statements.
-36-
<PAGE> 37
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation -- The consolidated financial statements include the
accounts of Children's Comprehensive Services, Inc. and its subsidiaries (the
Company). All significant intercompany transactions and balances have been
eliminated.
Business -- The Company provides a broad range of youth services, with emphasis
on education and treatment services for at risk and troubled youth, primarily to
state and local governmental entities charged with the responsibility for
providing such services. The Company offers these services through the operation
and management of education programs and both open and secured residential
treatment centers in Alabama, California, Florida, Louisiana and Tennessee. The
Company also provides consulting, management and marketing services to a
not-for-profit corporation which provides similar services.
Cash Equivalents -- The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
Property and Equipment -- Property and equipment are recorded at cost and
depreciated using the straight-line method over the following estimated useful
lives:
<TABLE>
<S> <C>
Land improvements 30 years
Buildings and improvements 2 - 30 years
Furniture and equipment 3 - 7 years
</TABLE>
Other Assets and Deferred Charges -- Contract pre-opening costs (incremental
direct costs incurred to open facilities in new market areas) are amortized
using the straight-line method over the lesser of the initial contract term or
one year. Deferred loan costs are amortized using the straight-line method over
the life of the related loans. Amortization of deferred loan costs is included
in interest expense.
Non-Competition Agreements -- Non-competition agreements are amortized using the
straight-line method over eight years.
Cost in Excess of Net Assets of Purchased Businesses -- The cost in excess of
net assets of purchased businesses ("goodwill") is amortized using the
straight-line method over twenty-five years. The carrying value of goodwill is
regularly reviewed for indicators of impairment in value, including unexpected
or adverse changes in the following: (i) the economic, competitive or regulatory
environments in which the Company operates, (ii) profitability and (iii) cash
flows. If facts and circumstances suggest that goodwill is impaired, the Company
would assess the fair value of the underlying business and would reduce the
goodwill balance to an amount that results in the book value of the Company
approximating fair value. The Company would determine fair value based on
independent appraisals, earnings multiples, estimated net proceeds assuming
disposition of the business, and/or discounted cash flows at risk-adjusted
rates, as appropriate in the circumstances.
-37-
<PAGE> 38
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition -- Revenues from youth education and treatment contracts
with governmental entities are recognized as services are rendered. The
receivables arising from such contracts are unsecured and generally are due
within thirty days.
Use of Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Fair Value of Financial Instruments -- The following methods and assumptions
were used by the Company in estimating its fair value disclosures for the
following financial instruments:
Cash and Cash Equivalents -- The carrying amounts reported in the
consolidated balance sheets for cash and cash equivalents approximate
fair value.
Accounts Receivable and Accounts Payable -- The carrying amounts
reported in the consolidated balance sheets for accounts receivable and
accounts payable approximate fair value.
Long Term Debt -- The carrying amounts reported in the consolidated
balance sheets for long term debt approximate fair value.
Stock Based Compensation -- The Company grants stock options for a fixed number
of shares to employees with an exercise price equal to the fair value of the
shares at the date of grant. The Company accounts for stock option grants in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and, accordingly, recognizes no compensation expense for
the stock option grants.
Net Income (Loss) Per Common Share -- The computation of net income (loss) per
common share is based on the weighted average number of shares outstanding and
common stock equivalents, consisting of dilutive stock options and warrants.
Income Taxes -- Income taxes are accounted for under the provisions of Financial
Accounting Standards Board Statement No. 109, "Accounting for Income Taxes".
Deferred income tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rate and laws that will be in effect when the
differences are expected to reverse.
Reclassifications -- Certain reclassifications have been made in the 1995 and
1994 financial statements to conform to the 1996 presentation.
-38-
<PAGE> 39
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE B--PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment consists of: March 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
Land and improvements $ 1,491,000 $ 1,491,000
Buildings and improvements 14,826,000 14,805,000
Furniture and equipment 2,792,000 2,658,000
----------- -----------
19,109,000 18,954,000
Less accumulated depreciation (4,803,000) (4,088,000)
----------- -----------
$14,306,000 $14,866,000
=========== ===========
</TABLE>
Depreciation expense totaled $775,000, $830,000, and $858,000 for the years
ended March 31, 1996, 1995 and 1994, respectively.
NOTE C -- PROPERTY HELD FOR SALE AND NOTE RECEIVABLE
Property held for sale at March 31, 1995 consisted of the estimated net
realizable value of an idle residential treatment center owned by the Company in
Ramona, California. The Company had determined, during fiscal 1995, that the
property had suffered a permanent impairment of value and had recorded a write
down of $122,000. On September 29, 1995, the Company sold this property for
$255,000, receiving a cash down payment of $38,000 and a note receivable of
$217,000. The note receivable bears interest at 7% per annum, and is due
September 29, 1998. The Company realized a gain of $67,000 on the sale of this
property. Of this amount, $10,000 was recognized as income during the year ended
March 31, 1996. The balance, $57,000, will be recognized as income upon
collection of the underlying note receivable.
NOTE D--HELICON INCORPORATED
Helicon, Incorporated ("Helicon"), a 501(c)(3) tax exempt company not affiliated
with the Company, operates youth treatment programs in California in facilities
owned by the Company and by Los Angeles County, California, and youth education
programs in Tennessee at various emergency shelters and diagnostic and
assessment centers throughout the state. The majority of youth in Helicon youth
treatment programs are also involved in the Company's educational treatment
programs.
The Company provides management and marketing services to Helicon for which it
is entitled to a management fee. Management fee income totaled $1,036,000,
$367,000 and $-0- for the years ended March 31, 1996, 1995 and 1994,
respectively. Additional management fee income of $217,000, $703,000 and
$771,000 for the years ended March 31, 1996, 1995 and 1994, respectively, was
not recognized due to the inability of Helicon to pay these amounts.
-39-
<PAGE> 40
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE D--HELICON INCORPORATED (continued)
The Company also leases real property to Helicon. Real estate and improvements
with a cost of $9,597,000 and a carrying value of $8,464,000 were leased, under
operating lease arrangements, to Helicon at March 31, 1996. Future minimum
rental payments due under these operating leases as of March 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Year ending March 31:
<S> <C>
1997 $ 857,000
1998 823,000
1999 720,000
2000 720,000
2001 720,000
2002 and thereafter 13,200,000
-----------
Total $17,040,000
===========
</TABLE>
Lease income totaled $857,000 for each of the years ended March 31, 1996 and
1995. Lease income of $892,000 for the year ended March 31, 1994 was not
recognized due to the inability of Helicon to pay these amounts.
During fiscal 1994, the Company made advances to Helicon of $1,024,000 to
provide working capital for the start-up of operations. These advances were
expensed during fiscal 1994. During the period subsequent to March 31, 1994, no
additional advances have been made to Helicon.
Prior to fiscal 1995, Helicon was unable to pay either management fees or lease
payments. Additionally, as discussed above, the Company advanced Helicon
$1,024,000 during fiscal 1994. An additional $1,145,000 was advanced to Helicon
during fiscal 1993. At March 31, 1996, unpaid management fees, lease payments
and advances due the Company totaled $5,587,000. Additionally, interest due but
not recognized on these past due obligations totaled $944,000. The total amount
due from Helicon, $6,531,000, has been fully reserved by the Company. Based on
the current level of operations being maintained by Helicon, management does not
anticipate collecting any of these amounts. Future payments received from
Helicon on these amounts, if any, will be recognized by the Company on the cash
basis.
In January 1996, Helicon obtained through First American National Bank ("FANB")
a $500,000 revolving line of credit. This line of credit bears interest at prime
+ 3/4% (9% at March 31, 1996) and matures in September 1996. The Company
facilitated Helicon in this process by agreeing to reduce its line of credit
with FANB from $2.5 million to $2.0 million and further by agreeing to guarantee
Helicon's performance under the line of credit. No advances have been made under
this line of credit.
-40-
<PAGE> 41
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE E--LINE OF CREDIT
In September 1994, the Company obtained through FANB a $2.5 million one-year
revolving line of credit. This line of credit, which was renewed in September
1995 for a term of one year, bears interest at prime + 3/4% (9% at March 31,
1996) and is secured primarily by the Company's accounts and notes receivable.
In January 1996, the amount available under the line of credit was reduced to
$2,000,000. (See Note D.) There were no borrowings outstanding against the line
of credit at March 31, 1996 or 1995. Availability under the line of credit at
March 31, 1996 was approximately $1,540,000, as the issuance of a letter of
credit of approximately $460,000 (see Note F) reduced the Company's available
credit by such amount.
The agreement with FANB includes covenants which restrict the incurrence of
certain additional indebtedness, provides for the maintenance of specified
financial ratios and prohibits the payment of cash dividends.
NOTE F--LONG TERM DEBT
In September 1994, the Company entered into agreements with National Health
Investors, Inc. ("NHI") and T. Rowe Price Strategic Partners Fund II, L.P. ("T.
Rowe Price"). The Company obtained 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. Proceeds from the NHI loan were used to repay all the Company's
short-term bank obligations, and the T. Rowe Price agreement was an extension of
an existing loan with T. Rowe Price. During fiscal 1996, the Company made
unscheduled principal payments of approximately $708,000 towards the T. Rowe
Price loan, resulting in the retirement of the remaining obligation under that
loan. The Company wrote off deferred loan costs of approximately $64,000 in
connection with the early extinguishment of the T. Rowe Price loan.
The agreement with NHI gives NHI a 25% interest in any increases in the equity
of the Company's operations at Helicon Youth Center in Riverside, California and
Grand Terrace School in Grand Terrace, California, and any such amount is
payable to NHI upon repayment of its loan. At March 31, 1996 the amount due
under the equity participation agreement was $-0-. The agreement with NHI also
gives NHI a 5% interest in any increases in gross revenues generated by the
Company's operations at the Helicon Youth Center and Grand Terrace School. At
March 31, 1996, the amount due under the revenue participation agreement was
approximately $18,000.
The NHI agreement also requires the Company to provide a debt service reserve
equal to six months payments of principal and interest (approximately $460,000).
This reserve was established through the execution of an irrevocable letter of
credit with FANB. (See Note E). The NHI agreement is secured primarily by
substantially all of the Company's real estate, improvements and equipment.
-41-
<PAGE> 42
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE F--LONG TERM DEBT (continued)
The agreements include covenants which restrict the incurrence of certain
additional indebtedness and provide for the maintenance of specified financial
ratios.
Future principal maturities of long-term debt are as follows at March 31, 1996:
<TABLE>
<S> <C>
Year Ending March 31:
1997 $ 201,000
1998 225,000
1999 253,000
2000 5,574,000
----------
Total 6,253,000
Less current portion (201,000)
----------
Total long-term $6,052,000
==========
</TABLE>
NOTE G--INCOME TAXES
Effective April 1, 1993, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes". Under SFAS No. 109,
deferred income tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
-42-
<PAGE> 43
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE G--INCOME TAXES (continued)
As permitted by SFAS No. 109, the Company elected not to restate the financial
statements of any prior years. Adoption of SFAS No. 109 had no effect on net
income for fiscal 1994.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
March 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization $ 251,000 $ -0-
Other 125,000 125,000
----------- -----------
Total deferred tax liabilities 376,000 125,000
----------- -----------
Deferred tax assets:
Net operating losses and credit
carryforwards 2,225,000 2,795,000
Depreciation and amortization -0- 144,000
Accrued expenses 373,000 462,000
Other 44,000 114,000
----------- -----------
Total deferred tax assets 2,642,000 3,515,000
Valuation allowance for deferred
tax assets (2,391,000) (3,515,000)
----------- -----------
Net deferred tax assets 251,000 -0-
----------- -----------
Net deferred tax liability $ 125,000 $ 125,000
=========== ===========
</TABLE>
Management has evaluated the need for a valuation allowance for all or a
portion of the deferred tax assets. A valuation allowance of $2,391,000 has
been recorded for the excess of net operating loss carryforwards, credit
carryforwards, and future deductible temporary differences over future taxable
temporary differences. The valuation allowance decreased by $1,124,000 during
fiscal 1996.
Income tax expense (benefit) is allocated in the financial statements as
follows:
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------
1996 1995 1994
-------- ------- ----
<S> <C> <C> <C>
Income before extraordinary item $491,000 $69,000 $-0-
Extraordinary item (10,000) -0- -0-
-------- ------- ----
Total $481,000 $69,000 $-0-
======== ======= ====
</TABLE>
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------
1996 1995 1994
-------- ------- ----
<S> <C> <C> <C>
Current federal income tax $364,000 $36,000 $-0-
Current state income tax 127,000 33,000 -0-
-------- ------- ----
$491,000 $69,000 $-0-
======== ======= ====
</TABLE>
-43-
<PAGE> 44
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE G--INCOME TAXES (continued)
The reconciliation of income tax attributable to income before extraordinary
item computed at the federal statutory tax rates to income tax expense is as
follows:
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Income tax expense at
federal statutory rate $1,043,000 $ 660,000 $ 191,000
Benefit of prior year losses realized (648,000) (620,000) (195,000)
State income tax, net of federal benefit 84,000 22,000 -0-
Nondeductible expenses $ 12,000 7,000 4,000
---------- --------- ---------
Provision for income taxes $ 491,000 $ 69,000 $ -0-
========== ========= =========
</TABLE>
At March 31, 1996, the Company had regular tax net operating loss carryforwards
of $5,741,000 which expire from 2001 through 2010. Utilization of $740,000 of
the net operating loss carryforwards is subject to an annual limitation of
$40,000 pursuant to Internal Revenue Code Section 382. Utilization of
$5,001,000 of the net operating loss carryforwards is subject to an annual
limitation of $1,463,000 pursuant to Internal Revenue Code Section 382.
