<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 18, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM S-2
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
(Exact name of registrant as specified in its charter)
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<TABLE>
<S> <C> <C>
TENNESSEE 805 SOUTH CHURCH STREET 62-1240866
(State or other jurisdiction MURFREESBORO,TENNESSEE 37130 (I.R.S. Employer
of incorporation or (615) 896-3100 Identification Number)
organization) (Address, including zip
code, and telephone number,
including area code, of
registrant's principal
executive offices)
</TABLE>
------------------------------------
DONALD B. WHITFIELD
VICE PRESIDENT - FINANCE, SECRETARY AND TREASURER
CHILDREN'S COMPREHENSIVE SERVICES, INC.
805 SOUTH CHURCH STREET
MURFREESBORO, TENNESSEE 37130
(615) 896-3100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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<S> <C>
Copies to:
LEIGH WALTON DAVID SYLVESTER
BASS, BERRY & SIMS PLC MARK G. BORDEN
FIRST AMERICAN CENTER HALE AND DORR
NASHVILLE, TENNESSEE 37238 1455 PENNSYLVANIA AVE., N.W.
(615) 742-6200 WASHINGTON, D.C. 20004
(202) 942-8400
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================================
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SHARES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE FEE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value per share......... 2,875,000 $19.50 $56,062,500 $19,332
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</TABLE>
(1) Includes up to 375,000 shares of Common Stock which the Underwriters have
the option to purchase to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) on the basis of the average of the high and low
sales prices of the Registrant's Common Stock on the Nasdaq National Market
on July 16, 1996.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION, DATED JULY 18, 1996
2,500,000 SHARES
CHILDRENS COMPREHENSIVE SERVICES LOGO
COMMON STOCK
Of the 2,500,000 shares of Common Stock offered hereby, 1,500,000 are being
sold by Children's Comprehensive Services, Inc. (the "Company") and 1,000,000
are being sold by certain of the Company's shareholders (the "Selling
Shareholders"). See "Principal and Selling Shareholders." The Company will not
receive any of the proceeds from the sale of shares by the Selling Shareholders.
The Common Stock is quoted on the Nasdaq National Market under the symbol
"KIDS." On July 17, 1996, the last reported sale price of the Common Stock on
the Nasdaq National Market was $21.00 per share. See "Price Range of Common
Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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- -------------------------------------------------------------------------------------------
Price to Underwriting Proceeds to Proceeds to
Public Discount (1) Company (2) Selling
Shareholders
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<S> <C> <C> <C> <C>
Per Share............... $ $ $ $
Total (3)............... $ $ $ $
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</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting estimated offering expenses of $500,000, payable by the
Company.
(3) The Company and the Selling Shareholders have granted to the Underwriters a
30-day option to purchase up to 375,000 additional shares of Common Stock
solely to cover over-allotments, if any. If the Underwriters exercise this
option in full, the Price to Public will total $ , the
Underwriting Discount will total $ , the Proceeds to Company will
total $ and the Proceeds to Selling Shareholders will total
$ . See "Principal and Selling Shareholders" and "Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein when, as and if delivered to and accepted by the Underwriters and subject
to their right to reject any order in whole or in part. It is expected that
delivery of the certificates representing the shares will be made against
payment therefor at the office of Montgomery Securities on or about ,
1996.
------------------------
MONTGOMERY SECURITIES
EQUITABLE SECURITIES CORPORATION
LEHMAN BROTHERS
, 1996
<PAGE> 3
Omitted Graphic and Image Material
The following is a narrative description of graphic and image material
contained in the printed version of the prospectus which has been omitted from
the version filed electronically.
Inside front cover:
1. The heading "Education and Treatment Services for At Risk and Troubled
Youth."
2. Pictures depicting (i) a youth being comforted by a Company staff
member, (ii) a youth working at a computer and (iii) a youth
participating in an obstacle course at one of the Company's therapeutic
wilderness programs. The following caption accompanies the foregoing
pictures:
"Children's Comprehensive Services, Inc. is one of the largest
for-profit providers of education and treatment services for at risk
and troubled youth in the United States and, at March 31, 1996, served
over 1,800 youth through 37 programs.
3. A bar graph showing the continuum of programs provided by the
Company. The following caption accompanies the bar graph:
"The Company offers a comprehensive continuum of consistent, high
quality and cost-effective education and treatment programs, which
enables it to tailor its services to the specific needs of each locality,
client agency and youth population, and the unique needs of each youth.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS, IF ANY, MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE
SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information (including the consolidated financial statements and notes
thereto) included elsewhere in this Prospectus or incorporated by reference
herein, which should be read in its entirety. Unless the context indicates
otherwise, (i) references to programs and services provided by the Company
include programs and services provided by the Company directly and through its
management contract with Helicon, Incorporated ("Helicon"), a Section 501(c)(3)
not-for-profit corporation, (ii) all information gives effect to a one-for-two
reverse split of the Common Stock effective March 21, 1996, and (iii) all
information assumes no exercise of the Underwriters' over-allotment option. See
"Underwriting." The Company's fiscal year ends March 31. References to fiscal
years by date refer to the fiscal year ending March 31 of that year.
THE COMPANY
Children's Comprehensive Services, Inc. is one of the largest for-profit
providers of education and treatment services for at risk and troubled youth in
the United States. The Company's programs include a comprehensive continuum of
services provided in both residential and non-residential settings for youth who
are emotionally disturbed, behaviorally disordered, developmentally delayed or
learning disabled. The Company has contracts to provide its education and
treatment services through the operation and management of specialized education
programs and both open and secure residential treatment centers for local, state
and federal governmental agencies in Alabama, California, Florida, Louisiana,
Tennessee and Texas. As of March 31, 1996, the Company was providing education
and treatment services, either directly or through its management contract with
Helicon, to over 1,800 youth through 37 different programs. Since fiscal 1994,
the Company has expanded its operations by broadening its program offerings,
increasing student capacity at existing programs and developing new programs in
response to privatization and other opportunities. During this period, the
number of youth served in the Company's programs increased from approximately
1,100 as of March 31, 1994 to over 1,800 as of March 31, 1996.
The Company believes the market for the education and treatment of at risk
and troubled youth is a large and growing market. The population of at risk and
troubled youth ranges from youth who have been abused and neglected to those who
are seriously emotionally disturbed. At one end of the spectrum are at risk
youth. These are youth who are not functioning well in school or at home and
exhibit such behavior as aggressive noncompliance with parents and authority
figures, chronic truancy, fighting, running away and alcohol or drug abuse. At
the other end of the spectrum are troubled youth. These are youth who have
committed serious and/or violent crimes, such as sex offenses, robberies,
assaults and drug trafficking. Governmental agencies traditionally have provided
education and treatment services for at risk and troubled youth either directly
or through private providers of these services. The Company believes that the
increasing number of youth in the United States and the increasing prevalence of
juvenile crime have resulted in a growing demand for education and treatment
services for at risk and troubled youth, which will make it increasingly less
likely that governmental entities will be able to provide the necessary services
directly. The Company believes these factors, together with pressures on
governmental agencies to control costs and improve the quality of services, will
further the growing trend throughout the United States toward privatization of
these services.
The Company educates and treats at risk and troubled youth through a
comprehensive continuum of services that are designed to address the specific
needs of each individual in order to return the youth to their schools or
communities. The Company provides education and treatment services in both
non-residential and residential settings, ranging from family preservation
programs to 24-hour secure facilities. The Company's non-residential programs
are designed to meet the special needs of at risk and troubled youth, while
enabling the youth to remain in his or her home and community. These programs
include educational day treatment programs, diversionary education programs,
family preservation programs, homebound education services and on-site education
programs in emergency shelters and diagnostic centers. The Company's residential
programs consist of pre-trial secure residential programs, therapeutic
wilderness programs, a residential psychiatric treatment program, behavioral and
emotional disorder treatment programs , diagnostic and evaluation services and
group homes. Residential services are typically utilized when structured
observation is necessary, when severe behavior management needs are present or
when containment and safety are required.
3
<PAGE> 5
The Company's operating philosophy is to help at risk and troubled youth
reach their potential through the delivery of a comprehensive continuum of
consistent, high quality and cost-effective education and treatment services.
The Company believes the breadth of services it offers differentiates the
Company from other providers, which are typically state and local governmental
agencies or local not-for-profit companies, that provide fewer services. The
Company strives to enhance the quality of its programs, its program offerings
and the quality of its highly trained staff to improve the positive impact of
its programs on the youth they serve. The Company intends to focus on proven
policies and procedures and efficient application of financial resources in
order to continue to provide an attractive, cost-effective alternative to
programs operated directly by governmental entities.
The Company's growth strategy is to expand its existing programs and
program offerings, expand its programs to additional geographic areas in the
United States and pursue strategic acquisitions. The Company intends to build
upon established relationships to expand the Company's current programs and
obtain contracts for additional programs in existing markets, and to develop new
programs in response to societal trends and the special needs of governmental
agencies. The Company also plans to expand its programs to additional geographic
areas. The Company has selectively targeted additional geographic areas, both
within the states in which the Company currently operates and in additional
states, for marketing over the next 12 to 18 months. Finally, because the market
for youth education and treatment services is highly fragmented, the Company
believes there are significant opportunities to enhance its market position
though strategic acquisitions that will enable the Company to expand its
operations into new geographic areas, add additional programs types and
establish new relationships with local governmental entities.
The Company conducts a significant portion of its business through its
relationship with Helicon, a not-for-profit provider of youth education and
treatment services. The Company provides consulting, management and marketing
services to Helicon at 11 programs. For these services, the Company is entitled
to receive a fee based upon the monthly gross revenues from Helicon's programs.
Helicon also leases certain facilities owned by the Company. See "Risk
Factors -- Relationship with Helicon."
The principal executive offices of the Company are located at 805 South
Church Street, Murfreesboro, Tennessee 37130, and its telephone number is (615)
896-3100. Unless the context indicates otherwise, references to the Company also
include its wholly-owned subsidiary, Children's Comprehensive Services of
California, Inc.
RECENT DEVELOPMENTS
1997 First Quarter Results
The Company announced today its preliminary results for the first quarter
of fiscal 1997. For the quarter ended June 30, 1996, the Company's total
revenues increased 20.8% to $6,793,000 from $5,624,000 for the first quarter of
fiscal 1996. Income from operations increased 59.7% to $1,332,000 for the first
quarter of fiscal 1997 from $834,000 for the first quarter of fiscal 1996. Net
income increased 68.2% to $853,000 for the quarter ended June 30, 1996 from
$507,000 for the same period in fiscal 1996. Fully diluted net income per share
for the first quarter of fiscal 1997 increased to $0.15 from $0.09 for the first
quarter of fiscal 1996. These increases were primarily due to higher utilization
and increased efficiencies within existing programs, the impact of programs
opened during fiscal 1996 and increased management fee income from Helicon.
Recently Announced Programs
Riverside County, California. In May 1996, the Company initiated an
educational day treatment program at a residential juvenile facility for 30
students in Riverside County, California. The Company also manages the
facility's residential treatment program for Helicon.
Bexar County, Texas. In July 1996, the Company entered into a contract to
operate a juvenile justice alternative school in Bexar County, Texas. Scheduled
to open in September 1996 for the 1996-1997 school
4
<PAGE> 6
year, the school will accommodate up to 400 students who have been removed from
the county's public school system for various statutory offenses.
Eufaula, Alabama. In July 1996, the Company entered into a contract to
operate a medium-security residential youth center in Eufaula, Alabama. The
program, scheduled to open in August 1996, will serve 60 juvenile males who have
been committed to state custody.
THE OFFERING
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<S> <C>
Common Stock offered by the Company.................... 1,500,000 shares
Common Stock offered by the Selling Shareholders....... 1,000,000 shares
Common Stock to be outstanding after the offering...... 6,999,160 shares(1)
Use of proceeds........................................ To repay indebtedness, finance
expansion of the Company's
programs, including possible
acquisitions, and for general
corporate purposes.
Nasdaq National Market symbol.......................... KIDS
</TABLE>
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(1) Does not include 417,732 shares of Common Stock issuable upon the exercise
of (a) outstanding stock options to purchase 408,116 shares of Common Stock
under the Company's stock incentive plans and (b) an outstanding warrant to
purchase 9,616 shares of Common Stock. See "Description of Capital Stock."
------------------------------
The discussion in this Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
significantly from those discussed in this Prospectus. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed in "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," as well as those discussed
elsewhere in this Prospectus.
5
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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-----------------------------------
1994 1995 1996
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<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Total revenues....................................... $18,849 $20,942 $24,666
Operating expenses:
Employee compensation and benefits................. 11,619 12,676 15,010
Purchased services and other expenses.............. 3,601 3,886 4,590
Depreciation and amortization...................... 1,277 1,080 1,025
Other operating expenses........................... 193 184 139
------- ------- -------
Total operating expenses........................ 16,690 17,826 20,764
------- ------- -------
Income from operations............................... 2,159 3,116 3,902
Interest expense, net................................ 1,397 1,187 833
Other (income) expense, net.......................... 455(1) (44) (2) --
------- ------- -------
Income before income taxes and extraordinary item.... 307 1,973 3,069
Provision for income taxes........................... -- 69 491
------- ------- -------
Income before extraordinary item..................... 307 1,904 2,578
Extraordinary item................................... -- -- 54(3)
------- ------- -------
Net income........................................... $ 307 $ 1,904 $ 2,524
======= ======= =======
Net income per common share, fully diluted........... $ 0.08 $ 0.37 $ 0.44
Weighted average common shares outstanding, fully
diluted............................................ 3,756 5,115 5,688
OTHER OPERATING DATA (AT PERIOD END)(4):
Number of programs................................... 29 34 37
Number of youth in programs:
Residential........................................ 366 396 458
Non-residential.................................... 755 1,255 1,354
------- ------- -------
Total........................................... 1,121 1,651 1,812
</TABLE>
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<CAPTION>
MARCH 31, 1996
--------------------------
ACTUAL AS ADJUSTED(5)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital................................................... $ 3,904 $ 26,462
Total assets...................................................... 22,122 44,479
Total long-term debt.............................................. 6,052 --
Total shareholders' equity........................................ 12,032 40,621
</TABLE>
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(1) Amount consists of write-off of advances to Helicon of $1,024, net of other
income of $569. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus
and incorporated by reference herein.
(2) Amount consists of write-down of property of $122, net of other income of
$166. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Company's Consolidated Financial Statements
and Notes thereto included elsewhere in this Prospectus and incorporated by
reference herein.
(3) Amount represents loss on early extinguishment of debt, net of an income tax
benefit of $10. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus
and incorporated by reference herein.
(4) Other operating data includes data relating to programs operated by the
Company directly and through its management contract with Helicon.
(5) Adjusted to reflect the sale of the 1,500,000 shares of Common Stock offered
hereby by the Company at an assumed public offering price of $21.00 per
share and the application of the estimated net proceeds therefrom, including
the repayment of long-term debt. The Company intends to repay in full the
Company's long-term debt, together with an associated prepayment penalty of
approximately $500, in October 1996. See "Use of Proceeds."
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RISK FACTORS
In addition to the other information contained or incorporated by reference
in this Prospectus, the following risk factors should be considered carefully in
evaluating an investment in the Common Stock offered hereby.
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 three contracts with the State of Tennessee. The existing
contracts with Riverside County and the State of Tennessee expired on June 30,
1996. As is customary, the Company historically has negotiated the renewal of
these contracts in July and August following the end of the fiscal year (June
30) of these governmental entities. The Company currently is negotiating the
renewal of the contract with Riverside County for a period of one year. The
Company has reached agreement regarding the renewal terms of each of the three
Tennessee contracts, two of which were renewed for a period of six months and
the other for a period of one year. The termination or non-renewal of any of
these contracts or the renewal of such contracts on less favorable terms would
have a material adverse effect on the Company, and it would be difficult for the
Company to replace the revenues from these contracts. There can be no assurance
that all of the contracts with Riverside County or the State of Tennessee will
be renewed for the current or any subsequent year on terms acceptable to the
Company. See "Business -- Major Customers."
DEPENDENCE ON GOVERNMENTAL AGENCIES
The Company conducts its business primarily under contracts with state and
local governments and governmental agencies, and virtually all of the Company's
revenues are attributable to such contracts. 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. Numerous
state and local governments, including certain of those with which the Company
has contracts, have experienced fiscal difficulties. Any deferral or reduction
in payment could have a material adverse effect on the Company's cash flow. In
addition, the Company is dependent on governmental entities for referral of a
sufficient number of youth to fill the Company's programs. The failure of the
Company to receive a sufficient number of such referrals may have a material
adverse effect on the Company's financial condition and results of operations.
CONTRACT RENEWAL AND TERMINATION
The Company's contracts are typically subject to renewal annually. The
renewal and financial terms of each contract are dependent upon many factors,
including the quality and type of services provided, governmental budget
constraints, 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, and the Company's customers
generally may terminate their contracts with the Company for cause and upon
certain other specified conditions. Although the Company has not experienced any
such termination to date, there can be no assurance that the Company's customers
will not terminate their contracts with the Company in the future. The loss or
renewal on less favorable terms of certain of the Company's major contracts
would have a material adverse effect on the Company's financial condition and
results of operations.
DEPENDENCE ON ADDITIONAL PROGRAMS FOR GROWTH
The Company's growth is dependent upon its ability to obtain contracts to
operate or manage additional youth education and treatment programs. The
Company's potential for growth will depend on a number of
7
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factors, including the number of at risk and troubled youth requiring the
Company's services, the availability of sufficient funding, 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, to integrate new programs into its management structure on a
profitable basis and to develop new types of education and treatment services.
There can be no assurance that the Company will be able to obtain additional
contracts to operate or manage additional or new programs on favorable terms.
RISKS ASSOCIATED WITH EXPANSION
The Company intends to grow internally through obtaining contracts to
operate additional programs, as well as through possible strategic acquisitions.
When the Company initiates a new program, the program may be unprofitable until
the program population approaches intended levels because the Company staffs its
programs based on specified population levels. 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 operate 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 operations.