NOTE H--SHAREHOLDERS' EQUITY
Reverse Stock Split -- Effective March 21, 1996, the Company effected a 1 for 2
reverse stock split, whereby each two shares of the Company's $.01 par value
Common Stock were exchanged for one share of the Company's $.01 par value
Common Stock. The number of shares and per share amounts in the consolidated
financial statements have been retroactively adjusted to reflect the reverse
stock split.
Warrants -- The following table sets forth outstanding warrants as of March 31,
1996 for the purchase of the Company's Common Stock:
<TABLE>
<CAPTION>
Exercise
Date Number of Exercise Price
Granted Shares Expiration Date Per Share
- ------------------ --------- ------------------ ---------
<S> <C> <C> <C>
September 20, 1993 50,000 September 20, 2003 $2.00
September 30, 1995 9,615 September 30, 2004 $5.20
------
59,615
======
</TABLE>
-44-
<PAGE> 45
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE H--SHAREHOLDERS' EQUITY (continued)
During fiscal 1995, the Company issued warrants to purchase 8,000 shares of
the Company's Common Stock to School Improvement Services, Inc. in conjunction
with a marketing and consulting agreement entered into between the Company and
School Improvement Services, Inc. Additionally, in the event the average
closing price of the Company's Common Stock during the period October 1, 1994
through September 30, 1995 was less than $6.25 per share, then the number of
shares issuable under this warrant would be adjusted to equal the number of
shares obtained by dividing $50,000 by the average closing price of the
Company's Common Stock. Pursuant to this provision, during fiscal 1996 the
number of shares issuable under this warrant was adjusted to 9,615, and the
purchase price was reduced to $5.20. (See Note L). During fiscal 1994 the
Company issued warrants to purchase 50,000 shares of the Company's Common Stock
to Signet Bank/Virginia in conjunction with the renewal of the Company's bank
notes payable. This warrant replaced an existing warrant for 6,600 shares
which had previously been issued BVA Credit Corporation.
No warrants were exercised during fiscal 1996. During fiscal 1995, T. Rowe
Price exercised a warrant and purchased 1,662,080 shares of the Company's
Common Stock for an aggregate purchase price of $1,848,000. During fiscal 1995
warrants for the purchase of 90,000 shares of the Company's Common Stock
expired. Of the 59,615 shares under warrant at March 31, 1996, all were
exercisable.
Stock Options -- The following table sets forth outstanding stock options under
the Company's stock option plans as of March 31, 1996, 1995 and 1994 for the
purchase of the Company's Common Stock:
<TABLE>
<CAPTION>
March 31,
---------------------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Outstanding at beginning
of period 395,175 266,425 231,425
Granted 89,250 138,750 65,000
Exercised (22,875) (5,000) (2,500)
Forfeited (47,500) (5,000) (27,500)
------- ------- -------
Outstanding at end
of period 414,050 395,175 266,425
======= ======= =======
Exercisable 336,050 395,175 266,425
Option price range $.62 $.62 $.62
to to to
$7.00 $8.00 $8.00
</TABLE>
-45-
<PAGE> 46
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE H--SHAREHOLDERS' EQUITY (continued)
Options for 22,875 shares were exercised during fiscal 1996 at exercise prices
of $1.125, $3.00, $3.25 and $5.75 per share, options for 5,000 shares were
exercised during fiscal 1995 at exercise prices of $3.00 per share and options
for 2,500 shares were exercised during fiscal 1994 at exercise prices of $3.00
per share. During fiscal 1996, fiscal 1995 and fiscal 1994 options for the
purchase of 47,500 shares, 5,000 shares and 27,500 shares of the Company's
Common Stock expired.
The following table summarizes common shares reserved at March 31, 1996:
<TABLE>
<S> <C>
Warrants 59,615
1987 Employee Stock Option Plan 915,250
l989 Stock Option Plan for Non-Employee Directors 70,000
---------
Total common shares reserved 1,044,865
=========
</TABLE>
Employee Stock Purchase Plan -- The Company had an employee stock purchase plan
for full-time employees of the Company. The purchase price per share was
determined as the lesser of 85% of the closing market price of the Company's
Common Stock on (1) the first trading date of the Company's fiscal year, or (2)
the last trading date of the Company's fiscal year. Closing market price was
determined as the last reported trade of the Company's Common Stock on the
Nasdaq Stock Market. During fiscal 1994, employees purchased 59,580 shares of
the Company's Common Stock at purchase prices of $.54 and $.58 per share under
this plan. As of March 31, 1994, 99,508 shares had been issued under this
plan; no additional shares will be issued under this plan.
Preferred Stock -- The shareholders of the Company have authorized the issuance
of up to 10 million shares of preferred stock, $1.00 par value, on such terms
as the directors of the Company may determine, with full authority in the Board
of Directors to fix series, conversion rights and other provisions applicable
to such preferred stock. No specific terms or provisions have been set, and no
preferred shares have been issued.
NOTE I--EMPLOYEE BENEFIT PLAN
In 1986, certain of the Company's California subsidiaries, collectively known
as Advocate Schools, adopted a Salary Reduction Plan under section 401(k) of
the Internal Revenue Code. Effective January 1, 1994 the plan was amended to
allow for the participation of all otherwise qualified Company employees. This
plan allows employees paid on a salary only basis to defer not less than 1% and
not more than 10% of pre-tax compensation each year, subject to Internal
Revenue Service limitations, through contributions to a designated investment
fund. Under the provisions of the plan, the Company may contribute a
discretionary amount to be determined each year. No contributions have been
made under the plan. Administrative costs under the plan totaled $17,000,
$21,000, and $15,000 for the years ended March 31, 1996, 1995 and 1994,
respectively.
-46-
<PAGE> 47
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE J--COMMITMENTS
The following is a schedule, by year, of future minimum rental payments
required under operating leases that have initial or remaining terms in excess
of one year as of March 31, 1996:
<TABLE>
<S> <C>
Year ending March 31:
1997 $297,000
1998 181,000
1999 105,000
2000 68,000
2001 and thereafter 58,000
--------
TOTAL $709,000
========
</TABLE>
Certain of the leases have renewal options of up to 2 years. Total rental
expense for all operating leases and other rental arrangements for the years
ended March 31, 1996, 1995 and 1994 was $587,000, $448,000, and $482,000,
respectively.
NOTE K--CONTINGENCIES
Alabama Wilderness Program Wrongful Death Litigation -- In October 1995, a
civil action was filed in the Circuit Court of Colbert County, Alabama, against
the Company and certain of the Company's employees in connection with the
circumstances surrounding the alleged wrongful death of a juvenile enrolled at
the Company's wilderness program in Jasper, Alabama. The Company's
investigation indicates that the juvenile had physical impairments prior to his
enrollment in the wilderness program, which may have contributed to his death.
The complaint, among other things, alleges negligence and civil rights
violations on the part of the Company and certain of its employees, and seeks
an unspecified amount of damages. The action has been removed from the Circuit
Court of Colbert County to the United States District Court for the Northern
District of Alabama, Northwestern Division. While management believes the
allegations are without merit and intends to defend the litigation vigorously,
management is unable at this time to estimate the effect of any settlement or
adverse judgment on the results of operations or financial condition of the
Company. The Company has, therefore, made no accrual for any such settlement,
adverse judgment, or costs of adjudication.
Worker's Compensation Insurance Litigation -- In March 1993, the Company, along
with Legion Insurance Company, filed an involuntary bankruptcy petition against
J.R. McVay & Company, Insurance Brokers, Inc. ("McVay") in the United States
Bankruptcy Court, Central District of California. McVay was the insurance
broker responsible for obtaining worker's compensation insurance for the
Company's California operations. The Company received relief from the
automatic stay in the bankruptcy action and in July 1993, filed an action in
Riverside Superior Court against McVay. The Company alleged that McVay was
negligent and acted fraudulently in obtaining worker's compensation insurance
for the Company.
-47-
<PAGE> 48
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE K--CONTINGENCIES (continued)
The Company believes that the problems that arose with McVay were also caused,
or at least exacerbated, by the fraud and negligence of the insurance companies
that issued California workers compensation coverage to the Company, the
companies that financed the premiums for those coverages, and the bank that
allowed McVay to endorse fraudulent checks in excess of $2,000,000.
Consequently, in June 1993 the Company filed an action in Riverside Superior
Court against Transamerica Insurance Finance Corporation, Commonwealth Risk
Services-West, Commonwealth Risk Services, Inc., Robert McIntosh, Legion
Insurance Company, Cananwill, Inc. and Sanwa Bank of California. This action was
transferred to Los Angeles Superior Court in October 1993.
During October 1994, the Company reached a settlement with respect to this
litigation. Pursuant to the settlement, the Company received $150,000 in cash
and all parties to the litigation executed a mutual release of all claims
related to such litigation. Previously, during fiscal 1994, the Company
recovered approximately $534,000 of deposits previously written off. These
amounts are included in other income in the Company's Consolidated Statements of
Operations for fiscal 1995 and 1994.
California Department of Social Services Audit -- In December 1992, the Company
received an audit report from the California Department of Social Services
alleging overpayments of approximately $315,000 at its 6-bed group homes for the
years 1991 and 1992. The Company is contesting this determination and filed a
rate protest with the Department of Social Services in February 1993. An
informal hearing was concluded in October 1995, and in April 1996, the Company
filed a request for a formal hearing. The Department of Social Services has
established August 6, 1996 as the hearing date. A provision for liability of
approximately $201,000 is included in accrued other expenses at March 31, 1996
and 1995.
Other Litigation -- The Company is involved in various other legal proceedings,
none of which are expected to have a material effect on the Company's financial
position or results of operations.
NOTE L--RELATED PARTY TRANSACTIONS
In September 1993, the Company received $1,500,000 from T. Rowe Price under a
12%, one year term loan. This note had equity components through which T. Rowe
Price received 172,200 shares of the Company's Common Stock upon closing and a
warrant to increase its ownership position to up to one third of the Company's
total outstanding Common Stock. In July 1994, T. Rowe Price exercised its
warrant and purchased 1,662,080 shares of the Company's Common Stock for an
aggregate purchase price of $1,848,000. A portion of the proceeds from the
warrant exercised, $500,000, was used to reduce the balance outstanding under
the term loan to $1,000,000. Subsequently, in September 1994, T. Rowe Price
renewed the $1,000,000 balance outstanding under this loan for a term of five
years. During fiscal 1996, the Company made unscheduled principal payments of
approximately $708,000 that retired the outstanding balance under this loan. The
Company wrote off deferred loan costs of approximately $64,000 in connection
with the early extinguishment of the T. Rowe Price loan.
-48-
<PAGE> 49
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE L--RELATED PARTY TRANSACTIONS (continued)
During fiscal 1995 the Company entered into a one-year agreement with School
Improvement Services, Inc. for marketing and consulting services; Joseph A.
Fernandez, Ed.D., a director of the Company, is President and Chief Executive
Officer of School Improvement Services, Inc. Compensation under this agreement
consisted of a fee of $50,000 and warrants for 8,000 shares of the Company's
Common Stock, exercisable at $6.25 per share. Additionally, in the event the
average closing price of the Company's Common Stock during the period October
1, 1994 through September 30, 1995 was less than $6.25 per share, then the
number of shares issuable under this warrant would be adjusted to equal the
number of shares obtained by dividing $50,000 by the average closing price of
the Company's Common Stock. Pursuant to this provision, during fiscal 1996 the
number of shares issuable under this warrant was adjusted to 9,615, and the
purchase price was reduced to $5.20. This agreement was renewed during fiscal
1996 for the period of October 1, 1995 through June 30, 1996. Compensation
under this agreement during the renewal period consists of monthly payments of
approximately $4,000. Payments under this agreement during fiscal 1996 and
1995, including reimbursable expenses, totaled $52,000 and $34,000,
respectively.
In conjunction with its acquisition of Advocate Schools in 1988, the Company
agreed to continue payments under several real property leases between Amy S.
Harrison and/or Martha A. Petrey, Ph.D. and their former companies. Ms.
Harrison and Dr. Petrey are the former stockholders of the acquired companies
and are now officers and directors of the Company. These leases expired during
fiscal 1994. However, the Company continues to utilize certain of the subject
properties on a month-to-month basis under the same payment terms and
conditions as in the original leases. Payments under these leases or
month-to-month rental arrangements during the years ended March 31, 1996, 1995,
and 1994 totaled $101,000, $101,000, and $312,000, respectively. Fiscal 1994
payments included $211,000 provided for in fiscal 1993 due to the Company's
decision to close seven 6-bed group homes as part of its fiscal 1993
restructuring.
-49-
<PAGE> 50
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE M--SIGNIFICANT CUSTOMERS
Virtually all of the Company's revenues are attributable to contracts with
state and local government and governmental agencies. Such contracts are
typically subject to renewal annually. Contract renewal is affected by the
quality and type of services provided by the Company.
The following summarizes those customers from which in excess of 10% of the
Company's youth services revenues were derived:
<TABLE>
<CAPTION>
For the Year
Ended % of Operating
March 31: Customer Revenue Revenue
- ------------ ------------------------ ------------- ---------------
<S> <C> <C> <C>
1996 Riverside County
Office of Education $ 5,360,000 23%
State of Tennessee 3,612,000 15
----------- --
$ 8,972,000 38%
=========== ==
1995 Riverside County
Office of Education $ 5,080,000 25%
State of Tennessee 3,636,000 17
----------- --
$ 8,716,000 42%
=========== ==
1994 Riverside County
Office of Education $ 5,179,000 28%
State of Tennessee 3,780,000 20
----------- --
$ 8,959,000 48%
=========== ==
</TABLE>
At March 31, 1996 and 1995, accounts receivable from the above customers
totaled $906,000 and $956,000, respectively. Additionally, accounts receivable
from Los Angeles City Unified School District totaled $366,000 and $478,000 at
March 31, 1996 and 1995, respectively.
-50-
<PAGE> 51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
INFORMATION REQUIRED BY ITEM 10 (DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT), ITEM 11 (EXECUTIVE COMPENSATION), ITEM 12 (SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT), AND ITEM 13 (CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS), will be included in the Company's Proxy Statement to
be filed within 120 days of March 31, 1996 and is incorporated herein by
reference.
-51-
<PAGE> 52
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The following financial statements of Children's Comprehensive Services,
Inc. are included in Part II, Item 8:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets-March 31, 1996 and 1995 31
Consolidated Statements of Operations for the Years Ended
March 31, 1996, 1995 and 1994 33
Consolidated Statements of Shareholders' Equity for
the Years Ended March 31, 1996, 1995 and 1994 34
Consolidated Statements of Cash Flows for the Years
Ended March 31, 1996, 1995 and 1994 35
Notes to Consolidated Financial Statements 37
(2) Financial Statement Schedules
Schedule II - Valuation and qualifying accounts 55
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
applicable or not required under their related instructions or the
required information is included in the financial statements or notes
thereto.
(3) Management Contracts and Compensatory Plans or Arrangements
1987 Employee Stock Option Plan, as amended, (included herein as
Exhibit 10.4)
1989 Stock Option Plan for Non-Employee Directors, (included herein
as Exhibit 10.5)
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter ended March 31,
1996.
(c) Exhibits
The exhibits listed in the accompanying index to exhibits on page 56 are
filed as part of this annual report on Form 10-K.
-52-
<PAGE> 53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: June 28, 1996 By:/s/William J Ballard
------------------------------------------
William J Ballard
Chairman, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: June 28, 1996 /s/William J Ballard
------------------------------------------
William J Ballard
Chairman, Chief Executive Officer
and Director (Principal Executive
Officer)
Date: June 28, l996 /s/Amy S. Harrison
------------------------------------------
Amy S. Harrison
Vice Chairman, President and Director
Date: June 28, 1996 /s/Martha A. Petrey, Ph.D.
------------------------------------------
Martha A. Petrey, Ph.D.
Executive Vice President and Director
Date: June 28, 1996 /s/Stephen H. Norris
------------------------------------------
Stephen H. Norris
Executive Vice President
Date: June 28, 1996 /s/Donald B. Whitfield
------------------------------------------
Donald B. Whitfield
Vice President - Finance, Secretary
and Treasurer (Principal Financial and
Accounting Officer)
-53-
<PAGE> 54
Date: June 28, 1996 Thomas B. Clark
------------------------------------------
Thomas B. Clark
Director
Date: June 28, 1996 /s/Joseph A. Fernandez, Ed.D.
------------------------------------------
Joseph A. Fernandez, Ed.D.
Director
Date: June 28, 1996 /s/David L. Warnock
------------------------------------------
David L. Warnock
Director
-54-
<PAGE> 55
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
CHILDREN'S COMPREHENSIVE SERVICES, INC.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
COL. A COL B. COL C. COL D. COL E.
- ---------------------------------------------------------------------------------------------------------
Additions
----------------------------
(1) (2)
Balance Charged to Charged to Balance
at Beginning Costs and Other Accounts- Deductions- at End
DESCRIPTION of Period Expenses Describe Describe of Period
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1996:
Deducted from asset accounts:
Allowance for doubtful
accounts $133,000 $38,000 $-0- $ 25,000(1) $146,000
-------- ------- --- -------- --------
Totals $133,000 $38,000 $-0- $ 25,000 $146,000
======== ======= === ======== ========
Year ended March 31, 1995:
Deducted from asset accounts:
Allowance for doubtful
accounts $368,000 $83,000 $-0- $318,000(1) $133,000
-------- ------- --- -------- --------
Totals $368,000 $83,000 $-0- $318,000 $133,000
======== ======= === ======== ========
Year ended March 31, 1994:
Deducted from asset accounts:
Allowance for doubtful
accounts $354,000 $92,000 $-0- $ 78,000(1) $368,000
-------- ------- --- -------- --------
Totals $354,000 $92,000 $-0- $ 78,000 $368,000
======== ======= === ======== ========
</TABLE>
- --------------------
(1) Uncollectible accounts written off against allowance account.
-55-
<PAGE> 56
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C>
3.1 Restated Charter filed June 11, 1987. (1)
3.2 By-Laws. (2)
3.3 Amendment to Restated Charter filed June 26, 1989. (2)
3.4 Amendment to Restated Charter filed February 11, 1994. (6)
3.5 Amendment to Restated Charter filed March 21, 1996.
4 Specimen Stock Certificate. (6)
10.1 Non-competition Agreement between Registrant and Amy S.
Harrison. (3)
10.2 Non-competition Agreement between Registrant and Martha A.
Petrey. (3)
10.3 Registration Agreement between Registrant and Amy S.
Harrison and Martha A. Petrey. (3)
10.4 1987 Employee Stock Option Plan, as amended. (8)
10.5 1989 Stock Option Plan for Non-Employee Directors. (4)
10.6 Assignment and Sublease between Registrant and Helicon
Incorporated. (5)
10.7 Warrant Agreement dated as of September 20, 1993 between
the Registrant and Signet Commercial Credit Corporation.
(6)
10.8 Loan Agreement dated as of September 23, 1994, by and
between Registrant, Children's Comprehensive Services of
California, Inc. and National Health Investors, Inc. (7)
10.9 Security Agreement/Deposits dated as of September 23,
1994, by and among Registrant and Children's Comprehensive
Services of California, Inc. and National Health
Investors, Inc. (7)
10.10 Security Agreement/Projects dated as of September 23,
1994, between Registrant, Children's Comprehensive
Services of California, Inc. and National Health
Investors, Inc. (7)
10.11 Equity Participation Agreement dated as of September 23,
1994, by and between Registrant, Children's Comprehensive
Services of California, Inc. and National Health
Investors, Inc. (7)
10.12 Assignment and Participation Agreement dated as of
September 23, 1994, by and between Registrant and National
Health Investors, Inc. (7)
10.13 Assignment and Participation Agreement dated as of
September 23, 1994, by and between Children's
Comprehensive Services of California, Inc. and National
Health Investors, Inc. (7)
10.14 Intercreditor Agreement dated as of September 23, 1994, by
and among Registrant, Children's Comprehensive Services of
California, Inc., National Health Investors, Inc., First
American National Bank, and T. Rowe Price Strategic
Partners Fund II, L.P. (7)
10.15 Loan and Security Agreement dated September 23, 1994, by
and among First American National Bank, Registrant and
Children's Comprehensive Services of California, Inc. (7)
</TABLE>
-56-
<PAGE> 57
INDEX TO EXHIBITS (Continued)
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C>
10.16 Collateral Assignment of Loan Documents dated as of
September 23, 1994, by Registrant in favor of First
American National Bank. (7)
10.17 Second Amendment to Collateral Assignment of Loan
Documents dated January 29, 1996, by the Registrant in
favor of First American National Bank.
10.18 Amendment No. 1 to Warrant Agreement dated October 4,
1995, between the Registrant and School Improvement
Services, Inc.
10.19 Consulting and Marketing Agreement, effective as of August
1, 1992, dated September 22, 1994, by and between the
Registrant and Helicon Incorporated. (8)
10.20 Agreement dated as of August 4, 1994, between the
Registrant and Riverside County, California Superintendent
of Schools for special education services. (8)
10.21 Registration Rights Agreement, dated September 20, 1993,
by and between the Registrant and T. Rowe Price Strategic
Partners Fund II, L.P.
10.22 Debt Subordination Agreement dated January 29, 1996, by
and between First American National Bank, the Registrant
and National Health Investors.
10.23 Guaranty and Suretyship Agreement dated January 29, 1996,
by and between First American National Bank, the
Registrant and Helicon Incorporated.
10.24 Second Amendment to Loan and Security Agreement dated
January 29, 1996, by and among First American National
Bank and the Registrant.
11 Statement Re: Computation of Per Share Earnings.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule
</TABLE>
(1) Incorporated herein by reference from Registrant's Registration Statement
on Form S-1, filed June 12, 1987 (Reg. No. 33-15034).
(2) Incorporated herein by reference from Registrant's Registration Statement
on Form S-1, filed October 11, 1989 (Reg. No. 33-31527).
(3) Incorporated herein by reference from Registrant's Form 8-K, dated April
12, 1988, reporting the acquisition of Advocate Schools (File No.
0-16162).
(4) Incorporated herein by reference from Registrant's Registration Statement
on Form S-8, filed February 14, 1990 (Reg. No. 2-33-33499).
(5) Incorporated herein by reference from Registrant's Form 10-K for the
fiscal year ended March 31, 1990, dated June 28, 1990 (File No. 0-16162).
(6) Incorporated herein by reference from Registrant's Form 10-K for the
fiscal year ended March 31, 1994, dated June 28, 1994 (File No. 0-16162).
(7) Incorporated herein by reference from Registrant's Form 8-K, dated October
11, 1994, reporting the execution of loan agreements with National Health
Investors, Inc., T. Rowe Price Strategic Partners Fund II, L.P., and First
American National Bank (File No. 0-16162).
(8) Incorporated herein by reference from Registrant's Form 10-K for the
fiscal year ended March 31, 1995, dated June 28, 1995 (File No. 0-16162).
-57-
<PAGE> 1
Exhibit 3.5
ARTICLES OF AMENDMENT TO THE RESTATED CHARTER
OF
CHILDREN'S COMPREHENSIVE SERVICES, INC.
Pursuant to the provisions of Section 48-20-06 of the Tennessee
Business Corporation Act, the undersigned Corporation adopts the following
articles of amendment (the "Articles of Amendment") to the restated Charter
(the "Restated Charter"):
1. Name of Corporation. The name of the Corporation is
Children's Comprehensive Services, Inc.
2. Section 6 of the Restated Charter is hereby deleted in its
entirety and replaced with the following:
6. The maximum number of shares of capital stock the
corporation shall have the authority to issue is
twenty million (20,000,000) shares, of which ten
million (10,000,0000) shares are designated Common
Stock, par value One One-Hundredth of a Dollar ($.01)
per share, and ten million (10,000,000) shares
designated Preferred Stock, par value One Dollar
($1.00) per share.
3. Automatic Conversion of Common Stock. Upon the effective date
of these Articles of Amendment to the Restated Charter (the
"Effective Date"), each two (2) shares of the issued and
outstanding Common Stock par value $.01 per share of the
Corporation (the "Common Stock"), shall automatically and
without any action by the holder thereof be converted into and
shall thereafter constitute one (1) share of Common Stock,
provided, that no fractional shares of Common Stock will be
issued. Any holder of Common Stock who owns shares not evenly
divisible by two (2) shall receive in lieu of a fractional
share of Common Stock, an amount of cash based on the closing
sale price of the Common Stock as reported on the Nasdaq Stock
Market on the Effective Date, and such fractional shares will
be canceled.
4. Adoption. These Articles of Amendment were duly adopted by
the Board of Directors and the Shareholders of the
Corporation.
5. Effective Date. These Articles of Amendment will be effective
when filed with the Secretary of State.
Date: March 21, 1996
CHILDREN'S COMPREHENSIVE SERVICES, INC.
By: /s/ Donald B. Whitfield
-------------------------------------
Donald B. Whitfield, Secretary
<PAGE> 1
Exhibit 10.17
SECOND AMENDMENT TO COLLATERAL
ASSIGNMENT OF LOAN DOCUMENTS
This Second Amendment to Collateral Assignment of Loan documents (the
"Agreement"), is made and entered into as of the 29th day of January, 1996, by
Children's Comprehensive Services, Inc., a Tennessee corporation ("Assignor"),
in favor of First American National Bank, a national banking association
("Assignee"). Capitalized terms not otherwise defined herein shall have the
meaning ascribed to such terms in the Collateral Assignment of Loan Documents
dated as of September 23, 1994, by and between the Assignor and the Assignee,
as amended from time to time (the "Assignment").