REGULATIONS
The industry in which the Company operates is subject to federal, state and
local regulations which are administered by various regulatory authorities and
accrediting bodies. Pursuant to the terms of the Company's contracts and state
laws and regulations, the Company is required to obtain licenses, certifications
and/or accreditations for its programs. 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, certification or accreditation could have
a material adverse effect on the Company's financial condition and results of
operations. 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 operations.
ACCEPTANCE OF PRIVATIZED YOUTH EDUCATION AND TREATMENT PROGRAMS
Management of youth education schools and treatment centers by private
for-profit entities has not achieved complete acceptance by either governments
or the public. Additionally, 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, or may be required or may elect to delegate such responsibilities to
not-for-profit entities. The Company believes 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 hinder public and government acceptance of
privatized youth education and treatment programs. In addition, changes in the
government leadership or 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 markets.
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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 youth 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 youth 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 facilities, programs, personnel or participants. In
addition, the Company's contracts and the laws of certain states generally
require the Company to maintain adequate insurance for its operations and 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
has, on occasion, been sued by third parties and maintains an insurance program
that provides coverage for certain liability risks faced by the Company,
including wrongful death, personal injury, bodily injury 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. See "Business -- Insurance" and "Business -- Legal
Proceedings."
RELATIONSHIP WITH HELICON
The Company conducts a significant portion of its business through its
relationship with Helicon. As of March 31, 1996, the Company was providing
consulting, management and marketing services to Helicon at 11 programs. 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 management fees for these services 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 three fiscal years ended March
31, 1996, 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, and there
can be no assurance that the Company will recognize any management fee income in
the future. As of March 31, 1996, unpaid management fees, lease payments and
advances, plus interest, due the Company from Helicon totaled $6,531,000. Based
on the current level of operations being maintained by Helicon, the Company does
not anticipate collecting any of this amount. The Helicon Agreement expires on
September 1, 1999. The Company also has guaranteed Helicon's obligations under a
bank line of credit in the amount of $500,000. Because Helicon provides services
similar to those provided by the Company, Helicon's business and operations are
subject to certain of the same risks as the Company including, without
limitation, dependence on certain customers, dependence on governmental
agencies, contract renewal and termination and governmental and other
regulations. Any material loss of revenue by Helicon, the inability of Helicon
to pay future management fees or lease payments, the default by Helicon under
its line of credit or the loss or renewal on less favorable terms of the Helicon
Agreement would have a material adverse impact on the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business -- Relationship with Helicon."
9
<PAGE> 11
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. See "Management."
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.
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.
COMPETITION
The youth education and treatment market is highly fragmented, with no
single company or entity holding a dominant market share. The Company competes
with other for-profit companies, not-for-profit entities and governmental
agencies that are responsible for youth education and treatment. The Company
competes primarily on the basis of the quality, range and price of services
offered, its experience in operating 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 youth education or treatment programs. Many 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. Certain not-for-profit entities may offer education and
treatment programs at a lower cost than the Company due in part to government
subsidies, foundation grants, tax deductible contributions or other financial
resources not available to for-profit companies.
DISCRETIONARY USE OF PROCEEDS
Of the net proceeds of approximately $29.1 million expected to be received
by the Company in this offering (assuming an offering price of $21.00), the
Company anticipates using approximately $6.8 million to repay certain
indebtedness and an associated prepayment penalty to one of the Company's
lenders. The remaining net proceeds, estimated at approximately $22.4 million,
will be used for the expansion of the Company's programs and program offerings,
both internally and through possible future strategic acquisitions, and for
general corporate purposes, including working capital. Accordingly, the Company
will have broad discretion as to the application of such proceeds. See "Use of
Proceeds" and "Business -- Growth Strategy."
SEASONALITY AND QUARTERLY FLUCTUATIONS
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
10
<PAGE> 12
the Easter holiday falls. The Company's quarterly results of operations also may
fluctuate significantly as a result of a variety of factors, including the
timing of the initiation of new programs and net revenues contributed by such
new programs. When the Company initiates a new program, the program may be
unprofitable until the program population approaches intended levels because the
Company staffs its programs based on specified population levels. As a result,
the Company's results of operations for any given quarter can be materially
adversely affected by the timing of the opening of one or more programs in any
such quarter. Because of the seasonality of the Company's business and the
significant quarterly fluctuations in the Company's revenues and operating
results, results for any particular quarter may not be indicative of future
results or results for the full fiscal year. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Seasonality and
Quarterly Financial Data."
CONCENTRATION OF VOTING CONTROL
Upon completion of this offering, T. Rowe Price Strategic Partners Fund II,
L.P. ("T. Rowe Price") and the directors and executive officers of the Company
will, collectively, own beneficially or control approximately 23.8% of the
outstanding shares of Common Stock (21.0% assuming exercise of the Underwriters'
over-allotment option). Accordingly, these persons collectively will have
substantial influence over the affairs of the Company, including the ability to
influence the election of directors and other matters requiring shareholder
approval.
VOLATILITY OF MARKET PRICE
From time to time after this offering, there may be significant volatility
in the market price of the Common Stock. The Company believes that the current
market price of the Common Stock reflects expectations that the Company will be
able to continue to operate its programs profitably and to develop additional
and new programs at a significant rate and operate them profitably. If the
Company is unable to operate its programs profitably or develop programs at a
pace that reflects the expectations of the market, investors could sell shares
of Common Stock at or after the time that it becomes apparent that such
expectations may not be realized, resulting in a decrease in the market price of
the Common Stock. In addition to the operating results of the Company, changes
in earnings estimated by analysts, changes in general conditions in the economy
or the financial markets or other developments affecting the Company or the
private youth services industry could cause the market price of the Common Stock
to fluctuate substantially. In recent years, the stock market has experienced
extreme price and volume fluctuations. This volatility has had a significant
effect on the market prices of securities issued by many companies for reasons
unrelated to their operating performance. See "Price Range of Common Stock."
SHARES ELIGIBLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock or the availability of such shares for future sale will
have on the market price of the Common Stock prevailing from time to time. Sales
of substantial amounts of Common Stock or the perception that such sales may
occur could adversely affect prevailing market prices for the Common Stock. An
aggregate of 5,499,160 shares of Common Stock are currently outstanding,
excluding 417,732 shares subject to outstanding stock options and a warrant.
Upon completion of this offering, approximately 5,443,563 shares of Common Stock
will be freely transferable and approximately 1,555,597 shares will be
transferable pursuant to Rule 144 under the Securities Act of 1933, as amended
(the "Securities Act"). The Company, the directors and executive officers of the
Company and the Selling Shareholders have agreed not to sell any shares of
Common Stock for 120 days after the date of this Prospectus (with certain
limited exceptions) without the prior written consent of Montgomery Securities.
Following this offering, beneficial holders of 1,573,105 shares of Common Stock
have contractual rights with respect to the registration of such shares. See
"Description of Capital Stock -- Registration Rights" and "Underwriting."
11
<PAGE> 13
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF THE COMPANY'S RESTATED CHARTER AND
BYLAWS
Certain provisions of the Company's Restated Charter, as amended (the
"Restated Charter"), and Bylaws (the "Bylaws") may be deemed to have
anti-takeover effects and may discourage, delay or prevent a takeover attempt
that a shareholder might consider in its best interest. The Bylaws establish
certain advance notice procedures for nominations of candidates for election as
directors and for shareholder proposals to be considered at shareholders'
meetings. In addition, pursuant to the Restated Charter the Board of Directors,
without further action of the shareholders, is permitted to issue and fix the
terms of preferred stock which may have rights senior to those of the Common
Stock. As a Tennessee corporation, the Company also is subject to the provisions
of the Tennessee Business Combination Act and the Tennessee Greenmail Act, each
of which may be deemed to have anti-takeover effects and may discourage, delay
or prevent a takeover attempt that might be considered in the best interest of
the Company's shareholders. See "Description of Capital Stock." The Company's
credit agreements with certain lenders also contain provisions that may
discourage proposals or bids to acquire the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
RISKS ASSOCIATED WITH FORWARD LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), which are intended to be
covered by the safe harbors created thereby. Those statements include, but may
not be limited to, the discussions of the Company's expectations concerning its
future profitability, the discussion of the Company's relationships with Helicon
and certain of the Company's major customers and the Company's operating and
growth strategy, including possible strategic acquisitions. Investors are
cautioned that all forward-looking statements involve risks and uncertainties
including, without limitation, the factors set forth under the caption "Risk
Factors" in this Prospectus. Although the Company believes that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of the assumptions could be inaccurate, and therefore, there can be no assurance
that the forward-looking statements included in this Prospectus will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
12
<PAGE> 14
USE OF PROCEEDS
The net proceeds from the sale of the 1,500,000 shares of Common Stock
offered hereby by the Company are estimated to be approximately $29.1 million
(approximately $33.6 million if the Underwriters' over-allotment option is
exercised in full), assuming a public offering price of $21.00 per share and
after deducting the underwriting discount and estimated offering expenses
payable by the Company. The Company will not receive any proceeds from the sale
of shares of Common Stock by the Selling Shareholders.
The Company intends to use approximately $6.8 million of the net proceeds
to repay all of the Company's indebtedness to National Health Investors, Inc.
("NHI") pursuant to a Loan Agreement, dated September 23, 1994, by and between
the Company and NHI (the "NHI Agreement"). The indebtedness to NHI bears
interest at a rate of 11.5% per annum and matures on September 23, 1999. The
Company anticipates repaying the outstanding indebtedness of $6.3 million, plus
a prepayment penalty of approximately $500,000, to NHI in October 1996. Pursuant
to the terms of the NHI Agreement, the Company plans to repay the NHI
indebtedness in October 1996 to take advantage of a reduction in the prepayment
penalty effective October 1, 1996. As a result of the repayment of this debt,
the Company expects to incur a pre-tax extraordinary charge of approximately
$620,000 during the quarter ending December 31, 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The remaining net proceeds, estimated at $22.4 million, will be used for
the expansion of the Company's programs and program offerings, both internally
and through possible future strategic acquisitions, and for general corporate
purposes, including working capital. See "Risk Factors -- Discretionary Use of
Proceeds" and "Business -- Growth Strategy." The Company engages from time to
time in discussions regarding possible acquisitions, however, the Company
presently has no agreements, arrangements or commitments with respect to any
such acquisition. Pending such uses, the net proceeds will be invested in
investment grade interest-bearing securities.
13
<PAGE> 15
PRICE RANGE OF COMMON STOCK
The Common Stock is quoted on the Nasdaq National Market under the symbol
"KIDS." The following table sets forth, for the periods indicated, the high and
low closing sale prices for the Common Stock as reported on the Nasdaq National
Market.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
Fiscal 1995
First Quarter............................................................ $ 4 1/4 $ 3 1/4
Second Quarter........................................................... 6 5/8 3 7/8
Third Quarter............................................................ 6 1/4 2 1/2
Fourth Quarter........................................................... 6 1/4 3 3/4
Fiscal 1996
First Quarter............................................................ $ 5 1/2 $ 4 1/2
Second Quarter........................................................... 7 1/2 4 1/2
Third Quarter............................................................ 8 5 3/4
Fourth Quarter........................................................... 11 7/8 6 7/8
Fiscal 1997
First Quarter............................................................ $25 7/8 $10
Second Quarter (through July 17, 1996)................................... 25 1/4 18 3/4
</TABLE>
On July 17, 1996, the last reported sale price of the Common Stock as
reported on the Nasdaq National Market was $21.00 per share. As of July 15,
1996, there were 337 shareholders of record of the Common Stock.
DIVIDEND POLICY
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
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. In
addition, the Company's current revolving credit agreement prohibits the Company
from declaring or paying any cash dividends on its Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
14
<PAGE> 16
CAPITALIZATION
The following table sets forth the total capitalization of the Company as
of March 31, 1996, on an actual basis and as adjusted to give effect to the sale
of the 1,500,000 shares of Common Stock offered hereby by the Company, at an
assumed public offering price of $21.00 per share, and the application of the
net proceeds therefrom as described under "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
---------------------------
ACTUAL AS ADJUSTED(1)
-------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt................................................... $ 6,052 $ --
Shareholders' equity:
Preferred Stock, $1.00 par value per share; 10,000,000 shares
authorized, no shares outstanding........................... -- --
Common Stock, $.01 par value per share; 10,000,000 shares
authorized; 5,378,726 shares issued and outstanding, actual;
6,878,726 shares issued and outstanding, as adjusted(2)..... 54 69
Additional paid-in capital..................................... 25,422 54,517
Accumulated deficit............................................ (13,444) (13,965)
--------- ------
Total shareholders' equity....................................... 12,032 40,621
--------- ------
Total capitalization............................................. $ 18,084 $ 40,621
========= ======
</TABLE>
- ---------------
(1) The Company intends to repay in full the Company's long-term debt in October
1996. See "Use of Proceeds."
(2) Does not include 473,666 shares of Common Stock issuable as of March 31,
1996 upon the exercise of (a) outstanding stock options to purchase 414,050
shares of Common Stock under the Company's stock incentive plans and (b)
outstanding warrants to purchase 59,616 shares of Common Stock. The number
of authorized shares does not reflect a proposed increase in the number of
authorized shares of Common Stock to 50,000,000 that the Board of Directors
will submit to the Company's shareholders for approval at the annual meeting
of shareholders to be held August 14, 1996 (the "Annual Meeting"). See
"Description of Capital Stock."
15
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth for the periods indicated selected
consolidated financial data for the Company. The selected statement of
operations and balance sheet data presented below for the fiscal years ended
March 31, 1992, 1993, 1994, 1995 and 1996 have been derived from the Company's
consolidated financial statements that have been audited by Ernst & Young LLP,
independent auditors. This information should be read in conjunction with the
consolidated financial statements and the notes thereto included elsewhere in
this Prospectus and incorporated by reference herein and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
--------------------------------------------------------
1992 1993 1994 1995 1996
------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Operating revenues(1)............... $30,331 $ 24,541 $18,849 $20,575 $23,630
Management fee income............... -- -- -- 367 1,036
------- -------- ------- ------- -------
Total revenues................... 30,331 24,541 18,849 20,942 24,666
Operating expenses:
Employee compensation and
benefits......................... 21,000 16,605 11,619 12,676 15,010
Purchased services and other
expenses......................... 7,612 7,235 3,601 3,886 4,590
Depreciation and amortization....... 1,820 2,072 1,277 1,080 1,025
Other operating expenses............ 607 595 193 184 139
------- -------- ------- ------- -------
Total operating expenses......... 31,039 26,507 16,690 17,826 20,764
------- -------- ------- ------- -------
Income (loss) from operations......... (708) (1,966) 2,159 3,116 3,902
Interest expense, net................. 147 1,136 1,397 1,187 833
Other (income) expense, net........... 2,508(2) 7,674(3) 455(4) (44)(5) --
------- -------- ------- ------- -------
Income (loss) before income taxes and
extraordinary item.................. (3,363) (10,776) 307 1,973 3,069
Provision for income taxes............ -- -- -- 69 491
------- -------- ------- ------- -------
Income (loss) before extraordinary
item................................ (3,363) (10,776) 307 1,904 2,578
Extraordinary item.................... -- -- -- -- 54(6)
------- -------- ------- ------- -------
Net income (loss)..................... $(3,363) $(10,776) $ 307 $ 1,904 $ 2,524
======= ======== ======= ======= =======
Net income (loss) per share, fully
diluted............................. $ (1.10) $ (3.52) $ 0.08 $ 0.37 $ 0.44
Weighted average common shares
outstanding, fully diluted.......... 3,059 3,069 3,756 5,115 5,688
BALANCE SHEET DATA (AT PERIOD END):
Working capital (deficit)........... $(7,233) $(11,279) $(9,847) $ 1,422 $ 3,904
Total assets........................ 30,606 21,330 20,146 19,449 22,122
Long-term debt and capital lease
obligations...................... 1,359 1,312 8 6,924 6,052
Shareholders' equity................ 15,564 4,788 5,786 9,456 12,032
</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 $328, other related party
expense of $154, litigation settlement of $1,000, write-off of deferred
financing and pre-opening costs of $808 and loss on disposition of property
of $218.
(3) 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 merger costs of $567, provision for restructuring expenses of
$759 and loss on disposition of property of $15.
(4) Amount consists of write-off of advances to Helicon of $1,024, net of other
income of $569.
(5) Amount consists of write-down of property of $122, net of other income of
$166.
(6) Amount represents losses on early extinguishment of debt, net of an income
tax benefit of $10.
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 its management contract with
Helicon, to manage 37 programs in five 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 non-residential 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, and there can be
no assurance that the Company will recognize any management fee income in the
future. As of March 31, 1996, unpaid management fees, lease payments and
advances, plus interest, due the Company from Helicon totaled $6,531,000. Based
on the current level of operations being maintained by Helicon, the Company does
not anticipate collecting any of this amount. The Company has fully reserved
this amount, and future payments received from Helicon on these amounts, if any,
will be recognized by the Company on the cash basis. The Helicon Agreement
expires September 1, 1999. The Company also has guaranteed Helicon's obligations
under a bank line of credit in the amount of $500,000. See " -- Liquidity and
Capital Resources."
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.
The Company intends to use a portion of the net proceeds from this offering
to repay all of the Company's outstanding indebtedness to NHI. Pursuant to the
terms of the NHI Agreement, the Company will incur a prepayment penalty equal to
8% of the amount of indebtedness prepaid. The Company plans to repay the NHI
indebtedness in October 1996 to take advantage of a reduction in the prepayment
penalty effective October 1, 1996. Accordingly, as a result of the repayment of
this debt, the Company expects to incur a pre-tax extraordinary charge of
approximately $620,000, which will have a negative impact on the Company's net
income for the quarter ending December 31, 1996. See "Use of Proceeds."
The Company's quarterly results also may fluctuate significantly as a
result of a variety of factors, including the timing of the initiation of new
programs and net revenue contributed by such new programs. When the Company
initiates a new program, the program may be unprofitable until the program
population
17
<PAGE> 19
approaches intended levels because the Company staffs its programs based on
specified population levels. In the first quarter of fiscal 1997, the Company
executed contracts for three new programs, two of which will open in the second
quarter of fiscal 1997. The Company expects to incur operating losses at these
two programs until such time as the program populations approach intended
levels. As a result, the Company's results of operations will be adversely
affected in the second quarter of fiscal 1997. See " -- Seasonality and
Quarterly Results of Operations."