W I T N E S S E T H:
WHEREAS, pursuant to the Assignment, Assignor assigned to Assignee a
security interest in the Pledged Note and the Loan Documents, as collateral
security for the Loan; and
WHEREAS, Assignor and Assignee desire to amend the Assignment to
reflect the renewal and modification of the Loan,
NOW, THEREFORE, in consideration of the foregoing premises, and other
good and valuable consideration, the receipt and legal sufficiency of which is
hereby acknowledged, the parties hereto agree to amend the Assignment, as
follows:
1. The Loan shall be in the amount of $2,000,000 and is evidenced
by a Renewal and Extension Master Security Promissory Note dated as of January
29, 1996. All references to Note in the Assignment shall refer to the Renewal
and Modification Master Secured Promissory Note dated January 29, 1996, in the
original principal amount of $2,000,000, together with all renewals, extensions
and modifications thereof.
2. Assignor hereby restates and ratifies, as of the date hereof,
all representations and warranties contained in the Assignment, and hereby
acknowledges that the Assignment, as amended hereby, remains in full force and
effect.
IN WITNESS WHEREOF, the parties hereto have executed this Second
Amendment as of the day and date first above written.
ASSIGNEE:
FIRST AMERICAN NATIONAL BANK
By: /s/
--------------------------------
Title:
-----------------------------
<PAGE> 2
ASSIGNOR:
CHILDREN'S COMPREHENSIVE
SERVICES, INC.
By: /s/ William J. Ballard
-------------------------------------
Title: Chairman
----------------------------------
<PAGE> 1
Exhibit 10.18
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
UNDER THE SECURITIES LAWS OF ANY STATE, AND MAY NOT BE SOLD,
OR OTHERWISE TRANSFERRED, IN THE ABSENCE OF SUCH REGISTRATION
OR AN EXEMPTION THEREFROM UNDER SUCH ACT AND UNDER ANY SUCH
APPLICABLE STATE LAWS.
AMENDMENT NO. 1
TO
WARRANT AGREEMENT
This AMENDMENT NO. 1 TO WARRANT AGREEMENT, dated October 4, 1995 (the
"Amended Warrant"), supersedes and replaces the Warrant Agreement (the
"Original Warrant") issued October 1, 1994, by Children's Comprehensive
Services, Inc., a Tennessee corporation (the "Company"), to School Improvement
Services, Inc. ("Holder").
WITNESSETH:
WHEREAS, the number of shares subject to, and the exercise price of,
the Original Warrant were based upon the average annual closing sale price of
the Company's Common Stock for the period October 1, 1994 to September 30, 1995
(the "Average Price"); and
WHEREAS, because the Average Price now can be determined, the parties
desire to amend the Warrant to reflect the exact number of shares subject to,
and the exercise price of, the Warrant.
NOW, THEREFORE, the parties agree as follows:
1. Issuance of Amended Warrant; Term. For and in consideration
of marketing consulting services provided to the Company by Holder, and other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the Company hereby grants to Holder, subject to the surrender of
Original Warrant and the provisions hereinafter set forth, the right to
purchase 19,231 shares of Common Stock, $.01 par value, of the Company (the
"Common Stock"). The shares of Common Stock issuable upon exercise of this
Warrant are hereinafter referred to as the "Shares." This Warrant shall be
exercisable at any time and from time to time from the date hereof for a period
ending September 30, 2004.
2. Exercise Price. The exercise price per share at which all or
any of the Shares may be purchased pursuant to the terms of this Warrant shall
be $2.60.
<PAGE> 2
3. Exercise. This Warrant may be exercised by the holder hereof
as to all or any increment or increments of 1,000 Shares (or the balance of the
Shares if less than such number), upon delivery of written notice of intent to
exercise to the Company at 805 South Church Street, Murfreesboro, Tennessee
37130, or such other address as the Company shall designate in a written notice
to the holder hereof, together with this Warrant and a certified or cashiers
check payable to the Company for the aggregate purchase price of the Shares so
purchased. Upon exercise of this Warrant as aforesaid, and upon compliance
with the covenants and conditions of Section 4 hereof, the Company shall, as
promptly as practicable, and in any event within 15 days thereafter, execute
and deliver to the holder of this Warrant a certificate or certificates for the
total number of whole Shares for which this Warrant is being exercised in such
names and denominations as are requested by such holder. If this Warrant shall
be exercised with respect to less than all of the Shares, the holder shall be
entitled to receive a new Warrant covering the number of Shares in respect of
which this Warrant shall not have been exercised, which new Warrant shall in
all other respects be identical to this Warrant.
4. Covenants and Conditions. The issuance of shares pursuant
hereto are subject to the following:
(a) Neither this Warrant nor the Shares have been
registered under the Securities Act of 1933, as amended (the "Act"),
or any state securities laws ("Blue Sky Laws"). This Warrant has been
acquired for investment purposes only and not with a view to
distribution or resale and may not be made subject to a security
interest, pledged, hypothecated, sold, exercised in favor of third
parties or otherwise transferred without an effective registration
statement for such Warrant under the Act and applicable Blue Sky Laws
or an opinion of counsel reasonably satisfactory to the Company that
registration is not required under the Act or under any applicable
Blue Sky Laws.
(b) Transfer of the Shares issued upon the exercise of
this Warrant shall be restricted in the same manner and to the same
extent as the Warrant and the certificates representing such Shares
shall bear the following legend:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS,
BUT HAVE BEEN ACQUIRED FOR THE PRIVATE INVESTMENT OF THE
HOLDER HEREOF AND MAY NOT BE OFFERED, SOLD OR TRANSFERRED
UNTIL (i) A REGISTRATION STATEMENT UNDER THE ACT AND SUCH
STATE SECURITIES LAWS AS ARE APPLICABLE SHALL HAVE BECOME
EFFECTIVE WITH REGARD THERETO, OR (ii) IN THE OPINION OF
COUNSEL
2
<PAGE> 3
ACCEPTABLE TO THE COMPANY REGISTRATION UNDER THE ACT AND SUCH
STATE SECURITIES LAWS AS ARE APPLICABLE IS NOT REQUIRED IN
CONNECTION WITH SUCH PROPOSED OFFER, SALE OR TRANSFER.
(c) The holder hereof and the Company agree to execute
such other documents and instruments as counsel for the Company
reasonably deems necessary to effect the compliance of the issuance of
this Warrant and any shares of Common Stock issued upon exercise
hereof with applicable federal and state securities laws.
(d) The Company covenants and agrees that all Shares
which may be issued upon exercise of this Warrant will, upon issuance
and payment therefor, be legally and validly issued and outstanding,
fully paid and nonassessable, free from all taxes, liens and charges
with respect thereto or to the issuance thereof. The Company shall at
all times reserve and keep available for issuance upon the exercise of
this Warrant or Warrants such number of the authorized but unissued
shares of the Common Stock as from time to time may be required to
exercise this Warrant (or any replacement thereof) in full.
5. Transfer of Warrants. Subject to the provisions of Paragraph
4, this Warrant may be transferred, in whole or in part, by presentation of the
Warrant to the Company with written instructions for such transfer. Upon
presentation for transfer, the Company shall promptly execute and deliver a new
Warrant or Warrants in the form hereof in the name of the assignee or assignees
and in the denominations specified in such instructions. All expenses, taxes
and other charges payable in connection with the preparation, issuance and
delivery of Warrants under this Paragraph shall be paid by the party requesting
transfer of the Warrant.
6. Warrant Holder Not Shareholder. This Warrant does not confer
upon the holder hereof, as such, any right whatsoever as a shareholder of the
Company.
7. Adjustment Upon Changes in Stock. The number of Shares
subject to this Warrant and the price per share of such Shares shall be
adjusted by the Company in an equitable manner to reflect changes in the
capitalization of the Company, occurring after the date hereof, including, but
not limited to, such changes as result from merger, consolidation,
reorganization, recapitalization, reclassification, stock dividend, dividend in
property other than cash, stock split, combination of shares, exchange of
shares and change in corporate structure. If any adjustment under this
Paragraph 7 would create a fractional share of Common Stock or a right to
acquire a fractional share of Common Stock, the aggregate number of shares
represented by this Warrant shall be adjusted and any resulting fractional
share shall be rounded to the nearest whole share. Whenever the number of
Shares issuable upon exercise of this Warrant or the price per share of such
Shares shall be adjusted pursuant to this Paragraph 7, the Company shall
forthwith notify the holder or holders of this Warrant
3
<PAGE> 4
of such adjustment, setting forth in reasonable detail the event requiring the
adjustment and the method by which such adjustment was calculated.
IN WITNESS WHEREOF, the parties hereto have set their hands as of the
date first above written.
CHILDREN'S COMPREHENSIVE SERVICES, INC.
By: /s/
-------------------------------------
Title:
----------------------------------
SCHOOL IMPROVEMENT SERVICES, INC.
By: /s/
-------------------------------------
Title:
----------------------------------
4
<PAGE> 1
Exhibit 10.21
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made
as of September 20, 1993 between PRICOR CORPORATION, a Tennessee corporation
(the "Company"), and T. ROWE PRICE STRATEGIC PARTNERS FUND II, L.P., a limited
partnership organized under the laws of the State of Delaware ("Strategic").
WHEREAS, the Company and Strategic are parties to a Secured
Loan Agreement dated as of September 20, 1993 by and among the Company, Amemar,
Inc., a California corporation, Broad Horizons of Ramona, Inc., a California
corporation, Helicon, Inc., a California corporation, and Strategic (the "Loan
Agreement");
WHEREAS, pursuant to the Loan Agreement, the Company is
issuing to Strategic certain shares of Common Stock, par value $.01 per share
of the Company ("Common Stock") and a Warrant to purchase certain additional
shares of Common Stock (the "Warrant");
WHEREAS, in connection with such issuances, the Company and
Strategic desire to enter into this Agreement to provide Strategic with certain
registration rights and to address related matters;
NOW THEREFORE, in consideration of the foregoing and of the
mutual covenants and agreements set forth herein, the parties agree as follows:
1. REGISTRATION RIGHTS
1.1. DEMAND REGISTRATION RIGHTS
1.1.1 REQUEST
Subject to the provisions of this Section 1.1., at any time
after the date hereof, Strategic may request registration for sale under the
Securities Act of 1933, as amended (the "Act"), of all or part of the Common
Stock then held by Strategic or issuable to Strategic pursuant to conversion of
the Warrant; provided, that no such request shall be for registration of fewer
than 325,000 shares of Common Stock. The Company shall thereafter, as
expeditiously as practicable, use its best efforts (i) to file with the
Securities and Exchange Commission (the "SEC") under the Act a registration
statement on the appropriate form (using Form S-3 or other "short form," if
available) covering all the shares of Common Stock specified in the demand
request and (ii) to cause such registration statement to be declared effective.
The Company shall use its best efforts to cause each offering pursuant to this
Section 1.1. to be managed, on a firm commitment basis, by a recognized
regional or national underwriter. The Company shall not be required to comply
with more than two (2) requests by Strategic for demand registrations pursuant
to this Section 1.1.
1
<PAGE> 2
1.1.2. DELAY BY COMPANY
The Company shall not be required to effect a demand
registration under the Act pursuant to this Section 1.1. if (i) the Company
receives such request for registration within 90 days preceding the anticipated
effective date of a proposed underwritten public offering of securities of the
Company approved by the Company's Board of Directors prior to the Company's
receipt of such request; (ii) within 90 days prior to any such request for
registration, a registration of securities of the Company has been effected in
which Strategic had the right to participate pursuant to Section 1.2. hereof;
or (iii) the Board of Directors of the Company reasonably determines in good
faith that effecting such a demand registration at such time would have a
material adverse effect upon a proposed sale of all (or substantially all) the
assets of the Company, or a merger, reorganization, recapitalization, or
similar transaction materially affecting the capital structure or equity
ownership of the Company; provided, however, that the Company may only delay a
demand registration pursuant to this Section 1.1. for a period not exceeding 90
days (or until such earlier time as such transaction is consummated or no
longer proposed). The Company shall promptly notify Strategic in writing of
any decision not to effect any such request for registration pursuant to this
Section 1.1., which notice shall set forth in reasonable detail the reason for
such decision and shall include an undertaking by the Company promptly to
notify Strategic as soon as a demand registration may be effected.
1.1.3. WITHDRAWAL
Strategic may withdraw a request for demand registration at
any time before a registration statement is declared effective, in which event
the Company shall withdraw such registration statement, and Strategic shall not
be deemed to have requested a demand registration for purposes of Section 1.1.
hereof. If the Company withdraws a registration statement under this Section
1.1. in respect of a registration for which the Company would otherwise be
required to pay expenses under Section 1.4. hereof, Strategic shall be liable
to the Company for all expenses of such registration specified in Section 1.4.
hereof in proportion to the number of shares Strategic shall have requested to
be registered.
1.2. PIGGYBACK REGISTRATION RIGHTS
1.2.1. REQUEST
If at any time or times after the date hereof the Company
proposes to make a registered public offering of any of its securities under
the Act (whether to be sold by it or by one or more third parties), other than
an offering pursuant to a demand registration under Section 1.1. hereof or an
offering registered on Form S-8, Form S-4, or comparable forms, the Company
shall, not less than 45 days prior to the proposed filing date of the
registration form, give written notice of the proposed registration to
Strategic, and at the written request of Strategic delivered to the Company
within 20 days after the receipt of such notice, shall include in such
registration
2
<PAGE> 3
and offering, and in any underwriting of such offering, all shares of Common
Stock that may have been designated in Strategic's request.