The following discussion should be read in conjunction with "Selected
Consolidated Financial Data" and the Company's Consolidated Financial Statements
and Notes thereto included elsewhere in this Prospectus and incorporated by
reference herein.
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>
FISCAL YEAR ENDED MARCH 31,
----------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Operating revenues............................................ 100.0% 9 8.2% 9 5.8%
Management fee income......................................... -- 1.8 4.2
------ ------ ------
Total revenues.............................................. 100.0% 100.0% 100.0%
Employee compensation and benefits............................ 61.6% 60.5% 60.9%
Purchased services and other expenses......................... 19.1% 18.6% 18.6%
Depreciation and amortization................................. 6.8% 5.2% 4.2%
Income from operations........................................ 11.5% 14.9% 15.8%
Interest expense, net......................................... 7.5% 5.7% 3.5%
Write-off of advances to Helicon.............................. 5.4% -- --
Other income.................................................. 3.0% 0.8% --
Provision for income taxes.................................... -- 0.3% 2.0%
Net income.................................................... 1.6% 9.0% 10.2%
</TABLE>
Fiscal 1996 Versus Fiscal 1995
Total revenues for fiscal 1996 increased $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 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.
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 prior year resulted 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.
18
<PAGE> 20
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 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 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 to $0 from $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.
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. See " -- Liquidity
and Capital Resources."
Fiscal 1995 Versus Fiscal 1994
Total revenues for fiscal 1995 increased $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 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
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<PAGE> 21
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.
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 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
treatment programs were also involved in the Company's education programs. Due
to the level of operations maintained by Helicon, no advances were made 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 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 who was
responsible for obtaining workers' 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 write-down
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.
SEASONALITY AND QUARTERLY FINANCIAL DATA
The Company has historically experienced and expects to continue to
experience seasonal fluctuations in its revenues. 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. The Company's quarterly results also
may fluctuate significantly as a result of a variety of factors, including the
timing of the initiation of new programs and net revenue contributed by such new
programs. When the Company initiates a new program, the program may be
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<PAGE> 22
unprofitable until the program population approaches intended levels because the
Company staffs its programs based on specified population levels. As a result,
the Company's results of operations for any given quarter can be materially
adversely affected by the timing of the opening of one or more programs in any
such quarter. Because of the seasonality of the Company's business and the
significant quarterly fluctuations in the Company's revenues and operating
results, results for any particular quarter may not be indicative of future
results or results for the full fiscal year.
The following table presents unaudited quarterly financial results for each
of the Company's last eight fiscal quarters. The unaudited information has been
prepared on the same basis as the audited consolidated financial statements
included elsewhere in this Prospectus and incorporated by reference herein and
includes all adjustments, consisting of only normal recurring adjustments, which
management considers necessary for a fair presentation of the financial data for
such periods. The operating results for any fiscal quarter are not necessarily
indicative of results of operations for any future period.
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
---------------- ---------------- ---------------- ----------------
1995 1996 1995 1996 1995 1996 1995 1996
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total revenue........... $5,300 $5,624 $4,609 $5,570 $5,076 $6,204 $5,957 $7,268
Income from
operations............ 886 834 507 653 668 993 1,055 1,422
Net earnings............ 497 507 220 302 528 668 659 1,047
Net earnings per common
share, fully
diluted............... 0.10 0.09 0.04 0.05 0.10 0.12 0.12 0.18
</TABLE>
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 as of March 31, 1996, was $3,904,000, as compared to
$1,422,000 as of 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 for
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.
In September 1994, the Company executed agreements with NHI and T. Rowe
Price pursuant to which 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. As of 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. As of
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
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<PAGE> 23
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 an additional term of one
year, bears interest at prime plus 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 as of March 31, 1996, availability under the line of credit was
approximately $1,540,000.
The NHI Agreement and the FANB line of credit require the Company to comply
with certain restrictive covenants with respect to its business and operations
and to maintain certain financial ratios that become more stringent over time.
The restrictive covenants under these agreements prohibit the Company, without
the prior consent of its lenders, from entering into major corporate
transactions, such as a merger, tender offer or sale of its assets, incurring
additional indebtedness, and, under the FANB line of credit, declaring or paying
cash dividends.
In October 1996, the Company intends to use a portion of the net proceeds
from this offering to repay all of the Company's indebtedness to NHI. See "Use
of Proceeds." Following the repayment of this indebtedness, the provisions of
the NHI Agreement and the obligations under the NHI equity and revenue
participation agreements will terminate. The Company also intends to pursue the
negotiation of a new credit facility following this offering to increase the
amount of credit available to the Company. There can be no assurance, however,
that the Company will enter into an agreement for a new credit facility.
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. See "Business -- Growth Strategy."
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. The Company believes that operations, amounts available under
its line of credit and the net proceeds from this offering 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
operations since inception. Certain of the Company's existing contracts provide
for annual price increases based upon changes in the Consumer Price Index.
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<PAGE> 24
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.
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<PAGE> 25
BUSINESS
GENERAL
Children's Comprehensive Services, Inc. is one of the largest for-profit
providers of education and treatment services for at risk and troubled youth in
the United States. The Company's programs include a comprehensive continuum of
services provided in both residential and non-residential settings for youth who
are emotionally disturbed, behaviorally disordered, developmentally delayed or
learning disabled. The Company has contracts to provide its education and
treatment services through the operation and management of specialized education
programs and both open and secure residential treatment centers for local and
state and federal governmental agencies in Alabama, California, Florida,
Louisiana, Tennessee and Texas. As of March 31, 1996, the Company was providing
education and treatment services, either directly or through its management
contract with Helicon, to over 1,800 youth through 37 different programs. Since
fiscal 1994, the Company has expanded its operations by broadening its program
offerings, increasing student capacity at existing programs, and developing new
programs in response to privatization and other opportunities. During this
period, the number of youth served in the Company's programs increased from
approximately 1,100 as of March 31, 1994 to over 1,800 as of March 31, 1996.
THE MARKET FOR THE COMPANY'S SERVICES
The Company believes the market for the education and treatment of at risk
and troubled youth is a large and growing market. The population of at risk and
troubled youth ranges from youth who have been abused and neglected to those who
are seriously emotionally disturbed. At one end of the spectrum are at risk
youth. These are youth who are not functioning well in school or at home,
exhibit such behavior as aggressive noncompliance with parents and authority
figures, chronic truancy, fighting, running away, and alcohol or drug abuse. Of
the 5.1 million children in special education programs during the 1992-93 school
year, 2.4 million were diagnosed as having specific learning disabilities and
over 400,000 were considered seriously emotionally disturbed. At the other end
of the spectrum are troubled youth. These are youth who have committed serious
and/or violent crimes, such as sex offenses, robberies, assaults and drug
trafficking. In 1994, there were 2.7 million arrests of juveniles under 18 years
of age, accounting for 19% of all violent crime and 35% of all property crime
arrests. The Company believes that factors contributing to the increase in the
rate of youth crime include the ready availability of firearms, the prevalence
of drug addiction, violence portrayed in the media and the increase in the
number of single parent homes. In addition, a recent census projection stated
that the number of youth in the United States is expected to increase by 21% to
nearly 21 million by the year 2005.
The federal Individuals with Disabilities Education Act mandates that all
children with disabilities be provided a free and appropriate education which
emphasizes special education and related services designed to meet their unique
needs. Governmental agencies traditionally have provided education and treatment
services for at risk and troubled youth either directly or through private
providers of these services. The Company believes that the increasing number of
youth in the United States and the increasing prevalence of juvenile crime have
resulted in a growing demand for education and treatment services for at risk
and troubled youth, which will make it increasingly less likely that
governmental entities will be able to provide the necessary services directly.
As a result, there is a growing trend throughout the United States toward
privatization of 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. Furthermore, the Company believes that, as
juvenile crime and the demand for special education services for at risk and
troubled youth continues to grow and 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
currently privately managed. Based on the combination of the current demographic
and societal factors affecting at risk and troubled youth, the Company believes
that the demand for education and treatment services for these youth will
continue to escalate and, increasingly, the private sector will be called upon
to meet the growing demands for these services.
24
<PAGE> 26
OPERATING STRATEGY
The Company's operating philosophy is to help at risk and troubled youth
reach their potential through the delivery of a comprehensive continuum of
consistent, high quality and cost-effective education and treatment services.
Comprehensive Continuum of Services. The Company offers a comprehensive
continuum of services to governmental entities ranging from non-restrictive
programs, such as family preservation and non-residential special education
programs, to secure residential and medium-security juvenile correctional
facilities. The Company believes its primary emphasis on education and
treatment, as well as consistency and flexibility in the delivery of its
services, are critical to the success of its programs. Accordingly, the
Company's programs are tailored to the specific needs of each locality, each
client agency, each youth population and, most importantly, to the unique needs
of each student or resident. The Company believes that this continuum of
services allows it to address the specific needs of each segment of the at risk
and troubled youth population and to satisfy the demands for such education and
treatment services by a community. Through its relationship with Helicon, the
Company also is able to deliver services to governmental agencies who are
required or elect to contract with not-for-profit entities for the provision of
youth education and treatment services.
Quality Management of Existing Programs. The Company strives to enhance
the quality of its programs, its program offerings and the quality of its highly
trained and dedicated staff to improve the positive impact that its education
and treatment programs have on the youth they serve. The Company has developed a
model of ongoing program evaluation and quality management which the Company
believes provides critical feedback to measure the qualitative performance of
its various programs. The Company believes its reputation for providing high
quality programs is an important competitive advantage which enables it to renew
existing contracts and expand services to its current clients, as well as
capitalize on privatization opportunities with additional governmental agencies.
Cost-Effective Solution. The Company believes that it is able to design,
develop and operate education and treatment facilities and programs at a lower
cost than governmental agencies that are responsible for performing such
services. The Company intends to focus on adherence to proven policies and
procedures and efficient application of financial resources in order to continue
to provide an attractive, cost-effective alternative to programs operated
directly by governmental entities.
GROWTH STRATEGY
The Company's growth strategy involves the expansion of its current
programs and the development of additional programs, expansion into new
geographic areas and possible strategic acquisitions.
Expansion of Current Programs and Development of Additional Programs. The
Company intends to build upon established relationships with governmental
contracting agencies and their administrative staffs to expand the Company's
current programs and to obtain contracts for additional programs in markets in
which the Company currently operates. The Company believes that once it has
established a relationship with a governmental agency and demonstrated expertise
and reliability, the Company will be better able to identify business
opportunities and obtain contracts for additional programs and services.
Furthermore, the Company believes that as its reputation with a governmental
entity is strengthened, the probability of such governmental entity utilizing
private services for new types of programs will increase. In addition to its
current continuum of programs, the Company also is prepared to develop new
programs in response to societal trends and the special needs of governmental
agencies.
Geographic Expansion in the United States. The Company plans to expand its
programs to additional geographic areas within the states in which the Company
currently operates and in additional states. The Company believes that the
public schools, correctional systems and youth services providers of many state
and local governments are overburdened and financially constrained and,
therefore, the private sector increasingly will be called upon to meet the
growing demands throughout the United States for education and treatment
services to at risk and troubled youth. The Company has selectively targeted
additional geographic areas for
25
<PAGE> 27
marketing efforts during the next 12 to 18 months based on probability of
success, geographic location, existing competition, potential profitability and
political acceptability.
Strategic Acquisitions. The market for youth education and treatment
services is highly fragmented. The Company believes this fragmented market
provides significant opportunities for the Company to enhance its market
position in existing and new markets through strategic acquisitions of
for-profit and not-for-profit companies in the youth education and treatment
services field. The Company intends to pursue acquisitions that will expand the
Company's operations into new geographic areas, add additional program types to
the Company's continuum of services and establish relationships with local
governmental entities. Although the Company currently has no agreement or
understanding with respect to any such acquisition, the Company continually
evaluates opportunities to expand its business through strategic acquisitions of
other companies that provide youth education and treatment services.
SERVICES PROVIDED BY THE COMPANY
The Company, directly and through programs managed for Helicon, educates
and treats at risk and troubled youth through a comprehensive continuum of
services that are designed to address the specific needs of each youth and to
return the youth to their schools and communities. The Company's programs,
ranging from non-residential family preservation programs to 24-hour secure
facilities, are based predominantly on behavioral models designed to achieve
behavior modification through therapy. The Company's programs include
computer-based educational/vocational training and comprehensive programs for
behavior change, including individual, group and family counseling, social and
independent living skills training, empathy development, critical thinking and
problem solving, anger management, substance abuse treatment and relapse
prevention. These programs 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. Although certain
youth in the Company's programs require both drug treatment and therapy, the
Company's goal is to minimize or eliminate the use of drugs whenever possible
over the course of its involvement with the youth. When drug treatment is
appropriate, drugs are prescribed by independent physicians and may be
administered by Company personnel. Management believes that the breadth of the
Company's services makes the Company attractive to local, state and federal
governmental agencies. As of March 31, 1996, the Company was providing services
to 1,354 youth in its 24 non-residential programs and 458 youth in its 13
residential programs.
Non-Residential Education and Treatment. The Company's non-residential
youth services programs 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. As described below, non-residential services provided by
the Company include educational day treatment programs, diversionary education
programs, family preservation programs, homebound education programs and on-site
education programs in emergency shelters and diagnostic centers. Referral
sources for non-residential services include school districts, juvenile courts
and state youth services departments.
Educational Day Treatment Programs. The Company's educational day
treatment programs provide specialized educational services for youth with
clinically definable emotional disorders. These programs provide the
opportunity to remedy deficits in a student's education and foster the
development of responsible social behaviors. For these students,
traditional public school programs have not been able to sustain motivation
or cooperation or have not provided needed specialized education services.
The Company's educational day treatment programs are staffed with teachers
and counselors with expertise in behavioral management to provide high
quality special education services, including specialized teaching methods,
individual and group therapy provided by licensed clinicians,
computer-based curriculum and instructional delivery and designs.
Diversionary Education Programs. The Company's diversionary education
programs provide educational and therapeutic day treatment services to
youth whose social function in school and society has been unsatisfactory,
delinquent and status offending youth and youthful sex offenders. These
programs
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<PAGE> 28
are designed to break the cycle of repeated teen delinquency and to
strengthen the youth's ties and relationships with his or her family and
community. In addition to individually tailored academic programs, these
programs are designed to provide intensive supervision, individualized
education and counseling, vocational counseling and job placement and
independent living skills in an effort to remotivate the student's interest
in school, develop self-discipline and improve social skills, self-esteem
and cooperation with others.
Family Preservation Programs. The Company's family preservation
programs provide a blend of home-based, intensive crisis intervention
services to at risk and troubled youth and their families. These programs
are designed to help the youth improve their coping and living skills and
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 and to keep
the youth in the family.
Homebound Education Programs. The Company's homebound education
programs provide educational services to students who are pregnant or 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 school
normally attended by the student.
On-Site Education Programs in Shelters and Diagnostic Centers. The
Company's shelter education program provides on-site educational services
at multiple locations to at risk and troubled youth who have been removed
from their homes and are in residence at emergency shelters and diagnostic
centers. The objective of this program is to provide continuity in a
student's education in a safe and secure environment while the youth awaits
permanent placement.
Residential Education and Treatment. The Company's residential education
and treatment programs provide highly structured therapeutic environments and
comprehensive treatment for at risk and troubled youth when structured
observation is necessary, when severe behavior management needs are present or
when containment and safety are required. As described below, the Company's
residential services include pre-trial secure residential programs, therapeutic
wilderness programs, a residential psychiatric treatment program, residential
treatment programs, diagnostic and evaluation services and group homes. Referral
sources for these services include governmental departments of probation, mental
health, social services and youth corrections.
Pre-Trial Secure Residential Programs. The Company's pre-trial secure
residential programs house youth awaiting disposition of their court cases.
While in detention, the emotional condition and educational needs of the
youth are assessed by the Company to help the courts determine the
appropriate permanent placement following adjudication. In addition,
residents at the Company's pre-trial secure residential centers receive
educational and treatment services, such as substance abuse and individual
and group counseling, to provide these youth with a meaningful start
towards 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 include educational and counseling services, and a regimen of
structured physical activity, including drill and ceremony training and
work projects. The Company believes its wilderness programs are an
effective method to educate youth and teach the discipline and self-respect
necessary to prevent a youth from repeating or engaging in more serious
delinquent behavior.
Residential Psychiatric Treatment Program. The Company's residential
psychiatric treatment program provides medical and behavioral treatment to
behaviorally and emotionally disturbed youth who suffer from depression,
chemical dependency and other psychiatric disorders. The Company's
psychiatric treatment program is the only Company program based on a
medical model and is designed to achieve behavior modification through the
use of therapy and medical treatment, including pharmaceuticals. Medical
treatment services at this program are provided by independent physicians
who contract with the Company to provide such services. Services offered at
this program include therapy groups, drug
27
<PAGE> 29
education and 12-step recovery meetings. A primary goal of the Company's
residential psychiatric program is to develop positive support systems for
the adolescent to allow for discharge to a less structured environment. In
1996, this program received accreditation "With Highest Distinction" from
the Joint Commission on Accreditation of Healthcare Organizations, and is
also a CHAMPUS certified "Prime Provider."
Residential Treatment Programs. The Company's residential treatment
programs serve behaviorally and emotionally disturbed youth, such as youth
who have substance abuse problems, youth suffering from depression and
youth sex offenders. While in the Company's residential treatment centers,
youth participate in individual, group and family therapy, recreation
therapy and educational programs. These programs focus on teaching more
appropriate behavior through cognitive restructuring, behavior management
and counseling.
Diagnostic and Evaluation Services Programs. The Company's diagnostic
and evaluation services are designed to provide short-term evaluation and
assessment services in a staff secure setting to youth who are in state
custody.
Group Homes. The Company's group home programs provide shelter care,
transitional services and independent living programs for youth in a
family-like setting in residential neighborhoods. These programs focus on
teaching family living and social skills, and include both individual and
group counseling.
As of March 31, 1996, the Company was providing educational and treatment
services, directly or through management contracts with Helicon, to over 1,800
youth through 37 programs. The table below sets forth certain information
regarding the Company's youth services programs in operation as of March 31,
1996.
<TABLE>
<CAPTION>
PROVIDER AVERAGE COMMENCEMENT
OF POPULATION FOR OF
LOCATION PROGRAM TYPE RECORD CAPACITY FISCAL 1996 OPERATIONS
- -------------------------------- ------------------------------------ -------- -------- -------------- ------------
<S> <C> <C> <C> <C> <C>
NON-RESIDENTIAL PROGRAMS:
California:
Banning....................... Educational day treatment Company 60 23 1985
Barstow....................... Educational day treatment Company 40 16 1994
Beaumont...................... Educational day treatment Company 40 23 1985
Chula Vista................... Educational day treatment Company 79 36 1994
Desert Hot Springs............ Educational day treatment Company 15 8 1992
Grand Terrace................. Educational day treatment Company 179 156 1985
Mid-Valley.................... Educational day treatment Company 84 80 1988
Quail Valley.................. Educational day treatment Company 40 30 1990
Ramona........................ Educational day treatment Company 40 28 1990
Riverside..................... Educational day treatment Company 132 117 1992
San Bernardino................ Educational day treatment Company 60 31 1980
Steele Canyon................. Educational day treatment Company 36 31 1994
Victorville................... Educational day treatment Company 40 32 1987
Florida:
Jacksonville.................. Diversionary education Company 32 9 1995
Louisiana:
New Orleans................... Diversionary education Company 30 29 1991
New Orleans................... Family preservation Company N/A 4 1994
Tennessee:
Covington..................... Diversionary education Helicon 30 29 1994
Clarksville................... Diversionary education Helicon 40 40 1994
Murfreesboro.................. Family preservation Helicon N/A 18 1988
</TABLE>
28
<PAGE> 30
<TABLE>
<CAPTION>
PROVIDER AVERAGE COMMENCEMENT
OF POPULATION FOR OF
LOCATION PROGRAM TYPE RECORD CAPACITY FISCAL 1996 OPERATIONS
- -------------------------------- ------------------------------------ -------- -------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Murfreesboro.................. Educational day treatment Helicon 20 16 1990
Murfreesboro.................. Diversionary education Helicon 40 40 1994
Nashville..................... Diversionary education Helicon 40 40 1990
Nashville..................... Homebound education Company N/A 84 1991
Various....................... On-site education services in Helicon 403 359 1993
emergency shelters and diagnostic
centers
RESIDENTIAL PROGRAMS:
Alabama:
Eutaw......................... Therapeutic wilderness Company 20 15 1995
Jasper........................ Therapeutic wilderness Company 20 16 1994
Selma......................... Therapeutic wilderness Company 26 10 1996
Tuscaloosa.................... Pre-trial secure residential Company 27 24 1989
Tuscumbia..................... Pre-trial secure residential Company 25 19 1992
California:
Mid-Valley.................... Residential treatment Helicon 84 81 1988
Ramona........................ Residential psychiatric treatment Helicon 40 36 1984
Riverside..................... Residential treatment Helicon 120 115 1992
Various....................... Group homes Helicon 36 20 1994
Tennessee:
Clarksville................... Diagnostic and evaluation services Company 25 25 1992
Johnson City.................. Pre-trial secure residential Company 12 9 1985
Murfreesboro.................. Residential treatment Company 34 34 1989
Newbern....................... Residential treatment Company 32 32 1990
</TABLE>
Since March 31, 1996, the Company has entered into contracts to operate the
following programs:
Riverside County, California. In May 1996, the Company initiated an
educational day treatment program at a residential juvenile facility for 30
students in Riverside County, California. The Company also manages the
facility's residential treatment program for Helicon.
Bexar County, Texas. In July 1996, the Company entered into a
contract to operate a juvenile justice alternative school in Bexar County,
Texas. Scheduled to open in September 1996 for the 1996-1997 school year,
the school will accommodate up to 400 students who have been removed from
the county's public school system for various statutory offenses.
Eufaula, Alabama. In July 1996, the Company entered into a contract
to operate a medium-security residential youth center in Eufaula, Alabama.
The program, scheduled to open in August 1996, will serve 60 juvenile males
who have been committed to state custody.
OPERATIONAL PROCEDURES
The Company's programs are designed to provide consistent, high quality and
cost-effective education and 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 own and Helicon's facilities and programs, including staff recruitment,
general administration and security and supervision of the youth in their
programs.
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
29
<PAGE> 31
area of the Company's operations. The Company believes that its recruitment,
selection and training programs provide quality personnel experienced in the
Company's approach to providing education and treatment programs. The Company's
direct care staff includes teachers, counselors, mental health professionals,
juvenile justice administrators and licensed clinicians. The Company prefers to
recruit direct care staff who have pursued undergraduate or graduate studies in
education and in the behavioral or social sciences. The Company currently has 77
employees with masters or doctorate degrees.
The Company's internal training policies require the Company's teachers,
counselors, security and other direct care staff 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 social skills. Annual continuing education
also is required for all direct care staff. The Company demonstrates its
commitment to its employees' professional development by offering lectures,
classes and training programs, as well as tuition reimbursement benefits.
Quality Assessment. The Company has developed a model of ongoing program
evaluation and quality management which the Company believes provides critical
feedback to measure the quality of its various programs. The Company has
implemented its Periodic Service Review ("PSR") system at the majority of its
programs, and expects to complete implementation at the Company's remaining
programs during fiscal 1997. 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. The Company believes the PSR system is a vital management tool to evaluate
the quality 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 security, risk assessment and close supervision by
responsible and well-trained staff.
MARKETING
The Company's marketing activities are directed primarily toward local and
state governmental entities responsible for juvenile justice, social services
providers, education and mental health, as well as school districts and juvenile
courts responsible for special programs for at risk and 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 and 1994, 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 selectively focus its marketing efforts on a number of
additional geographic areas, both within states in which it currently operates
and in additional states, based on probability of success, geographic location,
existing competition, potential profitability and political acceptability. The
Company continues to evaluate these and other areas for their market potential.
The Company generally pursues its business opportunities in one of two
ways. The Company follows either the traditional competitive process 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,
30
<PAGE> 32
assesses the legal and political climate and 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 youth
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 RFPs. 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 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 in the future, to 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 on occasion requested by governmental agencies to make
presentations at such conferences or to provide professional training.
RELATIONSHIP WITH HELICON
The Company conducts a significant portion of its business through its
relationship with Helicon, a Section 501(c)(3) not-for-profit corporation. As of
March 31, 1996, the Company was providing consulting, management and marketing
services to Helicon at 11 programs. Helicon also leases two facilities owned by
the Company to operate its programs. Services provided to Helicon by the Company
include operational, management, marketing, program design, financial and other
support services, including payroll, budgeting and accounting. The Company is
entitled to receive management fees for these services 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,
and there can be no assurance that the Company will recognize any management fee
income in the future. As of March 31, 1996, unpaid management fees, lease
payments and advances, plus interest, due to the Company from Helicon totaled
$6,531,000. Based on the current level of operations being maintained by
Helicon, the Company does not anticipate collecting any of this amount. The
Helicon Agreement expires September 1, 1999. The Company also has guaranteed
Helicon's obligations under a bank line of credit in the amount of $500,000. See
"Risk Factors -- Relationship with Helicon," "Management's 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 revenues under a contract with the Riverside County
Office of Education, Riverside, California, and approximately 15% of its
revenues under three contracts with the State of Tennessee. The Company's
contract with the 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 Company's contracts with the State of Tennessee require that the Company
provide education, treatment, assessment and evaluation services. The existing
contracts with Riverside County and the State of Tennessee expired June 30,
1996. As is customary, the Company historically has negotiated the renewal of
these contracts in July and August following the end of the fiscal year (June
30) of these governmental entities. The Company currently is negotiating the
renewal of the contract with Riverside County, and expects to renew this
contract during July or August 1996 for a period of one year. The Company has
reached agreement regarding the renewal terms of each of the three Tennessee
31
<PAGE> 33
contracts, two of which were renewed for a period of six months and the other
for a period of one year. There can be no assurance that all of the contracts
with Riverside County or the State of Tennessee will be renewed for the current
or any subsequent year on terms acceptable to the Company. See "Risk Factors --
Dependence on Certain Customers," "Risk Factors -- Contract Renewal" and Note M
of Notes to Consolidated Financial Statements.
REGULATIONS
The industry in which the Company operates is subject to federal, state and
local regulations which are administered by various regulatory authorities and
accrediting bodies. Pursuant to the terms of the Company's contracts and state
laws and regulations, the Company is required to obtain licenses, certifications
and/or accreditations for its programs. 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, certification or accreditation could have
a material adverse effect on the Company's financial condition and results of
operations. 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 operations.
COMPETITION
The youth education and treatment market is highly fragmented, with no
single company or entity holding a dominant market share. The Company competes
with other for-profit companies, not-for-profit entities and governmental
agencies that are responsible for youth education and treatment. The Company
competes primarily on the basis of the quality, range and price of services
offered, its experience in operating 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. Many 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. Certain not-for-profit entities may offer education and
treatment programs at a lower cost than the Company due in part to government
subsidies, foundation grants, tax deductible contributions or other financial
resources not available to for-profit companies.
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.
INSURANCE
The Company maintains an $11 million general liability insurance policy for
all of its operations. The Company also maintains insurance in amounts it deems
adequate to cover property and casualty risks, workers' compensation and
director and officer 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 the Company does not maintain such
32
<PAGE> 34
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.
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 indicated 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, alleged negligence and civil
rights violations on the part of the Company and certain of its employees, and
sought an unspecified amount of damages. The Company reached a confidential
agreement to settle this lawsuit in July 1996, the terms of which will not have
an adverse effect on the Company's financial condition or results of operations.
In December 1992, the Company received an audit report from the California
Department of Social Services alleging overpayments of approximately $315,000 at
its six-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 condition or
results of operations.
PROPERTIES
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 (which are owned by the Company), the Company leases
facilities for the operation of its programs 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, Tennessee and
Texas. 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. The Company believes that if any of its
leases are terminated or the Company needs additional space, it will be able to
obtain new or additional space on acceptable terms.
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<PAGE> 35
MANAGEMENT
The following table sets forth certain information concerning the executive
officers and directors of the Company as of the date of this Prospectus.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- -----------------------------------------------
<S> <C> <C>
William J Ballard.................... 54 Chairman, Chief Executive Officer and Director
Amy S. Harrison...................... 46 Vice Chairman, President and Director
Martha A. Petrey, Ph.D............... 53 Executive Vice President and Director
Stephen H. Norris.................... 51 Executive Vice President
Vicki M. Agee, Ph.D.................. 57 Vice President
Kathryn Behm Celauro................. 48 Vice President - Business Development
Mary P. Trainor...................... 50 Vice President
Vice President - Finance, Secretary and
Donald B. Whitfield.................. 44 Treasurer
Thomas B. Clark...................... 54 Director
Joseph A. Fernandez, Ed.D.(1)........ 60 Director
David L. Warnock(1).................. 38 Director
</TABLE>
- ---------------
(1) Pursuant to a Stockholders' Agreement, dated September 20, 1993, between the
Company, T. Rowe Price, Ms. Harrison and Dr. Petrey (the "Stockholders'
Agreement"), such persons agreed to vote their shares of Common Stock and
take such other actions within their power as may be required to cause
individuals designated by T. Rowe Price to be elected to the Board of
Directors such that T. Rowe Price has representation on the Board of
Directors approximately equal to its percentage ownership in the Company for
as long as T. Rowe Price owns Common Stock with voting power equal to at
least 33% of the aggregate voting power of all outstanding Common Stock. Mr.
Warnock and Dr. Fernandez are the designated representatives of T. Rowe
Price. Following this offering, the Stockholders' Agreement will terminate;
however, Mr. Warnock and Dr. Fernandez have been nominated by the Board of
Directors for reelection to the Board of Directors at the Annual Meeting.
Mr. Ballard has served as Chief Executive Officer of the Company since
March 1993, as a director since May 1993, and as Chairman of the Board since
September 1994. Mr. Ballard also served as President of the Company from March
1993 to February 1996. From May 1992 through March 1993, Mr. Ballard served as
Vice President of Cumberland Health Systems, Inc., in connection with its
proposed merger with the Company. From June 1990 through May 1992, Mr. Ballard
served as Vice President - Finance and Treasurer of the Company. Prior to such
time, Mr. Ballard served as President of Paladin Capital, Inc. from March 1988
through May 1990, and as President of Major Safe Co., Inc. from 1973 through
1987.
Ms. Harrison has served as Vice Chairman of the Company since May 1990, as
President since February 1996, and as a director of the Company since May 1988.
From March 1988 through September 1994, Ms. Harrison served as an Executive Vice
President of the Company. Ms. Harrison founded a group of corporations
collectively known as Advocate Schools ("Advocate Schools") in 1977, and served
as an executive officer and a director of those corporations until their
acquisition by the Company in March 1988 and February 1990. Ms. Harrison also
currently serves as a consultant to the California State Department of Education
and has had numerous state and county appointments.
Dr. Petrey has served as Executive Vice President of the Company since
March 1988 and as a director since May 1988. Dr. Petrey served as an executive
officer and a director of Advocate Schools from 1980 until their acquisition by
the Company in March 1988 and February 1990. Dr. Petrey holds a Ph.D. in
clinical psychology from the University of South Carolina and is a licensed
clinical psychologist with experience in both public and private practice.
Mr. Norris has served as Executive Vice President of the Company since
April 1993. From June 1990 though March 1993, Mr. Norris served as President of
the Company. From December 1988 to May 1990, Mr. Norris served as Executive
Director of the Tennessee Business Roundtable, and from 1985 to 1988 Mr. Norris
served as Commissioner of the Tennessee Department of Correction.
34
<PAGE> 36
Dr. Agee has served as a Vice President of the Company since September
1995. From July 1991 through September 1995, Dr. Agee served as Senior Vice
President and Clinical Director for Youth Services International, Inc. Prior to
July 1991, Dr. Agee served as Director of Correctional Services for New Life
Youth Services, Inc. Dr. Agee holds a Ph.D. in clinical psychology from the
University of Texas and is a licensed clinical psychologist.
Ms. Celauro has served as Vice President - Business Development since
November 1993. From April 1993 through October 1993, Ms. Celauro served as a
Vice President of Cumberland Health Systems, Inc. From January 1987 through
March 1993, Ms. Celauro served in various capacities with the Company, including
Senior Vice President, Vice President and Secretary. From September 1985 to
January 1987, Ms. Celauro served as Commissioner of Revenue for the State of
Tennessee. Prior to that time, she served as legal counsel to the Commissioner
of Finance and Administration and was an Assistant Attorney General for the
State of Tennessee for four years.
Ms. Trainor has served as a Vice President of the Company since 1989. Ms.
Trainor served as Administrative Director of Advocate Schools from 1985 to 1988
and joined the Company as Director of Operations, Advocate Schools in March 1988
following the Company's acquisition of three of the four Advocate Schools
corporations.
Mr. Whitfield has served as Vice President - Finance, Secretary and
Treasurer of the Company since March 1993. Mr. Whitfield has been employed by
the Company since March 1988 in various capacities, including Controller,
Assistant Secretary and Assistant Treasurer. Mr. Whitfield is a certified public
accountant.
Mr. Clark is an attorney-at-law in private practice. From January 1994
until October 1994, he served as Executive Vice President-Administration and
General Counsel of Genesco, Inc., a footwear and apparel manufacturer and
retailer headquartered in Nashville, Tennessee. Prior to assuming that position,
Mr. Clark served as a partner in the law firm of Boult, Cummings, Conners &
Berry in Nashville, Tennessee from 1987 to 1994.
Dr. Fernandez is President of Joseph A. Fernandez & Associates, Inc., an
education consulting firm. From June 1993 until June 1996, Dr. Fernandez served
as President and Chief Executive Officer of School Improvement Services, Inc., a
Winter Park, Florida organization which provides consulting services related to
school improvement at the state, district or school level. Prior to assuming
such position in 1993, Dr. Fernandez served as Chancellor of the New York City
Public Schools from 1990 to 1993, and as Superintendent of the Dade County
Public Schools in Miami, Florida from 1987 to 1990. Dr. Fernandez received his
Doctor of Education from Nova University in 1985. In June 1996, the Company
entered into a one-year agreement with Joseph Fernandez & Associates, Inc.
("JFA"), of which Dr. Fernandez serves as President, for the provision of
certain marketing and consulting services to the Company. Pursuant to the terms
of this agreement, JFA will be paid a monthly fee of $4,167 and will receive
warrants for 20,000 shares of Common Stock for each new Company program obtained
as a result of services provided under the agreement that meet specified annual
operating income criteria.
Mr. Warnock is a partner in Cahill, Warnock & Company, an investment
management company, as well as a consultant to the Advisory Committee of T. Rowe
Price, a principal shareholder of the Company. See "Principal and Selling
Shareholders." Until July 1995, Mr. Warnock served as President of T. Rowe Price
Strategic Partners II, L.P., the general partner of T. Rowe Price, and as a Vice
President of T. Rowe Price Associates, Inc.
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<PAGE> 37
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of the date hereof, and as adjusted to reflect
the sale of the Common Stock offered hereby, with respect to (i) the Selling
Shareholders; (ii) each person known by the Company to own beneficially more
than five percent of the Common Stock; (iii) each of the Company's directors;
and (iv) all directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES
SHARES BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING(1) OFFERING(1)
------------------- SHARES TO ------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT BE SOLD IN NUMBER PERCENT
- --------------------------------------------- -------- ------- THE OFFERING ------- -------
------------
<S> <C> <C> <C> <C> <C>
T. Rowe Price Strategic Partners Fund II,
L.P.(2).................................... 1,834,280 33.4% 930,000 904,280 12.9%
William J Ballard(3)......................... 115,000 2.0 50,000 65,000 *
Amy S. Harrison(4)(5)........................ 348,579 6.3 -- 348,579 4.9
Martha A. Petrey, Ph.D.(5)(6)................ 340,246 6.1 20,000 320,246 4.6
Thomas B. Clark(7)........................... 7,250 * -- 7,250 *
Joseph A. Fernandez, Ed.D.(8)................ 19,336 * -- 19,336 *
David L. Warnock(9).......................... 6,500 * -- 6,500 *
All directors and executive officers as a
group (11 persons)(10)..................... 893,685 15.5 70,000 823,685 11.4
</TABLE>
- ---------------
*Less than one percent.