1.2.2. PRO RATA REDUCTION
If a registration in which Strategic has the right to
participate pursuant to this Section 1.2. is an underwritten primary offering
on behalf of the Company, and the managing underwriters advise the Company in
writing that in their opinion the number of securities requested to be included
in such registration, together with the securities being offered by the
Company, exceeds the number which can be effectively sold in such offering, the
Company shall include in such registration (i) first, the securities of the
Company proposed to be sold by the Company, and (ii) second, to the extent
possible, the Common Stock proposed to be sold by Strategic pursuant to such
registration. If a registration in which Strategic has the right to participate
pursuant to this Section 1.2. is partly or wholly an underwritten secondary
offering and the managing underwriters advise the Company in writing that in
their opinion the number of securities requested to be included in such
registration, together with the securities being offered by the Company,
exceeds the number which can be effectively sold in such offering, then the
Company shall include in such registration (i) first the number of shares of
Common Stock to be sold by the Company, and (ii) second, to the extent
possible, the Common Stock proposed to be sold by Strategic and the other
selling stockholders pursuant to such registration, in proportion to the number
of shares of Common Stock so requested by each of them to be included.
1.3. REGISTRATION PROCEDURES
The Company shall have no obligation to file a registration
statement pursuant to Section 1.1. hereof, or to include shares of Common Stock
owned by or issuable to Strategic in a registration statement pursuant to
Section 1.2. hereof, unless and until Strategic shall have furnished the
Company with all information and statements about or pertaining to Strategic in
such reasonable detail and on such timely basis as is reasonably deemed by the
Company to be necessary or appropriate with respect to the preparation of a
registration statement. Whenever Strategic has requested that any shares of
Common Stock be registered pursuant to Sections 1.1. or 1.2. hereof, the
Company shall, as expeditiously as reasonably possible:
(a) prepare and file with the SEC a registration
statement with respect to such shares and use its best efforts to cause such
registration statement to become effective as soon as reasonably practicable
thereafter (provided that before filing a registration statement or prospectus
or any amendments or supplements thereto, the Company shall furnish counsel for
Strategic with copies of all such documents proposed to be filed);
(b) prepare and file with the SEC such amendments and
supplements to such registration statement and prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
a period of not less than nine (9) months (or two (2) years, if the provisions
of Rule 415 under the Act are available with respect thereto) or until
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Strategic has completed the distribution described in such registration
statement, whichever occurs first;
(c) furnish to Strategic such number of copies of such
registration statement, each amendment and supplement thereto, the prospectus
included in such registration statement (including each preliminary
prospectus), and such other documents as Strategic may reasonably request;
(d) use its best efforts to register or qualify such
shares under such other securities or blue sky laws of such jurisdictions as
Strategic requests (and to maintain such registrations and qualifications
effective for a period of nine (9) months or until Strategic has completed the
distribution of such shares, whichever occurs first), and to do any and all
other acts and things which may be necessary or advisable to enable Strategic
to consummate the disposition in such jurisdictions of such shares (provided
that the Company will not be required to (i) qualify generally to do business
in any jurisdiction where it would not be required but for this Section
1.3.(d), (ii) subject itself to taxation in any such jurisdiction, or (iii)
file any general consent to service of process in any such jurisdiction);
provided that, notwithstanding anything to the contrary in this Agreement with
respect to the bearing of expenses, if any such jurisdiction shall require that
expenses incurred in connection with the qualification of such shares in that
jurisdiction be borne in part or full by Strategic, then Strategic shall pay
such expenses to the extent required by such jurisdiction;
(e) notify Strategic, at any time when a prospectus
relating thereto is required to be delivered under the Act within the period
that the Company is required to keep a registration statement effective, of the
happening of any event as a result of which the prospectus included in any such
registration statement contains an untrue statement of a material fact or omits
any fact necessary to make the statements therein not misleading, and prepare a
supplement or amendment to such prospectus so that, as thereafter delivered to
the purchasers of such shares, such prospectus will not contain an untrue
statement of a material fact or omit to state any fact necessary to make the
statements therein not misleading;
(f) cause all such shares to be listed on securities
exchanges or interdealer quotation systems (including NASDAQ), if any, on which
similar securities issued by the Company are then listed;
(g) provide a transfer agent and registrar for all such
shares not later than the effective date of such registration statement;
(h) enter into such customary agreements (including an
underwriting agreement in customary form) and take all such other actions as
Strategic reasonably requests (and subject to its reasonable approval) in order
to expedite or facilitate the disposition of such shares; and
(i) make available for inspection by Strategic, by any
underwriter participating in any distribution pursuant to such registration
statement, and by any attorney, accountant or other agent retained
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by Strategic or by any such underwriter, all financial and other records,
pertinent corporate documents, and properties (other than confidential
intellectual property) of the Company.
1.4. REGISTRATION EXPENSES
1.4.1. STRATEGIC EXPENSES
If, pursuant to Section 1.1. or 1.2. hereof, shares of Common
Stock owned by Strategic are included in a registration statement, then
Strategic shall pay all transfer taxes, if any, relating to the sale of its
shares, the fees and expenses of its own counsel, and its pro rata portion of
any underwriting discounts or commissions or the equivalent thereof.
1.4.2. COMPANY EXPENSES
Except as otherwise provided in this Agreement, the Company
shall pay all expenses incident to the registration and to the Company's
performance of or compliance with this Agreement, including, without
limitation, all registration and filing fees, fees and expenses of compliance
with securities or blue sky laws, underwriting discounts, fees and expenses,
printing expenses, messenger and delivery expenses, and fees and expenses of
counsel for the Company and all independent certified public accountants and
other persons retained by the Company. With respect to any registration
pursuant to Section 1.1. or 1.2. hereof, the Company shall pay its internal
expenses (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties) and the expenses
and fees for listing the securities to be registered on exchanges or
interdealer quotation systems on which similar securities issued by the Company
are then listed.
1.5. INDEMNITY
(a) In the event that any shares of Common Stock owned by
Strategic are sold by means of a registration statement pursuant to Section 1.1
or 1.2 hereof, the Company agrees to indemnify and hold harmless Strategic,
each of its partners and their officers and directors, and each person, if any,
who controls or may control Strategic within the meaning of the Act (Strategic,
each of its partners and their officers and directors, and any such other
persons being hereinafter referred to individually as an "Indemnified Person"
and collectively as "Indemnified Persons") from and against all demands,
claims, actions or causes of action, assessments, losses, damages, liabilities,
costs, and expenses, including, without limitation, interest, penalties, and
reasonable attorneys' fees and disbursements, asserted against, resulting to,
imposed upon or incurred by such Indemnified Person, directly or indirectly
(hereinafter referred to in this Section 1.5 in the singular as a "claim" and
in the plural as "claims"), based upon, arising out of or resulting from any
untrue statement of a material fact contained in the registration statement or
any omission to state therein a material fact necessary to make the statements
made therein, in the light of the circumstances under which they were made, not
misleading, except insofar as such
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claim is based upon, arises out of or results from information furnished to the
Company in writing by Strategic for use in connection with the registration
statement.
(b) Strategic agrees to indemnify and hold harmless the Company,
its officers and directors, and each person, if any, who controls or may
control the Company within the meaning of the Act (the Company, its officers
and directors, and any such other persons also being hereinafter referred to
individually as an "Indemnified Person" and collectively as "Indemnified
Persons") from and against all claims based upon, arising out of or resulting
from any untrue statement of a material fact contained in the registration
statement or any omission to state therein a material fact necessary in order
to make the statement made therein, in the light of the circumstances under
which they were made, not misleading, to the extent that such claim is based
upon, arises out of or results from information furnished to the Company in
writing by Strategic for use in connection with the registration statement.
(c) The indemnification set forth herein shall be in
addition to any liability the Company or Strategic may otherwise have to the
Indemnified Persons. Promptly after actually receiving definitive notice of
any claim in respect of which an Indemnified Person may seek indemnification
under this Section 1.5, such Indemnified Person shall submit written notice
thereof to either the Company or Strategic, as the case may be (sometimes being
hereinafter referred to as an "Indemnifying Person"). The failure of the
Indemnified Person so to notify the Indemnifying Person of any such claim shall
not relieve the Indemnifying Person from any liability it may have hereunder
except to the extent that (a) such liability was caused or materially increased
by such failure, or (b) the ability of the Indemnifying Person to reduce such
liability was materially adversely affected by such failure. In addition, the
failure of the Indemnified Person so to notify the Indemnifying Person of any
such claim shall not relieve the Indemnifying Person from any liability it may
have otherwise than hereunder. The Indemnifying Person shall have the right to
undertake, by counsel or representatives of its own choosing, the defense,
compromise or settlement (without admitting liability of the Indemnified
Person) of any such claim asserted, such defense, compromise or settlement to
be undertaken at the expense and risk of the Indemnifying Person, and the
Indemnified Person shall have the right to engage separate counsel, at such
Indemnified Person's own expense, whom counsel for the Indemnifying Person
shall keep informed and consult with in a reasonable manner. In the event the
Indemnifying Person shall elect not to undertake such defense by its own
representatives, the Indemnifying Person shall give prompt written notice of
such election to the Indemnified Person, and the Indemnified Person may
undertake the defense, compromise or settlement (without admitting liability of
the Indemnified Person) thereof on behalf of and for the account and risk of
the Indemnifying Person by counsel or other representatives designated by the
Indemnified Person. In the event that any claim shall arise out of a
transaction or cover any period or periods wherein the Company and Strategic
shall each be liable hereunder for part of the liability or obligation arising
therefrom, then the parties shall, each choosing its own counsel and bearing
its own expenses, defend such claim, and no settlement or compromise of such
claim may be made without the joint consent or approval of the Company and
Strategic. Notwithstanding the foregoing, no Indemnifying Person shall be
obligated hereunder with respect to amounts paid in settlement of any claim if
such settlement is
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effected without the consent of such Indemnifying Person (which consent shall
not be unreasonably withheld).
(d) If for any reason the foregoing indemnity is
unavailable to, or is insufficient to hold harmless, an Indemnified Person,
then the Indemnifying Person shall contribute to the amount paid or payable by
the Indemnified Person as a result of such claims, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Person and the
Indemnified Person as well as any other relevant equitable considerations. No
person guilty of fraudulent misrepresentation (within the meaning of Section
ll(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
1.6. SUBSEQUENT REGISTRATION STATEMENTS
The Company shall not cause or permit any new registration
statements (except registration statements on Forms S-8, S-4, or comparable
forms) to become effective during the 90 days after the effective date of a
registration statement covering shares of Common Stock owned by Strategic.
1.7 TERMINATION
The Company's obligations pursuant to Section 1.1. and 1.2.
hereof shall terminate on December 31, 2003.
2. MISCELLANEOUS
2.1. ADDITIONAL ACTIONS AND DOCUMENTS
Each of the parties hereto hereby agrees to use its good faith
best efforts to bring about the consummation of this Agreement, and to take or
cause to be taken such further actions, to execute, deliver and file or cause
to be executed, delivered and filed such further documents and instruments, and
to obtain such consents, as may be necessary or as may be reasonably requested
in order to fully effectuate the purposes, terms and conditions of this
Agreement.
2.2. ASSIGNMENT
Strategic may assign its rights under this Agreement to any
assignee of the Warrant or Shares of Common Stock held by Strategic.
2.3. ENTIRE AGREEMENT; AMENDMENT
This Agreement, including the other writings referred to
herein or delivered pursuant hereto, constitutes the entire agreement among the
parties hereto with respect to the transactions contemplated herein, and it
supersedes all prior oral or written agreements,
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commitments or understandings with respect to the matters provided for herein.
No amendment, modification or discharge of this Agreement shall be valid or
binding unless set forth in writing and duly executed by the party against whom
enforcement of the amendment, modification, or discharge is sought.
2.4. LIMITATION ON BENEFITS
It is the explicit intention of the parties hereto that no
person or entity other than the parties hereto (and their respective successors
and assigns) is or shall be entitled to bring any action to enforce any
provision of this Agreement against any of the parties hereto, and the
covenants, undertakings and agreements set forth in this Agreement shall be
solely for the benefit of, and shall be enforceable only by, the parties hereto
or their respective successors and assigns.
2.5. BINDING EFFECT
This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns.
2.6. GOVERNING LAW
This Agreement, the rights and obligations of the parties
hereto, and any claims or disputes relating thereto, shall be governed by and
construed in accordance with the laws of Tennessee (excluding the choice of law
rules thereof).
2.7. NOTICES
All notices, demands, requests, or other communications which
may be or are required to be given, served, or sent by any party to any other
party pursuant to this Agreement shall be in writing and shall be mailed by
first-class, registered or certified mail, return receipt requested, postage
prepaid, or transmitted by hand delivery (including delivery by courier),
telegram, telex, or facsimile transmission, addressed as follows:
(a) If to the Company:
Pricor Corporation
805 South Church Street
Murfreesboro, Tennessee 37130
Attention: President
Facsimile: 615/896-5068
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with a copy (which shall not constitute notice) to:
Kenneth P. Ezell, Jr.
Baker, Worthington, Crossley, Stansberry & Woolf
1700 Nashville City Center
Nashville, TN 37219
Facsimile: 615/726-0464
(b) If to Strategic:
T. Rowe Price Strategic Partners Fund II, L.P.
100 East Pratt Street
Baltimore, Maryland 21202
Attention: Mr. David L. Warnock
Facsimile: 410/385-2537
with a copy (which shall not constitute notice) to:
Ann E. Flowers
Hogan & Hartson
555 Thirteenth Street, N.W.
Washington, DC 20004
Facsimile: 202/637-5910
Each party may designate by notice in writing a new address to
which any notice, demand, request or communication may thereafter be so given,
served or sent. Each notice, demand, request, or communication which shall be
mailed, delivered or transmitted in the manner described above shall be deemed
sufficiently given, served, sent and received for all purposes at such time as
it is delivered to the addressee (with the return receipt, the delivery
receipt, the affidavit of messenger or (with respect to a telex) the answer
back being deemed conclusive (but not exclusive) evidence of such delivery) or
at such time as delivery is refused by the addressee upon presentation.
2.8. HEADINGS
Article and Section headings contained in this Agreement are
inserted for convenience of reference only, shall not be deemed to be a part of
this Agreement for any purpose, and shall not in any way define or affect the
meaning, construction or scope of any of the provisions hereof.
2.9. EXECUTION IN COUNTERPARTS
To facilitate execution, this Agreement may be executed in as
many counterparts as may be required; and it shall not be necessary that the
signatures of each party appear on each
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counterpart; but it shall be sufficient that the signature of each party appear
on one or more of the counterparts. All counterparts shall collectively
constitute a single agreement. It shall not be necessary in making proof of
this Agreement to produce or account for more than a number of counterparts
containing the respective signatures of all of the parties hereto.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be duly executed on its behalf as of the date first above written.
PRICOR INCORPORATED
By: /s/ William J. Ballard
-------------------------------------------
T. ROWE PRICE STRATEGIC PARTNERS FUND II, L.P.
By: T. Rowe Price Strategic
Partners, L.P., its general partner
By: T. Rowe Price Strategic
Partners Associate, Inc., its
general partner
By: /s/ David L. Warnock
---------------------------------------
David L. Warnock
President
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Exhibit 10.22
DEBT SUBORDINATION AGREEMENT
This Agreement, made and entered into as of the 29th day of January,
1996, by and between First American National Bank, a national banking
association ("First American"), Children's Comprehensive Services, Inc., a
Tennessee corporation ("CCS"), Helicon, Inc. (the "Borrower"), and National
Health Investors, Inc., a Maryland corporation ("NHI").
W I T N E S S E T H:
WHEREAS, First American proposes, conditioned upon the making by CCS
of the agreements herein expressed, and pursuant to a Loan and Security
Agreement of even date herewith, between First American and Borrower (the
"First American Loan Agreement"), to loan certain funds to Borrower as set
forth in First American Loan Agreement (the "First American Loan"); and
WHEREAS, Borrower now owes to CCS the sum of $5,370,941.62, plus
accrued interest (the "Helicon Loan"), as evidenced by the instruments
described in Exhibit A attached hereto (collectively the "Helicon Loan
Documents"), and CCS may, from time to time, make further loans, advancements
or extensions of credit to Borrower; and
WHEREAS, the Helicon Loan Documents are pledged to NHI to secure
certain obligations owed by CCS and Children's Comprehensive Services of
California, Inc. ("CCSC") to NHI, pursuant to the terms of a Security
Agreement/Projects and Security Agreement/Deposits (collectively, the "NHI
Security Agreements") and by a Collateral Assignment of Loan Documents between
CCS and NHI dated as of September 23, 1994 (the "NHI Collateral Assignment");
and
WHEREAS, CCS and NHI have agreed with First American that the payment
of the indebtedness evidenced by the Helicon Loan shall be subordinate to the
obligations of the Borrower with respect to the First American Loan; and
WHEREAS, CCS and NHI have further agreed with First American that the
security interests granted by Borrower to CCS to secure the repayment of the
Helicon Loan, as evidenced by certain UCC financing statements identified in
Exhibit A attached hereto (collectively, the "CCS Liens"), are subordinate to
the security interests granted by Borrower to First American to secure the
First American Loan (the "First American Liens"); and,
WHEREAS, CCS, with the consent of NHI in its capacity as holder of the
Helicon Loan Documents, is willing, in order to induce First American to fund
the First American Loan to Borrower, to subordinate the Borrower's obligations
to CCS, as evidenced by the Helicon Loan Documents, whether now existing or
hereafter incurred, to the Borrower's obligations to First American, evidenced
by the First American Loan Agreement and the other documents and instruments
evidencing or securing the First American Loan (the "First American Loan
Documents"), and whether such obligations are now existing or are hereafter
incurred by Borrower under the First American Loan Documents,
<PAGE> 2
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and legal sufficiency of which is hereby
acknowledged, including without limitation, the funding by First American of
the First American Loan, or any portion thereof, CCS, NHI and First American
hereby agree as follows:
1. Agreement of Subordination. In order to induce First American
to extend the First American Loan, or to grant such renewals or extensions
thereof as First American may deem advisable, CCS and NHI, in its capacity as
holder of the Helicon Loan Documents, hereby agree that neither CCS nor NHI
will ask, demand, sue for, take or receive from Borrower, by set-off or any
other manner, the whole or any part of any monies, principal or interest, now
or hereafter owing by Borrower to CCS under the Helicon Loan Documents, nor any
security therefor, unless and until all obligations of Borrower to First
American under the First American Loan Documents, whether such obligations of
Borrower are now existing or hereafter arising, direct or indirect, absolute or
contingent, secured or unsecured, due or not due, and whether arising directly
between Borrower and First American or acquired outright, conditionally or as
collateral security from another by First American (collectively the "First
American Obligations"), shall have been fully paid with interest.
Notwithstanding the foregoing, nothing contained herein shall be deemed to
limit, restrict, or subordinate the obligations of Borrower to pay to CCS lease
payments, management fees, and consulting fees payable by Borrower to CCS in
the ordinary course of business, provided, however, CCS, Borrower and NHI
acknowledge that in the event of a default under the First American Loan
Agreement, no management fees or consulting fees shall be paid by Borrower to
CCS, without the prior written consent of First American. In the event any such
fees are received by CCS or NHI in violation of this Agreement, such fees shall
be deemed to be received in trust for the benefit of First American, and upon
request of First American, such fees shall be paid to First American to be
applied to the First American Obligations.
2. Lien Subordination. CCS and NHI, in its capacity as holder of
the Helicon Loan Documents, hereby subordinate the liens and security interests
granted by the Borrower to CCS to secure the Helicon Loan (excluding only the
security interests in any equipment of Borrower), whether evidenced by the CCS
Liens or otherwise, to the liens and security interests granted by Borrower to
First American to secure the First American Loan, including, without
limitation, the First American Liens.
3. Distribution of Assets of Borrower. CCS and NHI, in its
capacity as holder of the Helicon Loan Documents, agree that (i) in the event
of any distribution, division or application, partial or complete, voluntary or
involuntary, by operation of law or otherwise, of all or any part of the assets
of Borrower or the proceeds thereof to creditors of Borrower or upon any
indebtedness of Borrower, by reason of the liquidation, dissolution or other
winding up of Borrower or Borrower's business, or (ii) in the event of any
sale, receivership, insolvency or bankruptcy proceeding, or assignment for the
benefit of creditors, or any proceeding by or against Borrower for any relief
under any bankruptcy or insolvency law or laws relating to the relief of debts,
readjustment of indebtedness, reorganizations, compositions or extensions, then
and in any such event any payment or distribution of any kind or character,
either in cash, securities or other property, which shall be
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payable or deliverable upon or with respect to the Helicon Loan payable by
Borrower to CCS, shall be paid or delivered directly to First American for
application on the First American Obligations, whether the same are then due or
not due, until such time as the First American Obligations shall have been
fully paid and satisfied. CCS and NHI, in its capacity as holder of the Helicon
Loan Documents, hereby irrevocably authorize and empower First American to
demand, sue for, collect and receive every such payment or distribution and
give acquittance therefor and to file claims and take such other proceedings in
First American's own name or in the name of CCS or otherwise, as First American
may deem necessary or advisable for the enforcement of this Agreement. CCS
hereby agrees to execute and deliver to First American, upon request by First
American, such powers of attorney, assignments or other instruments as may be
requested by First American in order to enable First American to enforce any
and all claims upon or with respect to the Helicon Loan payable by Borrower to
CCS, and to collect and receive any and all payments or distributions which may
be payable or deliverable at any time upon or with respect to the Helicon Loan
owed by Borrower to CCS.
4. Payments Received by CCS or NHI for Benefit of First American.
Should any payment or distribution or security or proceeds thereof be received
by CCS or NHI upon or with respect to the Helicon Loan payable by Borrower to
CCS, in violation of this Agreement, prior to the full satisfaction of First
American Obligations, CCS and/or NHI will immediately deliver the same to First
American in precisely the form received (except for the endorsement or
assignment of CCS or NHI where necessary), for application on the First
American Obligations, whether the same are then due or not due, and, until so
delivered, the same shall be held in trust by CCS and/or NHI, as property of,
and for the benefit of First American. In the event of the failure of CCS or
NHI to make any such endorsement or assignment, First American, or any of its
officers or employees in behalf of First American, is hereby irrevocably
authorized by CCS and NHI to make the same.
5. Assignment of Rights of CCS. CCS agrees not to assign or
transfer to others any claim which CCS has or may have against Borrower while
any of First American Obligations remain unpaid, except for the assignment of
the Helicon Loan Documents to NHI under the NHI Collateral Assignment.
6. Continuing Agreement. This Agreement shall constitute a
continuing agreement of subordination, and First American may continue, without
notice to CCS or NHI, to lend monies, extend credit and make other
accommodations to or for the account of Borrower on the faith hereof until
written notice of revocation of this Agreement shall be delivered to First
American by CCS and/or NHI. Any such notice of revocation shall not affect
this Agreement in relation to any obligations or liabilities of Borrower then
existing or any obligations or liabilities created thereafter pursuant to any
previous commitment of First American to Borrower, or any extensions or
renewals of any such obligations or liabilities, and as to all such obligations
and liabilities and extensions or renewals thereof, this Agreement shall
continue in effect until such obligations shall have been fully discharged with
interest. Notwithstanding the foregoing, First American shall not increase the
principal amount of the First American Loan to an amount in excess of $500,000,
without the prior consent of NHI and CCS.
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7. Amendments and Modifications of the First American Loan
Documents. CCS and NHI agree that First American, at any time and from time to
time, either before or after receipt of a notice of revocation as provided for
in paragraph 6 hereof, may enter into such agreement or agreements with
Borrower as First American may deem proper extending the time of payment or
renewing or otherwise altering the terms of all or any of First American
Obligations (except for an increase in the principal amount of the First
American Loan), or affecting any security underlying any or all of First
American Obligations, or may exchange, sell or surrender or otherwise deal with
any such security, or may release any balance of funds of Borrower with First
American, without notice to CCS or NHI and without in any way impairing or
affecting this Agreement.
8. Acknowledgment of First American Obligations. CCS and NHI
acknowledge and agree that the First American Obligations shall be deemed to
have been made and incurred in reliance upon this Agreement.
9. Waiver by First American. No waiver shall be deemed to be
made by First American of any of its rights hereunder unless the same shall be
in writing signed in behalf of First American.
10. Notice of Acceptance Waived. Notice of acceptance by First
American of this Agreement is hereby waived by CCS and NHI, and this Agreement
and all of the terms and provisions hereof shall be immediately binding upon
CCS and NHI from the date of execution hereof.
11. Miscellaneous.
(a) Notices. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed to
have been given when actually delivered, if personally delivered, or
when mailed, if mailed by registered or certified mail, return receipt
requested, to the following addresses or to such other address as
either party may subsequently designate in writing:
(i) if to First American:
First American National Bank
Health Care Division
First American Center
Nashville, TN 37237-0203
Attn: Mark D. Mattson, Vice President
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with a copy given in the manner prescribed
above, to:
Sherrard & Roe, P.L.C.
424 Church Street, Suite 2000
Nashville, TN 37219
Attn: Kim A. Brown, Esq.
(ii) if to CCS:
Children's Comprehensive Services, Inc.
805 S. Church Street
Murfreesboro, TN 37133
Attn: William J. Ballard, President
with a copy given in the manner prescribed
above, to:
Baker, Donelson, et al.
1700 Nashville City Center
511 Union Street
Nashville, TN 37219
Attn: Kenneth P. Ezell, Jr., Esq
(iii) if to Borrower:
Helicon, Inc.
11980 S. Mt. Vernon Road
Grand Terrace, CA 93234
Attn: Mary Trainor
(b) Governing Law and Jurisdiction. This Agreement shall
be deemed to be a contract under the laws of the State of Tennessee
and for all purposes shall be governed by and construed and enforced
in accordance with the laws of such State. The parties hereto
irrevocably consent to the jurisdiction of the United States District
Court sitting in Nashville, Tennessee, and of all Tennessee state
courts, for the purpose of any litigation concerning this Agreement.
It is further agreed that venue shall be exclusively with courts
sitting in Davidson County, Tennessee.