(1) As used in this table, "beneficial ownership" means the sole or shared
power to vote or direct the voting or to dispose or direct the disposition
of any security. A person is deemed as of any date to have "beneficial
ownership" of any security that such person has a right to acquire within
60 days after such date. Any security that any person named above has the
right to acquire within 60 days is deemed to be outstanding for purposes of
calculating the ownership percentage of such person and all directors and
executive officers as a group, but is not deemed to be outstanding for
purposes of calculating the ownership percentage of any other person.
(2) In September 1993, the Company received $1,500,000 pursuant to a loan
agreement (the "T. Rowe Price Loan Agreement") with T. Rowe Price under a
12%, one-year term loan. This loan had equity components through which T.
Rowe Price received shares of Common Stock upon closing and a warrant to
increase its ownership position to up to one-third of the then total
outstanding Common Stock. In July 1994, T. Rowe Price exercised its
warrant, for a total consideration of $1,848,000. $500,000 of the proceeds
from the warrant exercised was used to reduce the balance outstanding under
the term loan to $1,000,000. In September 1994, T. Rowe Price renewed the
$1,000,000 balance outstanding under this loan for a term of five years.
The balance outstanding under this loan was repaid in full in September
1995. In connection with the T. Rowe Price Loan Agreement, the Company
entered into a Registration Rights Agreement pursuant to which the shares
being sold in this offering by T. Rowe Price are being sold. See
"Description of Capital Stock -- Registration Rights." T. Rowe Price's
address is 100 East Pratt Street, Baltimore, Maryland 21202.
(3) Includes 114,000 shares subject to currently exercisable options.
(4) Includes 44,000 shares subject to currently exercisable options.
(5) Mr. Harrison and Dr. Petrey are former shareholders of Advocate Schools and
have been executive officers and directors of the Company since the
Company's acquisition of Advocate Schools. After acquiring Advocate
Schools, the Company continued payments under several real property leases
between Ms. Harrison, Dr. Petrey and Advocate Schools on real property
owned by Ms. Harrison and Dr. Petrey. These leases expired during fiscal
1994. However, the Company continues to lease certain of the subject
properties on a month-to-month basis under the same payment terms and
conditions as in the original leases. Payments to Ms. Harrison and Dr.
Petrey under these rental arrangements during fiscal 1996 totaled $101,000.
Ms. Harrison and Dr. Petrey's address is c/o 805 South Church Street,
Murfreesboro, Tennessee 37130.
(6) Includes 35,667 shares subject to currently exercisable options.
(7) Includes 6,250 shares subject to currently exercisable options and 1,000
shares owned by Mr. Clark's spouse, as to which he disclaims beneficial
ownership.
(8) Includes 6,250 shares subject to currently exercisable options pursuant to
the Company's stock incentive plans and a warrant to purchase 9,616 shares
of Common Stock issued to School Improvement Services, Inc. Dr. Fernandez
is a principal shareholder and served as President and Chief Executive
Officer of School Improvement Services, Inc. from June 1993 until June
1996.
(9) Includes 6,250 shares subject to currently exercisable options. Does not
include 1,834,280 shares of Common Stock owned by T. Rowe Price. Mr.
Warnock serves as a consultant to the Advisory Committee of T. Rowe Price
and is the former president of T. Rowe Price Strategic Partners II, L.P.,
the general partner of T. Rowe Price. In such capacity, Mr. Warnock may be
deemed to share voting and investment power with respect to such shares.
Mr. Warnock disclaims beneficial ownership of such shares.
(10) Does not include shares of Common Stock beneficially owned by T. Rowe
Price. Includes an aggregate of 262,752 shares subject to currently
exercisable options and 9,616 shares subject to a currently exercisable
warrant.
36
<PAGE> 38
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock currently consists of 10,000,000
shares of Common Stock, $.01 par value, and 10,000,000 shares of preferred
stock, $1.00 par value ("Preferred Stock"). The Company has submitted for
approval by the shareholders of the Company at the Annual Meeting an amendment
to the Restated Charter that would increase the number of authorized shares of
Common Stock to 50,000,000. Upon the completion of this offering, 6,999,160
shares of Common Stock and no shares of Preferred Stock will be outstanding.
Pursuant to the Company's stock incentive plans, there are 408,116 shares of
Common Stock reserved for issuance pursuant to outstanding options and an
additional 506,700 shares of Common Stock available for future grants. In
addition, 9,616 shares of Common Stock are issuable upon the exercise of an
outstanding warrant.
The following summary description is qualified in its entirety by reference
to the Company's Restated Charter and Bylaws and the other contracts, agreements
and documents describing the terms of the Company's securities.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
to be voted on by shareholders and are not entitled to cumulative voting in the
election of directors. Accordingly, holders of a majority of the shares of
Common Stock voting in the election of directors can elect all of the directors
standing for election. Holders of Common Stock are entitled to share ratably in
dividends, if any, as may be declared from time to time by the Board of
Directors in its discretion out of funds legally available therefor. In the
event of any voluntary or involuntary liquidation, dissolution or winding up of
the Company, holders of Common Stock are entitled to share ratably in any assets
remaining after satisfaction of all prior claims. The Restated Charter gives
holders of Common Stock no preemptive or other subscription or conversion
rights, and there are no redemption provisions with respect to such shares. All
outstanding shares of Common Stock are, and the shares offered hereby will be,
when issued and paid for, fully paid and nonassessable. The rights, preferences
and privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of holders of shares of any series of Preferred Stock
which the Company may designate and issue in the future.
PREFERRED STOCK
The Restated Charter authorizes 10,000,000 shares of Preferred Stock, none
of which is outstanding. The Board of Directors has the authority, without any
further vote or action by the shareholders, to issue Preferred Stock in one or
more series and to fix the number of shares, designations, relative rights
(including voting rights), preferences and limitations of such series to the
full extent now or hereafter permitted by Tennessee law. The Company has no
present intention to issue any series of Preferred Stock.
REGISTRATION RIGHTS
Following this offering, beneficial holders of an aggregate of 1,573,105
shares of Common Stock have contractual rights with respect to the registration
of shares of Common Stock ("Registrable Shares") under the Securities Act. The
Company has granted two demand registration rights which may be exercised by T.
Rowe Price with respect to shares of Common Stock held by it. In addition, T.
Rowe Price, Amy S. Harrison and Martha A. Petrey have incidental registration
rights which provide that, in the event the Company proposes to register any of
its securities under the Securities Act for its own account, holders of
Registrable Shares may require the Company to include all or a portion of the
Registrable Shares in the registration, provided, among other conditions, that
the managing underwriter (if any) of any such offering has the right, subject to
certain conditions, to limit the number of Registrable Shares included in the
registration. In general, all fees, costs and expenses of such registrations
(other than the underwriting commissions, dealers' fees, brokers' fees and
concessions applicable to Common Stock) will be borne by the Company. In
connection with this offering, T. Rowe Price and Dr. Petrey have exercised their
incidental registration rights and are selling an aggregate of 950,000
Registrable Shares. Ms. Harrison has waived her registration rights with respect
to this offering.
37
<PAGE> 39
CERTAIN PROVISIONS OF THE RESTATED CHARTER, BYLAWS, AND TENNESSEE LAW
Certain provisions of the Company's Restated Charter, Bylaws, and Tennessee
statutory law described in this section may delay or make more difficult
acquisitions or changes of control of the Company that are not approved by the
Board of Directors. Such provisions have been implemented to enable the Company
to develop its business in a manner that will foster its long-term growth
without the disruption of the threat of a takeover not deemed by the Board of
Directors to be in the best interests of the Company and its shareholders.
Advance Notice for Shareholder Proposals or Making Nominations at
Meetings. The Bylaws establish an advance notice procedure for shareholder
proposals to be brought before a meeting of shareholders of the Company and for
nominations by shareholders of candidates for election as directors at an annual
meeting or a special meeting at which directors are to be elected. Subject to
any other applicable requirements, only such business may be conducted at a
meeting of shareholders as has been brought before the meeting by, or at the
direction of, the Board of Directors, or by a shareholder who has given to the
Secretary of the Company timely written notice in proper form, of the
shareholder's intention to bring that business before the meeting. The presiding
officer at such meeting has the authority to make such determinations. Only
persons who are selected and recommended by the Board of Directors, or the
committee of the Board of Directors designated to make nominations, or who are
nominated by a shareholder who has given timely written notice, in proper form,
to the Secretary prior to a meeting at which directors are to be elected will be
eligible for election as directors of the Company.
To be timely, notice of nominations or other business to be brought before
any meeting must be received by the Secretary of the Company not less than fifty
(50) days nor more than seventy-five (75) days prior to the meeting. The notice
of any shareholder proposal or nomination for election as director must set
forth various information required under the Bylaws. The person submitting the
notice of nomination and any person acting in concert with such person must
provide, among other things, the name and address under which they appear on the
Company's books (if they so appear) and the class and number of shares of the
Company's capital stock that are beneficially owned by them.
Amendment of the Bylaws and Restated Charter. The Bylaws provide that a
majority of the members of the Board of Directors or the holders of a majority
of the voting power of all shares of the Company's capital stock represented at
a regular or special meeting have the power to amend, alter, change, or repeal
the Bylaws.
Except as may be set forth in resolutions providing for any class or series
of Preferred Stock, any proposal to amend, alter, change, or repeal the Restated
Charter requires approval by the affirmative vote of both a majority of the
members of the Board of Directors then in office and the holders of a majority
of the voting power of all of the shares of the Company's capital stock entitled
to vote on the amendments, with shareholders entitled to dissenters' rights as a
result of the amendment voting together as a single class.
Anti-Takeover Legislation. The Tennessee Business Combination Act (the
"Combination Act") provides, among other things, that any corporation to which
the Combination Act applies, including the Company, shall not engage in any
"business combination" with an "interested shareholder" for a period of five
years following the date that such shareholder became an interested shareholder
unless prior to such date the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
shareholder becoming an interested shareholder.
The Combination Act defines "business combination," generally, to mean any:
(i) merger or consolidation; (ii) share exchange; (iii) sale, lease, exchange,
mortgage, pledge, or other transfer (in one transaction or a series of
transactions) of assets representing 10% or more of (A) the market value of
consolidated assets, (B) the market value of the corporation's outstanding
shares or (C) the corporation's consolidated net income; (iv) issuance or
transfer of shares from the corporation to the interested shareholder; (v) plan
of liquidation; (vi) transaction in which the interested shareholder's
proportionate share of the outstanding shares of any class of securities is
increased; or (vii) financing arrangements pursuant to which the interested
shareholder, directly or indirectly, receives a benefit except proportionately
as a shareholder.
The Combination Act defines "interested shareholder," generally, to mean
any person who is the beneficial owner, either directly or indirectly, of 10% or
more of any class or series of the outstanding voting
38
<PAGE> 40
stock, or any affiliate or associate of the corporation who has been the
beneficial owner, either directly or indirectly, of 10% or more of the voting
power of any class or series of the corporation's stock at any time within the
five year period preceding the date in question. Consummation of a business
combination that is subject to the five-year moratorium is permitted after such
period if the transaction (i) complies with all applicable charter and bylaw
requirements and applicable Tennessee law and (ii) is approved by at least two-
thirds of the outstanding voting stock not beneficially owned by the interested
shareholder, or when the transaction meets certain fair price criteria. The fair
price criteria include, among others, the requirement that the per share
consideration received in any such business combination by each of the
shareholders is equal to the highest of (i) the highest per share price paid by
the interested shareholder during the preceding five-year period for shares of
the same class or series plus interest thereon from such date at a treasury bill
rate less the aggregate amount of any cash dividends paid and the market value
of any dividends paid other than in cash since such earliest date, up to the
amount of such interest, (ii) the highest preferential amount, if any, such
class or series is entitled to receive on liquidation, or (iii) the market value
of the shares on either the date the business combination is announced or the
date when the interested shareholder reaches the 10% threshold, whichever is
higher, plus interest thereon less dividends as noted above.
The Tennessee Control Share Acquisition Act (the "Acquisition Act")
prohibits certain shareholders from exercising in excess of 20% of the voting
power in a corporation acquired in a "control share acquisition," as defined in
the Acquisition Act, unless such voting rights have been previously approved by
the disinterested shareholders of the corporation. The Company has not elected
to make the Acquisition Act applicable to the Company. No assurance can be given
that such election, which must be expressed in a charter or bylaw amendment,
will or will not be made in the future.
The Tennessee Greenmail Act (the "Greenmail Act") prohibits the Company
from purchasing or agreeing to purchase any of its securities, at a price in
excess of fair market value, from a holder of 3% or more of any class of such
securities who has beneficially owned such securities for less than two years,
unless such purchase has been approved by the affirmative vote of a majority of
the outstanding shares of each class of voting stock issued by the Company or
the Company makes an offer of at least equal value per share to all holders of
shares of such class.
The effect of the Combination Act, the Acquisition Act, and the Greenmail
Act may be to render more difficult a change of control of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is SunTrust
Bank, Atlanta.
39
<PAGE> 41
UNDERWRITING
The Underwriters named below have severally agreed, subject to the terms
and conditions set forth in the Underwriting Agreement, to purchase from the
Company and the Selling Shareholders the number of shares of Common Stock
indicated below opposite their respective names at the public offering price
less the underwriting discount set forth on the cover page of this Prospectus.
The Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent and that the Underwriters are committed
to purchase all of the shares if they purchase any.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
--------------------------------------------------------------------- ----------------
<S> <C>
Montgomery Securities................................................
Equitable Securities Corporation.....................................
Lehman Brothers Inc..................................................
---------
Total........................................................... 2,500,000
=========
</TABLE>
The Underwriters have advised the Company and the Selling Shareholders that
the Underwriters propose initially to offer the Common Stock to the public on
the terms set forth on the cover page of this Prospectus. The Underwriters may
allow to selected dealers a concession of not more than $ per share;
and the Underwriters may allow, and such dealers may reallow, a concession of
not more than $ per share to certain other dealers. After the public
offering, the offering price and other selling terms may be changed by the
Underwriters. The Common Stock is offered subject to receipt and acceptance by
the Underwriters, and to certain other conditions, including the right to reject
orders in whole or in part.
The Company and the Selling Shareholders have granted an option to the
Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to a maximum of 375,000 additional shares of Common
Stock to cover over-allotments, if any, at the same price per share as the
initial shares to be purchased by the Underwriters. In the event the
Underwriters exercise the over-allotment option for less than 375,000 shares,
the Underwriters will purchase such shares on a pro rata basis based on the
number of shares offered by the Company and the Selling Shareholders. To the
extent that the Underwriters exercise this option, the Underwriters will be
committed, subject to certain conditions, to purchase such additional shares in
approximately the same proportion as set forth in the above table. The
Underwriters may purchase such shares only to cover over-allotments made in
connection with this offering.
The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the Underwriters against certain liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments the Underwriters may be required to make in respect thereof.
The Selling Shareholders and each of the Company's directors and executive
officers have agreed, subject to certain limited exceptions, not to offer, sell
or otherwise dispose, directly or indirectly, of any shares of Common Stock for
a period of 120 days after the date of this Prospectus, without the prior
written consent of Montgomery Securities, as representative of the Underwriters.
The Company has agreed not to offer, sell or otherwise dispose of, directly or
indirectly, any shares of Common Stock for a period of 120 days after the date
of this Prospectus, without the prior written consent of Montgomery Securities,
as representative of the Underwriters, except that the Company, without such
consent, may grant options or issue Common Stock upon exercise of new or
outstanding options pursuant to the Company's stock incentive plans.
Certain of the Underwriters and selling group members (if any) that
currently act as market makers for the Common Stock may engage in "passive
market making" in the Common Stock on Nasdaq in accordance with Rule 10b-6A
under the Exchange Act. Rule 10b-6A permits, upon the satisfaction of certain
conditions, underwriters and selling group members participating in a
distribution that are also Nasdaq market makers in the security being
distributed to engage in limited market making transactions during the period
when Rule 10b-6 under the Exchange Act would otherwise prohibit such activity.
Rule 10b-6A prohibits underwriters and selling group members engaged in passive
market making generally from entering a bid or effecting a purchase at a price
that exceeds the highest bid for those securities displayed on Nasdaq by a
market maker that is not participating in the distribution. Under Rule 10b-6A,
each underwriter or selling
40
<PAGE> 42
group member engaged in passive market making is subject to a daily net purchase
limitation equal to 30% of such entity's average daily trading volume during the
two full consecutive calendar months immediately preceding the date of the
filing of the registration statement under the Securities Act pertaining to the
security to be distributed. Passive market making may stabilize the market price
of the Common Stock at a level above that which might otherwise prevail and, if
commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Bass, Berry & Sims PLC, Nashville, Tennessee. Certain
legal matters in connection with this offering will be passed upon for the
Underwriters by Hale and Dorr, Washington, D.C.
EXPERTS
The consolidated financial statements of the Company as of March 31, 1995
and 1996, and for each of the three years in the period ended March 31, 1996,
appearing in this Prospectus and the Registration Statement of which this
Prospectus is a part have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere or
incorporated by reference herein and in the Registration Statement and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-2 under the Securities Act with
respect to the shares of Common Stock offered by this Prospectus. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. Certain items are omitted in
accordance with the rules and regulations of the Commission. Statements
contained in this Prospectus concerning the provisions or contents of any
contract or other document referred to herein are not necessarily complete. With
respect to each such contract or other document filed as an exhibit to the
Registration Statement, reference is made to such exhibit for a more complete
description, and each such statement is deemed to be qualified in all respects
by such reference.
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports, proxy statements, and other
information with the Commission. The Registration Statement (with exhibits), as
well as such reports, proxy statements, and other information may be inspected
and copied at prescribed rates at the public reference facilities maintained by
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Regional Offices located at
Seven World Trade Center, 13th Floor, New York, New York 10048, and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission maintains a
web site that contains reports, proxy statements and other information regarding
registrants, including the Company, that file such information electronically
with the Commission. The address of the Commission's web site is
http://www.sec.gov.
41
<PAGE> 43
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended March
31, 1996 filed by the Company with the Commission is hereby incorporated herein
by reference. All reports and other documents filed by the Company pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of this offering shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
filing date of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein, or in any other subsequently filed document that
also is incorporated or is deemed to be incorporated by reference herein,
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus. Subject to the foregoing, all information appearing in this
Prospectus is qualified in its entirety by the information appearing in the
documents incorporated herein by reference.
The Company will provide, without charge, to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon the written or oral
request of such person, a copy of any document described herein (not including
exhibits to those documents unless such exhibits are specifically incorporated
by reference into this Prospectus). Requests for such documents should be
directed to Donald B. Whitfield, Children's Comprehensive Services, Inc., 805
South Church Street, Murfreesboro, Tennessee 37130, telephone number (615)
896-3100.
42
<PAGE> 44
CHILDREN'S COMPREHENSIVE SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Report of Independent Auditors..................................................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets at March 31, 1996 and 1995........................... F-3
Consolidated Statements of Income for the years ended March 31, 1996, 1995 and
1994.......................................................................... F-4
Consolidated Statements of Shareholders' Equity for the years ended March 31,
1996, 1995 and 1994........................................................... F-5
Consolidated Statements of Cash Flows for the years ended March 31, 1996, 1995
and 1994...................................................................... F-6
Notes to Consolidated Financial Statements....................................... F-7
</TABLE>
F-1
<PAGE> 45
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 income, shareholders' equity, and cash flows for the
years in the period ended March 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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.
ERNST & YOUNG LLP
Nashville, Tennessee
May 15, 1996
F-2
<PAGE> 46
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
=========== ============
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.
F-3
<PAGE> 47
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<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.
F-4
<PAGE> 48
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK,
$.01 PAR VALUE ADDITIONAL TOTAL
--------------------- 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.
F-5
<PAGE> 49
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
----------- ---------- -----------
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.
F-6
<PAGE> 50
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
secure 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.
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.
F-7
<PAGE> 51
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
NOTE B -- PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
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.
F-8
<PAGE> 52
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
<S> <C>
Year ending March 31:
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.
F-9
<PAGE> 53
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.
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>
F-10
<PAGE> 54
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
F-11
<PAGE> 55
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>
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.
F-12
<PAGE> 56
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H -- SHAREHOLDERS' EQUITY (CONTINUED)
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>
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
1989 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
F-13
<PAGE> 57
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- EMPLOYEE BENEFIT PLAN (CONTINUED)
under the plan totaled $17,000, $21,000, and $15,000 for the years ended March
31, 1996, 1995 and 1994, respectively.
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.
Workers' 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.
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.
F-14
<PAGE> 58
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- CONTINGENCIES (CONTINUED)
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.
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
F-15
<PAGE> 59
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE L -- RELATED PARTY TRANSACTIONS (CONTINUED)
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.
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
- ------------ ------------------------------------------- ---------- --------------
<C> <S> <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.
F-16
<PAGE> 60
Omitted Graphic and Image Material
Inside back cover:
1. A map of the United States with certain states shaded to indicate the
states in which the Company currently has contracts to operate, and a
cross-reference indicating the location of the Company's various program
types and corporate headquarters. The following caption accompanies
the map:
"Corporate Headquarters - Murfreesboro, Tennessee"
2. A table setting forth the location (by state), program type, number of
programs (by state and program type) and the provider of record for the
Company's non-residential and residential programs.
<PAGE> 61
- ------------------------------------------------------
- ------------------------------------------------------
No dealer, sales representative, or any other person has been authorized to
give any information or to make any representations other than those contained
in this Prospectus, and, if given or made, such information or representation
must not be relied upon as having been authorized by the Company, any Selling
Shareholder or by the Underwriters. Neither the delivery of this Prospectus nor
any sale made hereunder shall under any circumstances create any implication
that there has been no change in the affairs of the Company since the date
hereof. This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any securities offered hereby by anyone in any jurisdiction
in which such offer or solicitation is not authorized or in which the person
making such offer or solicitation is not qualified to do so or to any person to
whom it is unlawful to make such offer or solicitation.
----------------------------
TABLE OF CONTENTS
----------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 13
Price Range of Common Stock........... 14
Dividend Policy....................... 14
Capitalization........................ 15
Selected Financial Data............... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 24
Management............................ 34
Principal and Selling Shareholders.... 36
Description of Capital Stock.......... 37
Underwriting.......................... 40
Legal Matters......................... 41
Experts............................... 41
Available Information................. 41
Incorporation of Certain Information
by Reference........................ 42
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,500,000 SHARES
[CHILDRENS COMPREHENSIVE SERVICES LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MONTGOMERY SECURITIES
EQUITABLE SECURITIES
CORPORATION
LEHMAN BROTHERS
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 62
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated costs and expenses of the
Registrant in connection with the offering described in the Registration
Statement.
<TABLE>
<S> <C>
SEC registration fee............................................ $ 19,332
NASD Fee........................................................ 6,107
Nasdaq Stock Market fee for additional shares................... 17,500
Accounting fees and expenses.................................... 50,000
Legal fees and expenses......................................... 125,000
Printing and engraving expenses................................. 150,000
Blue Sky fees and expenses...................................... 10,000
Miscellaneous fees and expenses................................. 122,061
--------
Total................................................. $500,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Tennessee Business Corporation Act ("TBCA") provides that a corporation
may indemnify any director or officer against liability incurred in connection
with a proceeding if (i) the director or officer acted in good faith, (ii) the
director or officer reasonably believed, in the case of conduct in his or her
official capacity with the corporation, that such conduct was in the
corporation's best interest, or, in all other cases, that his or her conduct was
not opposed to the best interest of the corporation, and (iii) in connection
with any criminal proceeding, the director or officer had no reasonable cause to
believe that his or her conduct was unlawful. In actions brought by or in the
right of the corporation, however, the TBCA provides that no indemnification may
be made if such director or officer is adjudged to be liable to the corporation.
Similarly, the TBCA prohibits indemnification in connection with any proceeding
charging improper personal benefit to a director or officer if such director or
officer is adjudged liable on the basis that a personal benefit was improperly
received. In cases where the director or officer is wholly successful, on the
merits or otherwise, in the defense of any proceeding instigated because of his
or her status as a director or officer of a corporation, the TBCA mandates that
the corporation indemnify the director or officer against reasonable expenses
incurred in the proceeding. Notwithstanding the foregoing, the TBCA provides
that a court of competent jurisdiction, upon application, may order that a
director or officer be indemnified for reasonable expenses if, in consideration
of all relevant circumstances, the court determines that such individual is
fairly and reasonably entitled to indemnification, whether or not the standard
of conduct set forth above was met.
According to the Company's Restated Charter, to the fullest extent
permitted by applicable law, no director of the Company shall be personally
liable to the Company or its shareholders for monetary damages for any breach of
fiduciary duty as a director, provided, however, that a director shall be so
liable, to the extent provided by applicable law, (i) for breach of the
director's duty of loyalty to the Company or its shareholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, or (iii) pursuant to Section 48-8-304 of the TBCA when and if
enacted.
With respect to any threatened, pending or completed action, suit or
proceeding (whether civil, criminal, administrative or investigative), other
than an action by or in the right of the Company, the Company's Bylaws require
the Company to indemnify any person who was (or is) made (or threatened to be
made) a party to such an action, suit or proceeding by reason of the fact that
such person is or was a director, officer, employee or agent of the Company (or
is or was serving in such capacity for another entity at the request of the
Company). Indemnification must be provided for amounts actually and reasonably
incurred by such
II-1
<PAGE> 63
person in connection with the action, suit or proceeding to the extent the
amounts incurred represent expenses (including attorneys' fees), judgments,
fines, or amounts paid in settlement, but only if and to the extent the person
to be indemnified acted in good faith and in a manner he or she reasonably
believed to be in (or not opposed to) the best interests of the Company (and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful).
With respect to any action or suit by or in the right of the Company, the
Bylaws require indemnification similar to that described above (with the same
good faith and reasonable belief limitations) for expenses (including attorneys'
fees) actually and reasonably incurred by the person in connection with the
defense or settlement of the action or suit, except that no indemnification
shall be provided with respect to any matter as to which such person is adjudged
to be liable for negligence or misconduct in the performance of his or her duty
to the Company unless, and only to the extent that, the court in which such
action or suit was brought determines upon application that, despite the
adjudication of liability and in view of all the circumstances of the case, such
person fairly and reasonably is entitled to indemnity for those expenses that
the court deems proper.
If and to the extent a person to be indemnified under the provisions
described in the preceding paragraphs is successful on the merits or otherwise
in defense of the relevant action, suit or proceeding, the indemnification
described above will be provided, notwithstanding any limitations that would
otherwise apply. However, in no case will indemnification be provided in a
specific case (unless ordered by a court) unless and until such indemnification
is specifically authorized after a determination that the person to be
indemnified met the applicable standard of conduct, which determination shall be
made either by a majority vote of a quorum of those directors of the Company who
are not parties to the relevant action, suit or proceeding or, if such a quorum
is not obtainable (or even if obtainable, a quorum of disinterested directors so
directs), by independent legal counsel in a written opinion or by the
shareholders of the Company.
The Bylaws permit the Company to pay any amounts representing expenses
incurred by any person to be indemnified by the Company under the provisions
described above in advance of the final disposition of the relevant action, suit
or proceeding, if and to the extent such advance payment is specifically
authorized by the Board of Directors on a case by case basis, upon receipt of an
undertaking by or on behalf of the person to be indemnified to repay such
amounts unless it shall ultimately be determined that such person is entitled to
indemnification by the Company for such expenses.
The Bylaws also authorize the Board of Directors of the Company to purchase
and maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the Company (or is or was serving in such capacity
for another entity at the request of the Company) against any liability asserted
against and incurred by such person in such capacity, whether or not the Company
would have the power to indemnify such person against such liability under the
indemnification provisions of the Bylaws.
The Underwriting Agreement filed as Exhibit 1 to this Registration
Statement contains certain provisions relating to the indemnification of the
Company and its controlling persons by the Underwriters and the Selling
Shareholders and relating to the indemnification of the Underwriters by the
Company and the Selling Shareholders.
ITEM 16. EXHIBITS.
The following exhibits are filed as part of this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- -----------------------------------------------------------------------------------
<S> <C>
1 Form of Underwriting Agreement
4.1 Restated Charter, as amended (incorporated by reference from the Registrant's
Registration Statement on Form S-1 (Registration No. 33-15034); the Registrant's
Registration Statement on Form S-1 (Registration No. 33-31527); and the
Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1994)
</TABLE>
II-2
<PAGE> 64
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- -----------------------------------------------------------------------------------
<S> <C>
4.2 Bylaws (incorporated by reference from the Registrant's Registration Statement on
Form S-1 (Registration No. 33-31527))
4.3 Specimen Stock Certificate (incorporated by reference from the Registrant's Annual
Report on Form 10-K for the fiscal year ended March 31, 1994)
5 Opinion of Bass, Berry & Sims PLC
10.1 Non-Competition Agreement between the Registrant and Amy S. Harrison (incorporated
by reference from the Registrant's Current Report on Form 8-K, dated April 12,
1988)
10.2 Non-Competition Agreement between the Registrant and Martha A. Petrey (incorporated
by reference from the Registrant's Current Report on Form 8-K, dated April 12,
1988)
10.3 Registration Agreement between the Registrant and Amy S. Harrison and Martha A.
Petrey (incorporated by reference from the Registrant's Current Report on Form 8-K,
dated April 12, 1988)
10.4 1987 Employee Stock Option Plan, as amended (incorporated by reference from the
Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1995)
10.5 1989 Stock Option Plan for Non-Employee Directors (incorporated by reference from
the Registrant's Registration Statement on Form S-8 (Reg. No. 2-33-33499)
10.6 Assignment and Sublease between the Registrant and Helicon, Incorporated
(incorporated by reference from the Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1990)
10.7 Warrant Agreement dated as of September 20, 1993 between the Registrant and Signet
Commercial Credit Corporation (incorporated by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended March 31, 1994)
10.8 Loan Agreement dated as of September 23, 1994, by and between the Registrant,
Children's Comprehensive Services of California, Inc. and National Health
Investors, Inc. (incorporated by reference from the Registrant's Current Report on
Form 8-K, dated October 11, 1994)
10.9 Security Agreement/Deposits dated as of September 23, 1994, by and among the
Registrant, Children's Comprehensive Services of California, Inc. and National
Health Investors, Inc. (incorporated by reference from the Registrant's Current
Report on Form 8-K, dated October 11, 1994)
10.10 Security Agreement/Projects dated as of September 23, 1994, between the Registrant,
Children's Comprehensive Services of California, Inc. and National Health
Investors, Inc. (incorporated by reference from the Registrant's Current Report on
Form 8-K, dated October 11, 1994)
10.11 Equity Participation Agreement dated as of September 23, 1994, by and between the
Registrant, Children's Comprehensive Services of California, Inc. and National
Health Investors, Inc. (incorporated by reference from the Registrant's Current
Report on Form 8-K, dated October 11, 1994)
10.12 Assignment and Participation Agreement dated as of September 23, 1994, between the
Registrant and National Health Investors, Inc. (incorporated by reference from the
Registrant's Current Report on Form 8-K, dated October 11, 1994)
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. (incorporated by reference from the Registrant's Current Report on
Form 8-K, dated October 11, 1994)
</TABLE>
II-3
<PAGE> 65
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- -----------------------------------------------------------------------------------
<S> <C>
10.14 Intercreditor Agreement dated as of September 23, 1994, by and among the
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. (incorporated by reference from the Registrant's Current Report on
Form 8-K, dated October 11, 1994)
10.15 Loan and Security Agreement dated as of September 23, 1994, by and among First
American National Bank, the Registrant and Children's Comprehensive Services of
California, Inc. (incorporated by reference from the Registrant's Current Report on
Form 8-K, dated October 11, 1994)
10.16 Collateral Assignment of Loan Documents dated as of September 23, 1994, by the
Registrant in favor of First American National Bank (incorporated by reference from
the Registrant's Current Report on Form 8-K, dated October 11, 1994)
10.17 Second Amendment to Collateral Assignment of Loan Documents dated January 29, 1996,
by the Registrant in favor of First American National Bank (incorporated by
reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1996)
10.18 Amendment No. 1 to Warrant Agreement dated October 4, 1995, between the Registrant
and School Improvement Services, Inc. (incorporated by reference from the
Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1996)
10.19 Consulting and Marketing Agreement, effective as of August 1, 1992, dated September
22, 1994, by and between the Registrant and Helicon, Incorporated (incorporated by
reference from the Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 1995)
10.20 Agreement dated as of August 17, 1995, between the Registrant and Riverside County,
California Superintendent of Schools for Special Education Services
10.21 Registration Rights Agreement dated September 20, 1993, by and between the
Registrant and T. Rowe Price Strategic Partners Fund II, L.P. (incorporated by
reference from the Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 1996)
10.22 Debt Subordination Agreement dated January 29, 1996, by and between First American
National Bank, the Registrant and National Health Investors (incorporated by
reference to the Registrant's Annual report on Form 10-K for the fiscal year ended
March 31, 1996)
10.23 Guaranty and Suretyship Agreement dated January 29, 1996, by and between First
American National Bank, the Registrant and Helicon Incorporated (incorporated by
reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1996)
10.24 Second Amendment to Loan and Security Agreement dated January 29, 1996, by and
among First American National Bank and the Registrant (incorporated by reference to
the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31,
1996)
10.25 Marketing & Consulting Services Letter Agreement, dated June 30, 1996, by and
between Joseph A. Fernandez & Associates, Inc. and the Registrant
11 Statement Re: Computation of Per Share Earnings (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1996)
23.1 Consent of Ernst & Young LLP
23.2 Consent of Bass, Berry & Sims PLC (included in Exhibit 5)
24 Power of Attorney (included on signature page)
</TABLE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to
II-4
<PAGE> 66
Section 15(d) of the Exchange Act), that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of the securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 492(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 67
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Murfreesboro, State of Tennessee, on July 18, 1996.
CHILDREN'S COMPREHENSIVE SERVICES, INC.
By: /s/ WILLIAM J BALLARD
-------------------------------------
William J Ballard
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints William J Ballard and Donald B.
Whitfield, and each of them, his or her true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him or her and
in his or her name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement, and any registration statement relating to the same offering as this
Registration Statement that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents or any of them, or
their or his substitutes or substitute, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------ --------------
<C> <S> <C>
/s/ WILLIAM J BALLARD Chairman, Chief Executive Officer July 18, 1996
- ------------------------------------------ and Director (Principal Executive
William J Ballard Officer)
/s/ AMY S. HARRISON Vice Chairman, President and
- ------------------------------------------ Director July 18, 1996
Amy S. Harrison
/s/ MARTHA A. PETREY, PH.D. Executive Vice President and July 18, 1996
- ------------------------------------------ Director
Martha A. Petrey, Ph.D.
/s/ DONALD B. WHITFIELD Vice President-Finance, Secretary July 18, 1996
- ------------------------------------------ and Treasurer (Principal Financial
Donald B. Whitfield and Accounting Officer)
/s/ THOMAS B. CLARK Director July 18, 1996
- ------------------------------------------
Thomas B. Clark
/s/ JOSEPH A. FERNANDEZ, ED.D. Director July 18, 1996
- ------------------------------------------
Joseph A. Fernandez, Ed.D.