(c) Pledge of Helicon Loan to NHI. The Borrower, CCS,
NHI and First American acknowledge that the Helicon Loan, as evidenced
by the Helicon Loan Documents, is currently pledged to NHI as
collateral security for certain obligations owed by CCS and CCSC to
NHI, as evidenced by the NHI Security Agreements. The parties further
acknowledge that the purpose of this Subordination Agreement is to
confirm a direct, first priority security interest in the assets of
the Borrower, as described in the First American
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Loan Documents, in favor of First American, as collateral security for
the First American Obligations. The security interest granted to CCS
by Borrower, as set forth in the Helicon Loan Documents, and currently
held by NHI by virtue of the NHI Security Agreements shall continue as
collateral security for the obligations owed by Borrower to CCS,
subordinate only to the First American Obligations and the First
American Liens securing such obligations, as set forth herein.
(d) Successors and Assigns. This Agreement will be
binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns.
(e) Severability. The provisions of this Agreement are
intended to be severable. If any provision of this Agreement is held
invalid or unenforceable in whole or in part in any jurisdiction such
provision will, as to such jurisdiction, be ineffective to the extent
of such invalidity or unenforceability without in any manner affecting
the validity or enforceability of such provision in any other
jurisdiction or the remaining provisions of this Agreement in any
jurisdiction.
(f) Section Headings. The section headings in this
Agreement are for convenience only and do not limit, define or
construe the contents of the sections.
(g) Amendments and Waivers. Neither this Agreement nor
any term hereof may be amended, waived, discharged or terminated
except by a writing signed by all of the parties hereto.
(h) Injunctive Relief. Each party hereto acknowledges
that the breach by it of any of the provisions of this Agreement is
likely to cause irreparable damage to the other parties. Therefore,
the relief to which any party shall be entitled in the event of any
such breach or threatened breach shall include, but not be limited to,
a mandatory injunction for specific performance, judicial relief to
prevent a violation of any of the provisions of this Agreement,
damages and any other relief to which it may be entitled at law or in
equity.
(i) Counterparts. This Agreement may be executed in one
or more counterparts.
12. Joinder of Borrower. The Borrower has joined in this
Agreement for purposes of consenting to the terms of this Agreement.
6
<PAGE> 7
IN WITNESS WHEREOF, the undersigned parties have executed this
Agreement as of the day and date first above written.
FIRST AMERICAN NATIONAL BANK CHILDREN'S COMPREHENSIVE SERVICES, INC.
BY: /s/ BY: /s/
---------------------------------- ------------------------------------
TITLE: TITLE:
------------------------------- ---------------------------------
"FIRST AMERICAN" "CCS"
7
<PAGE> 8
NATIONAL HEALTH INVESTORS, INC. HELICON, INC.
BY: /s/ BY: /s/
---------------------------------- ------------------------------------
TITLE: TITLE:
------------------------------- ---------------------------------
"NHI" "BORROWER"
8
<PAGE> 1
Exhibit 10.23
GUARANTY AND SURETYSHIP AGREEMENT
FOR VALUE RECEIVED and intending to be legally bound, in consideration
of credit given, or to be given, advances made or to be made, or other
financial accommodations from time to time afforded or to be afforded to
Borrower (as hereinafter defined), the undersigned ("Guarantor") does hereby
unconditionally and irrevocably guarantee and become surety to First American
National Bank, its successors and assigns ("Lender"), having an office at First
American Center, Nashville, Tennessee 37237-0203, for the due and punctual
payment and performance of the Obligations (as hereinafter defined), as and
when such payment or performance shall respectively become due, payable and/or
performed in accordance with the terms of the Obligations, whether at maturity
or by declaration, acceleration, or otherwise.
I. DEFINITIONS
As used herein, the following terms shall have the indicated meanings:
"Agreement" means this Guaranty and Suretyship Agreement and all
modifications, renewals, extensions, and amendments hereto.
"Borrower" means Helicon, Inc., a California not for profit
corporation.
"Collateral" means the collateral securing, or which may in the future
secure the Obligations.
"Loan Agreement" means that certain Loan and Security Agreement dated
as of January 29, 1996, between the Borrower and the Lender, together with any
amendments, renewals, extensions, or restatements thereof.
"Loan Document" or "Loan Documents" means any or all, respectively, of
the Loan Agreement, the Note, and all other documents or instruments evidencing
or securing the indebtedness evidenced by the Note.
"Note" means the $500,000 Master Secured Promissory Note, dated as of
January 29, 1996, executed by the Borrower and payable to Lender, as the
same may be renewed, amended or modified from time to time.
"Obligations" means and includes (i) all indebtedness of Borrower to
Lender heretofore or hereafter created under the Loan Agreement and under the
Note, together with any extension, renewal, refinancing, or refunding of such
indebtedness in whole or in part, whether on account of principal, interest, or
otherwise (including, without limitation, any interest which accrues after the
commencement of any case, proceeding, or other action relating to the
bankruptcy, insolvency, or reorganization of Borrower), (ii) payment,
performance, and discharge of all Obligations of Borrower under the Loan
Agreement and under the Loan Documents, (iii) all costs and expenses, including
without limitation reasonable attorneys' fees, incurred by Lender in the
collection or attempted collection of any indebtedness included in the
Obligations, and in the
<PAGE> 2
administration of the Obligations, and (iv) all future advances made by Lender
for the maintenance, preservation, protection, or enforcement of, or
realization upon, the property subjected and intended to be subjected to the
lien and security interest in the collateral security described in the Loan
Agreement (the "Collateral"), or any portion thereof, including without
limitation advances for storage, transportation charges, taxes, insurance,
repairs, and the like; provided however, that Guarantor shall be liable under
this Agreement for the lesser of (i) $500,00 plus accrued but unpaid interest
under the Note, plus reasonable costs and expenses incurred in connection with
the enforcement of the Borrower's obligations set forth in the Note and the
Loan Documents, and the Guarantor's obligations under this Agreement, or (ii)
the maximum amount of such liability that can be incurred hereby without
rendering this Agreement, as it relates to Guarantor, voidable under applicable
law relating to fraudulent conveyance or fraudulent transfer.
Any capitalized term not otherwise defined herein shall have the same
meaning given that term in the Loan Agreement.
II. COVENANTS
2.1 The obligations of Guarantor under this Agreement shall be
continuing, absolute, and unconditional and shall remain in full force and
effect without regard to, and shall not be released, discharged, or in any way
affected by: (i) any amendment, extension, modification of, or supplement to
the Note or any of the other Loan Documents; (2) any exercise or nonexercise of
or delay in exercising any right, remedy, power, or privilege under or in
respect of this Agreement, the Loan Agreement, the Note, or any of the other
Loan Documents (even if any such right, remedy, power, or privilege shall be
lost thereby), or any waiver, consent, indulgence, or other action or inaction
in respect thereof; (3) any lack of diligence, failure, neglect, or omission on
the part of Lender to make any demand or protest or to give any notice of
dishonor or default; (4) any failure or omission of Lender to realize upon or
protect any of the Collateral, to exercise or enforce any lien upon the
Collateral, or to exercise any right of set-off; (5) any bankruptcy, insolvency,
arrangement, composition, assignment for the benefit of creditors, or similar
proceeding commenced by or against Borrower or Guarantor; (6) any failure to
perfect or continue perfection of, or any release or waiver of, any rights
given to Lender with resect to any property as security for the performance of
any of Borrower's obligations under the Loan Agreement, the Note, or any other
Loan Document; (7) any extension of time for payment of the Note or performance
of any of the Obligations; (8) dissolution (voluntarily or involuntarily) of
Guarantor; (9) the genuineness, validity, or enforceability of the Loan
Documents; (10) any limitation of liability of Borrower or Guarantor contained
in the Loan Documents; (11) any defense that may arise by reason of the failure
of Lender to file or enforce a claim against the Borrower in any bankruptcy or
other proceeding; (12) the voluntary or involuntary liquidation, dissolution,
sale of all or substantially all of the property of Borrower or Guarantor, the
marshalling of assets and liabilities, or other similar proceeding affecting
Borrower or any of its assets; (13) the release of Borrower or Guarantor from
the performance or observance of any of the agreements, covenants, terms, or
conditions contained in the Loan Documents by operation of law; (14) the
release or discharge of any other surety or guarantor of the Obligations; or
(15) any other circumstances
2
<PAGE> 3
which might otherwise constitute a legal or equitable discharge of, or defense
available to, a guarantor or surety.
2.2 Guarantor agrees that so long as this Agreement is in effect
Guarantor will comply with all covenants, representations and warranties
contained in the Loan and Security Agreement dated as of September 23, 1994,
between Guarantor and Lender, as amended from time to time (the "CCS Loan
Agreement").
2.3 Guarantor covenants that until payment and performance in full
of the Obligations, Guarantor will furnish to Lender any financial statements
of Guarantor required by the CCS Loan Agreement.
2.4 Guarantor shall furnish to Lender promptly upon request by
Lender such additional financial and business information concerning Guarantor
as Lender may reasonably request.
III. WAIVERS
3.1 Guarantor hereby waives and agrees not to exercise any rights
which it may acquire by way of subrogation or reimbursement under this Guaranty
as a result of any payment made hereunder or otherwise.
3.2 Guarantor hereby waives (a) any presentment for payment,
notice of nonpayment, demand, protest, or notice of acceptance of this
Agreement, (b) any right to notice of advances made to Borrower from time to
time under the provisions of the Loan Documents, and (c) any notice of any
matters described or referred to in Article II above.
3.3 Guarantor hereby further waives any and all notice of every
kind to which Guarantor might otherwise be entitled with respect to the
incurring of any further or increased obligation or liability by Borrower to
Lender, the demand for payment or the payment of all or any obligations or
liabilities of Borrower to Lender (whether now existing or hereafter arising)
or the presentment of any instrument for payment at any time in connection with
any obligation or liability of Borrower or the protest or nonpayment thereof.
Guarantor hereby further waives, surrenders, and agrees not to claim or enforce
any right to require the marshalling of any assets of Borrower, which right of
subrogation or marshalling might otherwise arise from any partial payment of
the Obligations by Guarantor.
3
<PAGE> 4
IV. REPRESENTATIONS AND WARRANTIES
Guarantor represents, warrants, and covenants to and with Lender that:
4.1 There is no action or proceeding pending or, to the knowledge
of Guarantor, threatened against Guarantor before any court or administrative
agency which might result in any material adverse change in the business or
condition of Guarantor or in the property of Guarantor, or which might affect
the legality, validity, or enforceability of this Agreement.
4.2 Guarantor has filed all Federal and State income tax returns
which Guarantor has been required to file and has paid all taxes as shown on
said returns and on all assessments received by Guarantor to the extent that
such taxes have become due.
4.3 Neither the execution nor delivery of this Agreement, nor the
fulfillment of or compliance with the terms and provisions hereof, will conflict
with, or result in a breach of, the terms, conditions, or provisions of, or
constitute a default under, or result in the creation of any lien, charge, or
encumbrance upon any property or assets of Guarantor under, any agreement or
instrument to which Guarantor is now a party or by which Guarantor may be
bound.
4.4 The execution and delivery of this Agreement and Guarantor's
compliance with the terms and provisions hereof has been duly authorized by the
Board of Directors of Guarantor, and no further consents, approvals, or
authorizations thereof are required on the part of Guarantor.
4.5 This agreement is a valid and legally binding agreement of
Guarantor and is enforceable against Guarantor in accordance with its terms.
4.6 Guarantor has examined the Loan Documents.
4.7 Guarantor has the full power, authority, and legal right to
execute and deliver this Agreement.
4.8 Guarantor acknowledges that this Agreement is necessary to
induce Lender to advance the credit for the Obligations, and Guarantor is
willing and able to deliver this Agreement because Guarantor will receive
direct and material benefit from Lender's extension of credit to Borrower.
4.9 Guarantor is now and will be completely familiar with the
business, operations, and condition of Borrower and Guarantor hereby waives and
relinquishes any duty on the part of Lender to disclose any matter, fact, or
thing relating to the business, operation, or condition of Borrower now known
or hereafter known by Lender.
4
<PAGE> 5
V. DEFAULT AND ENFORCEMENT
5.1 In addition to all liens upon and rights of set-off against
moneys, securities, or other property of Guarantor given to Lender by law or
equity, Lender shall have a lien upon, security interest in, and right of
immediate set-off against all moneys, instruments, notes, bonds, commercial
paper, securities, and other property of Guarantor now or hereafter in the
possession of or on deposit with Lender, whether held in a general or special
account for deposit, safekeeping, or otherwise. Every such lien and right of
set-off may be exercised after the occurrence of an Event of Default under the
Loan Agreement (and expiration of all notice and cure periods), or a default by
Guarantor under this Agreement, and expiration of applicable cure periods,
without further notice or demand to Guarantor, and Lender may sell or cause to
be sold, at public or private sale, in any manner and place which may be
lawful, for cash or credit and upon such terms as Lender may see fit, and
without demand or notice to Guarantor, all or any of such property, and Lender
or any other person may purchase such property, rights, or interests so sold
and thereafter hold the same free of any claim or right of whatsoever kind,
including any right of equity or statutory right of redemption, such demand,
notice, or right of equity or statutory right of redemption being hereby
expressly waived and released.