/s/ DAVID L. WARNOCK Director July 18, 1996
- ------------------------------------------
David L. Warnock
</TABLE>
II-6
<PAGE> 68
EXHIBITS INDEX
The following exhibits are filed as part of this Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- -----------------------------------------------------------------------------------
<S> <C>
1 Form of Underwriting Agreement
4.1 Restated Charter, as amended (incorporated by reference from the Registrant's
Registration Statement on Form S-1 (Registration No. 33-15034); the Registrant's
Registration Statement on Form S-1 (Registration No. 33-31527); and the
Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1994)
4.2 Bylaws (incorporated by reference from the Registrant's Registration Statement on
Form S-1 (Registration No. 33-31527))
4.3 Specimen Stock Certificate (incorporated by reference from the Registrant's Annual
Report on Form 10-K for the fiscal year ended March 31, 1994)
5 Opinion of Bass, Berry & Sims PLC
10.1 Non-Competition Agreement between the Registrant and Amy S. Harrison (incorporated
by reference from the Registrant's Current Report on Form 8-K, dated April 12,
1988)
10.2 Non-Competition Agreement between the Registrant and Martha A. Petrey (incorporated
by reference from the Registrant's Current Report on Form 8-K, dated April 12,
1988)
10.3 Registration Agreement between the Registrant and Amy S. Harrison and Martha A.
Petrey (incorporated by reference from the Registrant's Current Report on Form 8-K,
dated April 12, 1988)
10.4 1987 Employee Stock Option Plan, as amended (incorporated by reference from the
Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1995)
10.5 1989 Stock Option Plan for Non-Employee Directors (incorporated by reference from
the Registrant's Registration Statement on Form S-8 (Reg. No. 2-33-33499)
10.6 Assignment and Sublease between the Registrant and Helicon, Incorporated
(incorporated by reference from the Registrant's Annual Report on Form 10-K for the
fiscal year ended March 31, 1990)
10.7 Warrant Agreement dated as of September 20, 1993 between the Registrant and Signet
Commercial Credit Corporation (incorporated by reference to the Registrant's Annual
Report on Form 10-K for the fiscal year ended March 31, 1994)
10.8 Loan Agreement dated as of September 23, 1994, by and between the Registrant,
Children's Comprehensive Services of California, Inc. and National Health
Investors, Inc. (incorporated by reference from the Registrant's Current Report on
Form 8-K, dated October 11, 1994)
10.9 Security Agreement/Deposits dated as of September 23, 1994, by and among the
Registrant, Children's Comprehensive Services of California, Inc. and National
Health Investors, Inc. (incorporated by reference from the Registrant's Current
Report on Form 8-K, dated October 11, 1994)
10.10 Security Agreement/Projects dated as of September 23, 1994, between the Registrant,
Children's Comprehensive Services of California, Inc. and National Health
Investors, Inc. (incorporated by reference from the Registrant's Current Report on
Form 8-K, dated October 11, 1994)
10.11 Equity Participation Agreement dated as of September 23, 1994, by and between the
Registrant, Children's Comprehensive Services of California, Inc. and National
Health Investors, Inc. (incorporated by reference from the Registrant's Current
Report on Form 8-K, dated October 11, 1994)
10.12 Assignment and Participation Agreement dated as of September 23, 1994, between the
Registrant and National Health Investors, Inc. (incorporated by reference from the
Registrant's Current Report on Form 8-K, dated October 11, 1994)
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. (incorporated by reference from the Registrant's Current Report on
Form 8-K, dated October 11, 1994)
</TABLE>
<PAGE> 69
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- -----------------------------------------------------------------------------------
<S> <C>
10.14 Intercreditor Agreement dated as of September 23, 1994, by and among the
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. (incorporated by reference from the Registrant's Current Report on
Form 8-K, dated October 11, 1994)
10.15 Loan and Security Agreement dated as of September 23, 1994, by and among First
American National Bank, the Registrant and Children's Comprehensive Services of
California, Inc. (incorporated by reference from the Registrant's Current Report on
Form 8-K, dated October 11, 1994)
10.16 Collateral Assignment of Loan Documents dated as of September 23, 1994, by the
Registrant in favor of First American National Bank (incorporated by reference from
the Registrant's Current Report on Form 8-K, dated October 11, 1994)
10.17 Second Amendment to Collateral Assignment of Loan Documents dated January 29, 1996,
by the Registrant in favor of First American National Bank (incorporated by
reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1996)
10.18 Amendment No. 1 to Warrant Agreement dated October 4, 1995, between the Registrant
and School Improvement Services, Inc. (incorporated by reference from the
Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1996)
10.19 Consulting and Marketing Agreement, effective as of August 1, 1992, dated September
22, 1994, by and between the Registrant and Helicon, Incorporated (incorporated by
reference from the Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 1995)
10.20 Agreement dated as of August 17, 1995, between the Registrant and Riverside County,
California Superintendent of Schools for Special Education Services
10.21 Registration Rights Agreement dated September 20, 1993, by and between the
Registrant and T. Rowe Price Strategic Partners Fund II, L.P. (incorporated by
reference from the Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 1996)
10.22 Debt Subordination Agreement dated January 29, 1996, by and between First American
National Bank, the Registrant and National Health Investors (incorporated by
reference to the Registrant's Annual report on Form 10-K for the fiscal year ended
March 31, 1996)
10.23 Guaranty and Suretyship Agreement dated January 29, 1996, by and between First
American National Bank, the Registrant and Helicon Incorporated (incorporated by
reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended
March 31, 1996)
10.24 Second Amendment to Loan and Security Agreement dated January 29, 1996, by and
among First American National Bank and the Registrant (incorporated by reference to
the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31,
1996)
10.25 Marketing & Consulting Services Letter Agreement, dated June 30, 1996, by and
between Joseph A. Fernandez & Associates, Inc. and the Registrant
11 Statement Re: Computation of Per Share Earnings (incorporated by reference to the
Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1996)
23.1 Consent of Ernst & Young LLP
23.2 Consent of Bass, Berry & Sims PLC (included in Exhibit 5)
24 Power of Attorney (included on signature page)
</TABLE>
<PAGE> 1
EXHIBIT 1
FORM OF UNDERWRITING
AGREEMENT
2,500,000 Shares
Children's Comprehensive Services, Inc.
Common Stock
UNDERWRITING AGREEMENT
July __, 1996
MONTGOMERY SECURITIES
EQUITABLE SECURITIES CORPORATION
LEHMAN BROTHERS INC.
As Representatives of the several Underwriters
c/o MONTGOMERY SECURITIES
600 Montgomery Street
San Francisco, California 94111
Dear Sirs:
SECTION 1. Introductory. Children's Comprehensive Services, Inc., a
Tennessee corporation (the "Company"), proposes to issue and sell 1,500,000
shares of its authorized but unissued Common Stock (the "Common Stock") and the
stockholder of the Company named in Schedule B annexed hereto (the "Selling
Stockholder") propose to sell 1,000,000 shares of the Company's issued and
outstanding Common Stock to the several underwriters named in Schedule A annexed
hereto (the "Underwriters"), for whom you are acting as Representatives. Said
aggregate of 2,500,000 shares are herein called the "Firm Common Shares." In
addition, the Selling Stockholder proposes to grant to the Underwriters an
option to purchase up to 375,000 additional shares of Common Stock (the
"Optional Common Shares"), as provided in Section 5 hereof. The Firm Common
Shares and, to the extent such option is exercised, the Optional Common Shares
are hereinafter collectively referred to as the "Common Shares."
You have advised the Company and the Selling Stockholder that the
Underwriters propose to make a public offering of their respective portions of
the Common Shares on the effective date of the registration statement
hereinafter referred to, or as soon thereafter as in your judgment is advisable.
<PAGE> 2
The Company and the Selling Stockholder hereby confirm their respective
agreements with respect to the purchase of the Common Shares by the Underwriters
as follows:
SECTION 2. Representations and Warranties of the Company and the Selling
Stockholder. The Company and the Selling Stockholder represent and warrant to
the several Underwriters that:
(a) A registration statement on Form S-2 (File No. 333- ) with
respect to the Common Shares has been prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the
"Act"), and the rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder, and has
been filed with the Commission. The Company has prepared and has filed or
proposes to file prior to the effective date of such registration statement
an amendment or amendments to such registration statement, which amendment
or amendments have been or will be similarly prepared. There have been
delivered to you two signed copies of such registration statement and
amendments, together with two copies of each exhibit filed therewith.
Conformed copies of such registration statement and amendments (but without
exhibits) and of the related preliminary prospectus have been delivered to
you in such reasonable quantities as you have requested for each of the
Underwriters. The Company will next file with the Commission one of the
following: (i) prior to effectiveness of such registration statement, a
further amendment thereto, including the form of final prospectus, (ii) a
final prospectus in accordance with Rules 430A and 424(b) of the Rules and
Regulations or (iii) a term sheet (the "Term Sheet") as described in and in
accordance with Rules 434 and 424(b) of the Rules and Regulations. As
filed, the final prospectus, if one is used, or the Term Sheet and
Preliminary Prospectus, if a final prospectus is not used, shall include
all Rule 430A Information (as hereinafter defined) and, except to the
extent that you shall agree in writing to a modification, shall be in all
substantive respects in the form furnished to you prior to the date and
time that this Agreement was executed and delivered by the parties hereto,
or, to the extent not completed at such date and time, shall contain only
such specific additional information and other changes (beyond that
contained in the latest Preliminary Prospectus) as the Company shall have
previously advised you in writing would be included or made therein.
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time
-2-
<PAGE> 3
such registration statement becomes effective and, in the event any
post-effective amendment thereto becomes effective prior to the First
Closing Date (as hereinafter defined), shall also mean such registration
statement as so amended; provided, however, that such term shall also
include (i) all Rule 430A Information deemed to be included in such
registration statement at the time such registration statement becomes
effective as provided by Rule 430A of the Rules and Regulations and (ii)
any registration statement filed pursuant to Rule 462(b) of the Rules and
Regulations relating to the Common Shares. The term "Preliminary
Prospectus" shall mean any preliminary prospectus referred to in the
preceding paragraph and any preliminary prospectus included in the
Registration Statement at the time it becomes effective that omits Rule
430A Information. The term "Prospectus" as used in this Agreement shall
mean (i) the prospectus relating to the Common Shares in the form in which
it is first filed with the Commission pursuant to Rule 424(b) of the Rules
and Regulations, (ii) if a Term Sheet is not used and if no filing pursuant
to Rule 424(b) of the Rules and Regulations is required, the form of final
prospectus included in the Registration Statement at the time such
registration statement becomes effective or (iii) if a Term Sheet is used,
the Term Sheet in the form in which it is first filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations, together with the
Preliminary Prospectus included in the Registration Statement at the time
it becomes effective. The term "Rule 430A Information" means information
with respect to the Common Shares and the offering thereof permitted to be
omitted from the Registration Statement when it becomes effective pursuant
to Rule 430A of the Rules and Regulations. Any reference herein to any
Preliminary Prospectus or the Prospectus shall be deemed to refer to and
include the documents incorporated by reference therein pursuant to Form
S-2 under the Act, as of the date of such Preliminary Prospectus or
Prospectus, as the case may be.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus, and each Preliminary Prospectus has
conformed in all material respects to the requirements of the Act and the
Rules and Regulations and, as of its date, has not included any untrue
statement of a material fact or omitted to state a material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading; and at the time the Registration
Statement becomes effective, and at all times subsequent thereto up to and
including each Closing Date hereinafter mentioned, the Registration
-3-
<PAGE> 4
Statement and the Prospectus, and any amendments or supplements thereto,
will contain all material statements and information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations, and neither the Registration Statement nor the Prospectus, nor
any amendment or supplement thereto, will include any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading;
provided, however, no representation or warranty contained in this
subsection 2(b) shall be applicable to information contained in or omitted
from any Preliminary Prospectus, the Registration Statement, the Prospectus
or any such amendment or supplement in reliance upon and in conformity with
written information furnished to the Company by or on behalf of any
Underwriter, directly or through the Representatives, specifically for use
in the preparation thereof. The documents incorporated by reference in the
Prospectus, when they were filed with the Commission, conformed in all
material respects to the requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act") and the rules and regulations of the
Commission thereunder, and none of such documents contained an untrue
statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading.
(c) The Company does not own or control, directly or indirectly, any
corporation, association or other entity other than the subsidiaries listed
in Exhibit 21 to the Annual Report on Form 10-K for the Company's most
recent fiscal year. The Company and each of its subsidiaries have been
duly incorporated and are validly existing as corporations in good standing
under the laws of their respective jurisdictions of incorporation, with
full power and authority (corporate and other) to own and lease their
properties and conduct their respective businesses as described in the
Prospectus; the Company owns all of the outstanding capital stock of its
subsidiaries free and clear of all claims, liens, charges and encumbrances;
the Company and each of its subsidiaries are in possession of and operating
in compliance with all authorizations, licenses, permits, consents,
certificates and orders material to the conduct of their respective
businesses, all of which are valid and in full force and effect; the
Company and each of its subsidiaries are duly qualified to do business and
in good standing as foreign corporations in each jurisdiction in which the
ownership or leasing of properties or the conduct
-4-
<PAGE> 5
of their respective businesses requires such qualification, except for
jurisdictions in which the failure to so qualify would not have a material
adverse effect upon the Company or the subsidiary; and no proceeding has
been instituted in any such jurisdiction, revoking, limiting or curtailing,
or seeking to revoke, limit or curtail, such power and authority or
qualification.
(d) The Company has an authorized and outstanding capital stock as
set forth under the heading "Capitalization" in the Prospectus; the issued
and outstanding shares of Common Stock have been duly authorized and
validly issued, are fully paid and nonassessable, are duly traded on the
Nasdaq National Market, have been issued in compliance with all federal and
state securities laws, were not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase securities,
and conform to the description thereof contained in the Prospectus. All
issued and outstanding shares of capital stock of each subsidiary of the
Company have been duly authorized and validly issued and are fully paid and
nonassessable. Except as disclosed in or contemplated by the Prospectus
and the financial statements of the Company, and the related notes thereto,
included in the Prospectus, neither the Company nor any subsidiary has
outstanding any options to purchase, or any preemptive rights or other
rights to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell, shares
of its capital stock or any such options, rights, convertible securities or
obligations. The description of the Company's stock option, stock bonus
and other stock plans or arrangements, and the options or other rights
granted and exercised thereunder, set forth in the Prospectus accurately
and fairly presents the information required to be shown with respect to
such plans, arrangements, options and rights.
(e) The Common Shares to be sold by the Company have been duly
authorized and, when issued, delivered and paid for in the manner set forth
in this Agreement, will be duly authorized, validly issued, fully paid and
nonassessable, and will conform to the description thereof contained in the
Prospectus. No preemptive rights or other rights to subscribe for or
purchase exist with respect to the issuance and sale of the Common Shares
by the Company pursuant to this Agreement. No stockholder of the Company
has any right which has not been waived to require the Company to register
the sale of any shares owned by such stockholder under the Act in the
public offering contemplated by this Agreement. No further approval or
authority of the stockholders or the
-5-
<PAGE> 6
Board of Directors of the Company will be required for the transfer and
sale of the Common Shares to be sold by the Selling Stockholder or the
issuance and sale of the Common shares to be sold by the Company as
contemplated herein.
(f) The Company has full legal right, power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company
and constitutes a valid and binding obligation of the Company in accordance
with its terms. The making and performance of this Agreement by the
Company and the consummation of the transactions herein contemplated will
not violate any provisions of the certificate of incorporation or bylaws,
or other organizational documents, of the Company or any of its
subsidiaries, and will not conflict with, result in the breach or violation
of, or constitute, either by itself or upon notice or the passage of time
or both, a default under any agreement, mortgage, deed of trust, lease,
franchise, license, indenture, permit or other instrument to which the
Company or any of its subsidiaries is a party or by which the Company or
any of its subsidiaries or any of its respective properties may be bound or
affected, any statute or any authorization, judgment, decree, order, rule
or regulation of any court or any regulatory body, administrative agency or
other governmental body applicable to the Company or any of its
subsidiaries or any of their respective properties. No consent, approval,
authorization or other order of any court, regulatory body, administrative
agency or other governmental body is required for the execution and
delivery of this Agreement or the consummation of the transactions
contemplated by this Agreement, except for compliance with the Act, the
Blue Sky laws applicable to the public offering of the Common Shares by the
several Underwriters and the clearance of such offering with the National
Association of Securities Dealers, Inc. (the "NASD").
(g) Ernst & Young LLP, who have expressed their opinion with respect
to the financial statements and schedules filed with the Commission as a
part of the Registration Statement and included in the Prospectus and in
the Registration Statement, are independent accountants as required by the
Act and the Rules and Regulations.
(h) The financial statements and schedules of the Company, and the
related notes thereto, included in the Registration Statement and the
Prospectus present fairly the financial position of the Company as of the
respective dates of such financial statements and schedules, and the
results
-6-
<PAGE> 7
of operations and changes in financial position of the Company for the
respective periods covered thereby. Such statements, schedules and related
notes have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis as certified by the independent
accountants named in subsection 2(g). No other financial statements or
schedules are required to be included in the Registration Statement. The
selected financial data set forth in the Prospectus under the captions
"Capitalization" and "Selected Financial Data" fairly present the
information set forth therein on the basis stated in the Registration
Statement.
(i) Except as disclosed in the Prospectus, and except as to defaults
which individually or in the aggregate would not be material to the
Company, neither the Company nor any of its subsidiaries is in violation or
default of any provision of its certificate of incorporation or bylaws, or
other organizational documents, or is in breach of or default with respect
to any provision of any agreement, judgment, decree, order, mortgage, deed
of trust, lease, franchise, license, indenture, permit or other instrument
to which it is a party or by which it or any of its properties are bound;
and there does not exist any state of facts which constitutes an event of
default on the part of the Company or any such subsidiary as defined in
such documents or which, with notice or lapse of time or both, would
constitute such an event of default.
(j) There are no contracts or other documents required to be
described in the Registration Statement or to be filed as exhibits to the
Registration Statement by the Act or by the Rules and Regulations which
have not been described or filed as required. The contracts so described
in the Prospectus are in full force and effect on the date hereof; and
neither the Company nor any of its subsidiaries, nor to the best of the
Company's knowledge, any other party is in breach of or default under any
of such contracts.