5.2 Each and every right, remedy, and power hereby granted to
Lender or allowed it by law or other agreement shall be cumulative and not
exclusive of any other, and may be exercised by Lender at any time and from
time to time. In the event that the Obligations of Borrower to Lender exceed
in any respect any amount by which this Agreement may be limited, any payments
by Borrower, or any collections or recovery by Lender from any sources other
than this Agreement, may be applied first by Lender to any portion of the
Obligations which exceeds the limits of this Agreement.
5.3 Notwithstanding anything contained in this Agreement or in the
Loan Documents to the contrary, Guarantor shall be in default under this
Agreement upon the occurrence of an Event of Default under either the Loan
Agreement or the CCS Loan Agreement (and expiration of applicable cure
periods). Upon the occurrence of any such default, Lender may, at its option,
as to Guarantor, accelerate the indebtedness evidenced and secured by the Loan
Documents.
5.4 This shall be an agreement of suretyship as well as of
guaranty, and Lender may proceed directly against Guarantor whenever any
payment or performance required pursuant to the Obligations is not made or
rendered to Lender without being required to make demand upon or proceed first
against Borrower or any other person or entity, or against any security for
Borrower's or Guarantor's Obligations under the Loan Documents or hereunder, or
exhaust its remedies against Borrower or any other surety or guarantor. It is
expressly agreed that Lender may at any time following a default as set forth
in paragraph 5.3 hereof, make demand for payment on, or bring a claim against,
Guarantor.
5.5 If Lender employs counsel to enforce this Agreement by suit or
otherwise, Guarantor will reimburse Lender, upon demand, for all expenses
incurred in connection therewith
5
<PAGE> 6
(including, without limitation, reasonable attorneys' fees), whether or not
suit is actually instituted.
5.6 Guarantor irrevocably: (a) agrees that Lender or any other
holder or holders of the Note may bring suit, action, or other legal
proceedings arising out of this Guaranty or the transactions contemplated
hereby in the courts of the State of Tennessee, sitting in Nashville, Davidson
County, Tennessee, or the courts of the United States for the Middle District
of Tennessee, sitting in Nashville, Davidson County, Tennessee, but shall not
be restricted to such courts; (b) consents to the jurisdiction of each such
court in any such suit, action, or proceeding; and (c) waives any objection
which Guarantor may have to the laying of the venue of any such suit, action,
or proceeding in any of such courts.
VI. MISCELLANEOUS
6.1 In the event Lender is required at any time to refund or repay
to any person for any reason any sums collected by it on account of the
obligations subject to this Agreement, including but not limited to sums repaid
to a Trustee in bankruptcy as a result of an avoided preferential transfer or
fraudulent conveyance, Guarantor agrees that all such sums shall be subject to
the terms of this Agreement and that Lender shall be entitled to recover such
sums from Guarantor notwithstanding the fact that this Agreement previously may
have been returned to Guarantor or that Guarantor previously may have been
discharged from further liability under this Agreement.
6.2 Any notice, demand, or request by Lender to Guarantor or by
Guarantor to Lender shall be delivered in accordance with Section 7.12 of the
CCS Loan Agreement.
6.3 This Agreement constitutes the entire agreement, and
supersedes all prior agreements and understandings, both written and oral,
between Guarantor and Lender with respect to the subject matter hereof. If any
clause, provision, or section of this Agreement is determined to be illegal or
invalid by any court, the invalidity of such clause, provision, or section
shall not affect any of the remaining clauses, provisions, or sections hereof
and this Agreement shall be construed and enforced as if such illegal or
invalid clause, provision, or section had not been contained herein. In case
any agreement or obligation contained in this Agreement be held to be in
violation of law, then such agreement or obligation shall be deemed to be the
agreement or obligation of Guarantor, as the case may be, to the full extent
permitted by law.
6.4 No set-off, claim, reduction, or diminution of any obligation
or defense of any kind or nature, which Guarantor or Borrower has or may have
against Lender, shall be available hereunder to Guarantor against Lender.
6.5 No act of commission or omission of any kind or at any time on
the part of Lender in respect of any matter whatsoever shall in any way effect
or impair this Agreement. This Agreement is in addition to and not in
substitution for or discharge of any other suretyship held by Lender.
6
<PAGE> 7
6.6 This Agreement shall be construed and enforced in accordance
with, and the rights of the parties shall be governed by, the laws of the State
of Tennessee. The invalidity or unenforceability of any one or more phrases,
sentences, clauses, or provisions in this Agreement shall not affect the
validity or enforceability of the remaining portions of this Agreement or any
part thereof.
6.7 If there is more than one entity executing this Agreement as
Guarantor, each such person or entity by their respective signatures agrees
that the liabilities hereunder shall be joint and several. These presents
shall bind Guarantor and Guarantor's successors and assigns and the benefits
hereof shall inure to its successors and assigns. Lender may, without any
notice whatsoever to Guarantor, sell, assign, or transfer all or any part of
the Obligations, and in that event each and every immediate and successive
assignee, transferee, or holder of all or any part of the Obligations shall
have the right to enforce this Agreement, by suit or otherwise, for the benefit
of such assignee, transferee, or holder, as fully as though such assignee,
transferee, or holder were herein by name given such rights, powers, and
benefits; provided, however, that Lender shall have an unimpaired right, prior
and superior to that of any assignee, transferee, or holder, to enforce this
Agreement for the benefit of Lender as to so much of the Obligation that Lender
has not sold, assigned, or transferred.
WITNESS the due execution hereof this 29th day of January, 1996.
CHILDREN'S COMPREHENSIVE
SERVICES, INC., a Tennessee corporation
BY: /s/ William J. Ballard
-----------------------------------
TITLE: Chairman
Sworn to and subscribed
before me this _____ day of
_____________, 1996.
/s/
- --------------------------------
Notary Public
My Comm. Expires:_______________
7
<PAGE> 1
Exhibit 10.24
SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
This Second Amendment to Loan and Security Agreement (the
"Agreement"), dated as of January 29, 1996, is made and entered into on the
terms and conditions hereinafter set forth, by and among First American
National Bank, a national banking association, with principal offices located
in Nashville, Tennessee ("Lender"), Children's Comprehensive Services, Inc., a
Tennessee corporation, with principal offices located in Murfreesboro,
Tennessee ("CCS"), and Children's Comprehensive Services of California, Inc., a
California corporation, with principal offices located in Grand Terrace,
California ("CCSC; CCS and CCSC are sometimes hereinafter referred to
individually as a "Borrower" and collectively as "Borrowers"),
W I T N E S S E T H:
WHEREAS, pursuant to the terms of the Loan and Security Agreement
dated as of September 23, 1994, by and between the Lender and the Borrowers
(the "Loan Agreement"), Lender agreed to make available to Borrowers a
revolving line of credit in the original principal amount not exceeding
$2,500,000 (the "Loan"); and
WHEREAS, Lender agreed to renew and extend the maturity date of the
Loan from September 23, 1995, to September 30, 1996, as referred to in a First
Amendment to Loan and Security Agreement dated as of September 23, 1995; and,
WHEREAS, at the request of the Borrowers, Lender has agreed to modify
the Loan to reduce the amount available to $2,000,000,
NOW, THEREFORE, in consideration of the foregoing premises, and other
good and valuable consideration, the receipt and legal sufficiency of which is
hereby acknowledged, the Lender and the borrowers hereby agree to amend the
Loan Agreement, as follows:
1. Definitions. Capitalized terms not otherwise defined herein
shall have the meaning ascribed to such terms in the Loan Agreement.
As used in the Agreement:
"Loan" shall mean a $2,000,000 revolving line of
credit.
"Note" shall mean the $2,000,000 Renewal and
Modification Master Secured Promissory Note dated as of
January 29, 1996, as amended or modified from time to time.
2. Advances. Section 1.1(b) is hereby amended to reflect that
the aggregate amount outstanding under the loan at any one time shall not
exceed the lesser of (i) the Borrowing Base in effect from time to time, or
(ii) $2,000,000.
<PAGE> 2
3. Events of Default. Section 6.1 is hereby amended to delete
subsection (j) and add the following as new subsection (j):
(j) A default or Event of Default shall occur
under the Loan and Security Agreement dated as of January 29,
1996, and between Lender and Helcion, Inc.
4. Conditions. The Agreement of Lender to renew the Loan is
subject to satisfaction of the following conditions precedent, in form and
substance satisfactory to the Lender and its counsel:
a. Renewal Note. Execution and delivery by the
borrowers of a Renewal and Extension Secured Master Promissory
Note in the form attached to this Agreement as Exhibit A.
b. Amended Documents. Execution of such amendments
to the existing Loan Documents as Lender shall deem reasonably
necessary to evidence the renewal of the Loan, in accordance
with the terms and conditions of this Agreement.
c. Corporate Matters. Delivery of a borrowing
resolution and corporate organizational documents for the
borrowers, in form and substance acceptable to the Lender.
d. Officer's Certificate. Delivery of a
certificate executed by an authorized officer of the
Borrowers, confirming that:
(1) The representations and warranties
contained in the Loan Agreement, as amended by this Agreement,
are correct on and as of the date of the execution of this
agreement; and,
(2) No Event of Default exists, nor any event
that, with the giving of notice or the passage of time, or
both, would constitute an Event of Default, has occurred and
is continuing, or will result from transactions contemplated
by this Agreement.
5. Loan Agreement to Remain in Effect. The Borrowers hereby
restate and ratify all of the representations, warranties, terms and conditions
contained in the Loan Agreement as of the date hereof. The Borrowers
acknowledge and agree that the terms and conditions of the Loan Agreement, as
amended hereby, remain in full force and effect.
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have executed this agreement as
of the day and date first above written.
LENDER:
FIRST AMERICAN NATIONAL BANK
By: /s/
------------------------------------
Title:
---------------------------------
BORROWERS:
CHILDREN'S COMPREHENSIVE
SERVICES, INC.
By: /s/ William J. Ballard
------------------------------------
Title: Chairman
---------------------------------
CHILDREN'S COMPREHENSIVE
SERVICES OF CALIFORNIA, INC.
By: /s/ William J. Ballard
------------------------------------
Title: Chairman
---------------------------------
<PAGE> 1
EXHIBIT 11--STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ended March 31,
--------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
PRIMARY
Average shares outstanding 5,368,309 4,861,166 3,360,389
Net effect of dilutive stock
options and warrants--based
on the treasury stock method
using average market price 227,758 183,991 275,172
------------ ------------ ------------
TOTAL 5,596,067 5,045,157 3,635,561
============ ============ ============
Net income (loss) $ 2,524,000 $ 1,904,000 $ 307,000
Reduction of interest expense
based on the assumed reduction
of notes payable-banks -0- -0- 55,000
------------ ------------ ------------
Totals $ 2,524,000 $ 1,904,000 $ 362,000
============ ============ ============
Per share amount $ .45 $ .38 $ .10
============ ============ ============
FULLY DILUTED
Average shares outstanding 5,368,309 4,861,166 3,360,389
Net effect of dilutive stock
options and warrants--based
on the treasury stock method
using the higher of ending or
average market price 319,320 254,230 396,008
------------ ------------ ------------
TOTAL 5,687,629 5,115,396 3,756,397
============ ============ ============
Net income (loss) $ 2,524,000 $ 1,904,000 $ 307,000
============ ============ ============
Per share amount $ .44 $ .37 $ .08
============ ============ ============
</TABLE>
The number of shares and per share amounts have been restated to reflect the
Company's 1 for 2 reverse stock split, effected March 21, 1996.
<PAGE> 1
EXHIBIT 21--SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Percent State of
Owned Incorporation
----- -------------
<S> <C> <C>
Children's Comprehensive Services
of California, Inc. 100% California
</TABLE>
<PAGE> 1
EXHIBIT 23--CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (Nos. 33-33499 and 33-60773) pertaining to the Employee Stock
Purchase Plan, 1987 Employee Stock Option Plan, 1989 Stock Option Plan for
Non-Employee Directors, and 1986 Incentive Stock Plan of Children's
Comprehensive Services, Inc. and in the related Prospectus of our report dated
May 15, 1996, with respect to the consolidated financial statements and
schedule of Children's Comprehensive Services, Inc. included in the Annual
Report (Form 10-K) for the year ended March 31, 1996.
Ernst & Young LLP
Nashville, Tennessee
June 28, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 2427000
<SECURITIES> 0
<RECEIVABLES> 4614000
<ALLOWANCES> 146000
<INVENTORY> 0
<CURRENT-ASSETS> 7452000
<PP&E> 19109000
<DEPRECIATION> 4803000
<TOTAL-ASSETS> 22122000
<CURRENT-LIABILITIES> 3548000
<BONDS> 6052000
0
0
<COMMON> 54000
<OTHER-SE> 11978000
<TOTAL-LIABILITY-AND-EQUITY> 22122000
<SALES> 0
<TOTAL-REVENUES> 24666000
<CGS> 0
<TOTAL-COSTS> 20764000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 38000
<INTEREST-EXPENSE> 869000
<INCOME-PRETAX> 3069000
<INCOME-TAX> 491000
<INCOME-CONTINUING> 2578000
<DISCONTINUED> 0
<EXTRAORDINARY> 54000
<CHANGES> 0
<NET-INCOME> 2524000
<EPS-PRIMARY> .45
<EPS-DILUTED> .44
</TABLE>