(k) Except as disclosed in the Prospectus, there are no legal or
governmental actions, suits or proceedings pending or, to the best of the
Company's knowledge, threatened to which the Company or any of its
subsidiaries is or may be a party or of which property owned or leased by
the Company or any of its subsidiaries is or may be the subject, or related
to environmental or discrimination matters, which actions, suits or
proceedings might, individually or in the aggregate, prevent or adversely
affect the transactions contemplated by this Agreement or result in a
material adverse change in the
-7-
<PAGE> 8
condition (financial or otherwise), properties, business, results of
operations or prospects of the Company and its subsidiaries; and no labor
disturbance by the employees of the Company or any of its subsidiaries
exists or is imminent which might be expected to affect adversely such
condition, properties, business, results of operations or prospects.
Neither the Company nor any of its subsidiaries is a party or subject to
the provisions of any material injunction, judgment, decree or order of any
court, regulatory body, administrative agency or other governmental body.
(l) The Company or the applicable subsidiary has good and marketable
title to all the properties and assets reflected as owned in the financial
statements hereinabove described (or elsewhere in the Prospectus), subject
to no lien, mortgage, pledge, charge or encumbrance of any kind except (i)
those, if any, reflected in such financial statements (or elsewhere in the
Prospectus), or (ii) those which are not material in amount and do not
adversely affect the use made and proposed to be made of such property by
the Company and its subsidiaries. The Company or the applicable subsidiary
holds its leased properties under valid and binding leases, with such
exceptions as are not materially significant in relation to the business of
the Company. Except as disclosed in the Prospectus, the Company owns or
leases all such properties as are necessary to its operations as now
conducted or as proposed to be conducted.
(m) Since the respective dates as of which information is given in
the Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus: (i) the Company and its
subsidiaries have not incurred any material liabilities or obligations,
indirect, direct or contingent, or entered into any material verbal or
written agreement or other transaction which is not in the ordinary course
of business or which could result in a material reduction in the future
earnings of the Company and its subsidiaries; (ii) the Company and its
subsidiaries have not sustained any material loss or interference with
their respective businesses or properties from fire, flood, windstorm,
accident or other calamity, whether or not covered by insurance; (iii) the
Company has not paid or declared any dividends or other distributions with
respect to its capital stock and the Company and its subsidiaries are not
in default in the payment of principal or interest on any outstanding debt
obligations; (iv) there has not been any change in the capital stock (other
than upon the sale of the Common Shares hereunder and upon the exercise of
options and warrants described in the Registration Statement) or
indebtedness
-8-
<PAGE> 9
material to the Company and its subsidiaries (other than in the ordinary
course of business); and (v) there has not been any material adverse change
in the condition (financial or otherwise), business, properties, results of
operations or prospects of the Company and its subsidiaries.
(n) Except as disclosed in or specifically contemplated by the
Prospectus, the Company and its subsidiaries have sufficient trademarks,
trade names, patent rights, mask works, copyrights, licenses, approvals and
governmental authorizations to conduct their businesses as now conducted;
the expiration of any trademarks, trade names, patent rights, mask works,
copyrights, licenses, approvals or governmental authorizations would not
have a material adverse effect on the condition (financial or otherwise),
business, results of operations or prospects of the Company or its
subsidiaries; and the Company has no knowledge of any material infringement
by it or its subsidiaries of trademark, trade name rights, patent rights,
mask works, copyrights, licenses, trade secret or other similar rights of
others, and there is no claim being made against the Company or its
subsidiaries regarding trademark, trade name, patent, mask work, copyright,
license, trade secret or other infringement which could have a material
adverse effect on the condition (financial or otherwise), business, results
of operations or prospects of the Company and its subsidiaries.
(o) The Company has not been advised, and has no reason to believe,
that either it or any of its subsidiaries is not conducting business in
compliance with all applicable laws, rules and regulations of the
jurisdictions in which it is conducting business, including, without
limitation, all applicable local, state and federal environmental laws and
regulations; except where failure to be so in compliance would not
materially adversely affect the condition (financial or otherwise),
business, results of operations or prospects of the Company and its
subsidiaries.
(p) The Company and its subsidiaries have filed all necessary
federal, state and foreign income and franchise tax returns and have paid
all taxes shown as due thereon; and the Company has no knowledge of any tax
deficiency which has been or might be asserted or threatened against the
Company or its subsidiaries which could materially and adversely affect the
business, operations or properties of the Company and its subsidiaries.
(q) The Company is not, and upon receipt of the proceeds of the
offering of the Common Shares will not be, an
-9-
<PAGE> 10
"investment company" within the meaning of the Investment Company Act of
1940, as amended.
(r) The Company has not distributed and will not distribute prior to
the First Closing Date any offering material in connection with the
offering and sale of the Common Shares other than the Prospectus, the
Registration Statement and the other materials permitted by the Act.
(s) Each of the Company and its subsidiaries maintains insurance of
the types and in the amounts generally deemed adequate for its business,
including, but not limited to, insurance covering real and personal
property owned or leased by the Company and its subsidiaries against theft,
damage, destruction, acts of vandalism and all other risks customarily
insured against, all of which insurance is in full force and effect.
(t) Neither the Company nor any of its subsidiaries has at any time
during the last five years (i) made any unlawful contribution to any
candidate for foreign office, or failed to disclose fully any contribution
in violation of law, or (ii) made any payment to any federal or state
governmental officer or official, or other person charged with similar
public or quasi-public duties, other than payments required or permitted by
the laws of the United States or any jurisdiction thereof.
(u) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might be reasonably expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Common Shares.
(v) The Common Stock of the Company has been registered under Section
12(g) of the Exchange Act, and all of the outstanding shares of Common
Stock (including the Common Shares to be sold by the Selling Shareholder
hereunder) and the Common Shares to be issued by the Company hereunder have
been listed on the Nasdaq National Market.
(w) The Company has filed with the Commission, on a timely basis,
all documents required to have been filed by the Company pursuant to the
Exchange Act or the rules and regulations promulgated thereunder. Each
such document, when filed with the Commission, conformed in all material
respects to the requirements of the Exchange Act and the rules and
regulations promulgated thereunder, and did not contain an
-10-
<PAGE> 11
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
SECTION 3. Representations, Warranties and Covenants of the Selling
Stockholder.
(a) The Selling Stockholder represents and warrants to, and agrees
with, the several Underwriters that:
(i) The Selling Stockholder has, and on the First Closing Date
and the Second Closing Date hereinafter mentioned will have, good and
marketable title to the Common Shares proposed to be sold by the
Selling Stockholder hereunder on such Closing Date and full right,
power and authority to enter into this Agreement and to sell, assign,
transfer and deliver such Common Shares hereunder, free and clear of
all voting trust arrangements, liens, encumbrances, equities, security
interests, restrictions and claims whatsoever; and upon delivery of
and payment for such Common Shares hereunder, the Underwriters will
acquire good and marketable title thereto, free and clear of all
liens, encumbrances, equities, claims, restrictions, security
interests, voting trusts or other defects of title whatsoever.
(ii) This Agreement has been duly authorized, executed and
delivered by the Selling Shareholder and constitutes the valid and
binding obligation and agreement of the Selling Shareholder,
enforceable against the Selling Shareholder in accordance with its
terms.
(iii) The Selling Stockholder has executed and delivered a power
of Attorney and caused to be executed and delivered on his behalf a
Custody Agreement (herein-after collectively referred to as the
"Stockholder's Agreement") and in connection herewith the Selling
Stockholder further represents, warrants and agrees that the Selling
Stockholder has deposited in custody, under the Stockholder's
Agreement, with the agent named therein (the "Agent") as custodian,
certificates in negotiable form for the Common Shares to be sold
hereunder by the Selling Stockholder, for the purpose of further
delivery pursuant to this Agreement. The Selling Stockholder agrees
that the Common Shares to be sold by the Selling Stockholder on
deposit with the
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<PAGE> 12
Agent are subject to the interests of the Company and the
Underwriters, that the arrangements made for such custody are to that
extent irrevocable, and that the obligations of the Selling
Stockholder hereunder shall not be terminated, except as provided in
this Agreement or in the Stockholder's Agreement, by any act of the
Selling Stockholder, by operation of law, by the death or incapacity
of the Selling Stockholder or by the occurrence of any other event. If
the Selling Stockholder should die or become incapacitated, or if any
other event should occur, before the delivery of the Common Shares
hereunder, the documents evidencing Common Shares then on deposit with
the Agent shall be delivered by the Agent in accordance with the terms
and conditions of this Agreement as if such death, incapacity or other
event had not occurred, regardless of whether or not the Agent shall
have received notice thereof. This Agreement and the Stockholder's
Agreement have been duly executed and delivered by or on behalf of the
Selling Stockholder and the form of the Stockholder's Agreement has
been delivered to you.
(iv) The performance of this Agreement and the Stockholder's
Agreement and the consummation of the transactions contemplated hereby
and by the Stockholder's Agreement will not result in a breach or
violation by the Selling Stockholder of any of the terms or provisions
of, or constitute a default by the Selling Stockholder under, any
indenture, mortgage, deed of trust, trust (constructive or other),
loan agreement, lease, franchise, license or other agreement or
instrument to which the Selling Stockholder is a party or by which the
Selling Stockholder or any of its properties is bound, any statute, or
any judgment, decree, order, rule or regulation of any court or
governmental agency or body applicable to the Selling Stockholder or
any of its properties. No consent, approval, authorization or other
order of any court, regulatory body, administrative agency or other
governmental body is required for the execution and delivery by the
Selling Shareholder of this Agreement and the Shareholder's Agreement
or the consummation by the Selling Shareholder of the transactions
contemplated by this Agreement and the Shareholder's Agreement, except
for compliance with the Act, the Blue Sky laws applicable to the
public offering of the Common Shares by the several Underwriters and
the clearance of such offering with the NASD.
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<PAGE> 13
(v) The Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to or which has
constituted or which might reasonably be expected to cause or result
in stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Common Shares.
(vi) Each Preliminary Prospectus and the Prospectus, insofar as
it has related to the Selling Stockholder, has conformed in all
material respects to the requirements of the Act and the Rules and
Regulations and has not included any untrue statement of a material
fact or omitted to state a material fact necessary to make the
statements therein not misleading in light of the circumstances under
which they were made; and neither the Registration Statement nor the
Prospectus, nor any amendment or supplement thereto, as it relates to
the Selling Stockholder, will include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading.
(vii) The Selling Stockholder is not aware that any of the
representations and warranties set forth in Section 2 above is untrue
or inaccurate in any material respect. The Selling Shareholder is not
aware that the Registration Statement or Prospectus includes any
untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading.
(b) The Selling Stockholder agrees with the Company and the
Underwriters not to offer to sell, sell or contract to sell or otherwise
dispose of any shares of Common Stock or securities convertible into or
exchangeable for any shares of Common Stock, for a period of [120] days
after the first date that any of the Common Shares are released by you for
sale to the public, without the prior written consent of either Montgomery
Securities or each of the Representatives, which consent may be withheld at
the sole discretion of Montgomery Securities or each of the
Representatives, as the case may be.
SECTION 4. Representations and Warranties of the Underwriters. The
Representatives, on behalf of the several Underwriters, represent and warrant to
the Company and to the Selling Stockholder that the information set forth (i) on
the cover page of the Prospectus with respect to price, underwriting discounts
and commissions and terms of offering and (ii) under
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<PAGE> 14
"Underwriting" in the Prospectus was furnished to the Company by and on behalf
of the Underwriters for use in connection with the preparation of the
Registration Statement and the Prospectus and is correct in all material
respects. The Representatives represent and warrant that they have been
authorized by each of the other Underwriters as the Representatives to enter
into this Agreement on its behalf and to act for it in the manner herein
provided.
SECTION 5. Purchase, Sale and Delivery of Common Shares. On the basis of
the representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, (i) the Company agrees to issue and
sell to the Underwriters 1,500,000 of the Firm Common Shares, and (ii) the
Selling Stockholder agrees to sell to the Underwriters an aggregate of 1,000,000
of the Firm Common Shares. The Underwriters agree, severally and not jointly,
to purchase from the Company and the Selling Stockholder, respectively, the
number of Firm Common Shares described below. The purchase price per share to
be paid by the several Underwriters to the Company and to the Selling
Stockholder, respectively, shall be $_____ per share.
The obligation of each Underwriter to the Company shall be to purchase from
the Company that number of full shares which (as nearly as practicable, as
determined by you) bears to 1,500,000 the same proportion as the number of
shares set forth opposite the name of such Underwriter in Schedule A hereto
bears to the total number of Firm Common Shares. The obligation of each
Underwriter to the Selling Stockholder shall be to purchase from the Selling
Stockholder that number of full shares which (as nearly as practicable, as
determined by you) bears to 1,000,000 the same proportion as the number of
shares set forth opposite the name of such Underwriter in Schedule A hereto
bears to the total number of Firm Common Shares.
Delivery of certificates for the Firm Common Shares to be purchased by the
Underwriters and payment therefor shall be made at the offices of Montgomery
Securities, 600 Montgomery Street, San Francisco, California (or such other
place as may be agreed upon by the Company and the Representatives) at such time
and date, not later than the third (or, if the Firm Common Shares are priced as
contemplated by Rule 15c6-1(c) under the Exchange Act, after 4:30 p.m.,
Washington, D.C. time, the fourth) full business day following the first date
that any of the Common Shares are released by you for sale to the public, as you
shall designate by at least 48 hours prior notice to the Company (or at such
other time and date, not later than one week after such third or fourth, as the
case may be, full business day as may be agreed upon by the Company and the
Representatives) (the "First Closing Date");
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<PAGE> 15
provided, however, that if the Prospectus is at any time prior to the First
Closing Date recirculated to the public, the First Closing Date shall occur upon
the later of the third or fourth, as the case may be, full business day
following the first date that any of the Common Shares are released by you for
sale to the public or the date that is 48 hours after the date that the
Prospectus has been so recirculated.
Delivery of certificates for the Firm Common Shares shall be made by or on
behalf of the Company and the Selling Stockholder to you, for the respective
accounts of the Underwriters with respect to the Firm Common Shares to be sold
by the Company and by the Selling Stockholder against payment by you, for the
accounts of the several Underwriters, of the purchase price therefor by
certified or official bank checks payable in next day funds to the order of the
Company and of the Agent in proportion to the number of Firm Common Shares to be
sold by the Company and the Selling Stockholder, respectively. The certificates
for the Firm Common Shares shall be registered in such names and denominations
as you shall have requested at least two full business days prior to the First
Closing Date, and shall be made available for checking and packaging on the
business day preceding the First Closing Date at a location in New York, New
York, as may be designated by you. Time shall be of the essence, and delivery
at the time and place specified in this Agreement is a further condition to the
obligations of the Underwriters.
In addition, on the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Selling Stockholder hereby grants an option to the several Underwriters to
purchase, severally and not jointly, up to an aggregate of 375,000 Optional
Common Shares at the purchase price per share to be paid for the Firm Common
Shares, for use solely in covering any over-allotments made by you for the
account of the Underwriters in the sale and distribution of the Firm Common
Shares. The option granted hereunder may be exercised at any time (but not more
than once) within 30 days after the first date that any of the Common Shares are
released by you for sale to the public, upon notice by you to the Selling
Stockholder setting forth the aggregate number of Optional Common Shares as to
which the Underwriters are exercising the option, the names and denominations in
which the certificates for such shares are to be registered and the time and
place at which such certificates will be delivered. Such time of delivery
(which may not be earlier than the First Closing Date), being herein referred to
as the "Second Closing Date," shall be determined by you, but if at any time
other than the First Closing Date shall not be earlier than three nor later than
five full business days after delivery of such notice of exercise. The number
of Optional
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<PAGE> 16
Common Shares to be purchased by each Underwriter shall be determined by
multiplying the number of Optional Common Shares to be sold by the Selling
Stockholder pursuant to such notice of exercise by a fraction, the numerator of
which is the number of Firm Common Shares to be purchased by such Underwriter as
set forth opposite its name in Schedule A and the denominator of which is
2,500,000 (subject to such adjustments to eliminate any fractional share
purchases as you in your discretion may make). Certificates for the Optional
Common Shares will be made available for checking and packaging on the business
day preceding the Second Closing Date at a location in New York, New York, as
may be designated by you. The manner of payment for and delivery of the
Optional Common Shares shall be the same as for the Firm Common Shares purchased
from the Selling Stockholder as specified in the two preceding paragraphs. At
any time before lapse of the option, you may cancel such option by giving
written notice of such cancellation to the Selling Stockholder. If the option
is cancelled or expires unexercised in whole or in part, the Company will
deregister under the Act the number of Option Shares as to which the option has
not been exercised.
You have advised the Company and the Selling Stockholder that each
Underwriter has authorized you to accept delivery of its Common Shares, to make
payment and to receipt therefor. You, individually and not as the
Representatives of the Underwriters, may (but shall not be obligated to) make
payment for any Common Shares to be purchased by any Underwriter whose funds
shall not have been received by you by the First Closing Date or the Second
Closing Date, as the case may be, for the account of such Underwriter, but any
such payment shall not relieve such Underwriter from any of its obligations
under this Agreement.
Subject to the terms and conditions hereof, the Underwriters propose to
make a public offering of their respective portions of the Common Shares as soon
after the effective date of the Registration Statement as in the judgment of the
Representatives is advisable and at the public offering price set forth on the
cover page of and on the terms set forth in the final prospectus, if one is
used, or on the first page of the Term Sheet, if one is used.
SECTION 6. Covenants of the Company. The Company covenants and agrees
that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date
that this Agreement is executed and delivered by the parties hereto, to
become effective. If the Registration Statement has become or
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<PAGE> 17
becomes effective pursuant to Rule 430A of the Rules and Regulations, or
the filing of the Prospectus is otherwise required under Rule 424(b) of the
Rules and Regulations, the Company will file the Prospectus, properly
completed, pursuant to the applicable paragraph of Rule 424(b) of the Rules
and Regulations within the time period prescribed and will provide evidence
satisfactory to you of such timely filing. The Company will promptly
advise you in writing (i) of the receipt of any comments of the Commission,
(ii) of any request of the Commission for amendment of or supplement to the
Registration Statement (either before or after it becomes effective), any
Preliminary Prospectus or the Prospectus or for additional information,
(iii) when the Registration Statement shall have become effective and (iv)
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of the institution of any
proceedings for that purpose. If the Commission shall enter any such stop
order at any time, the Company will use its best efforts to obtain the
lifting of such order at the earliest possible moment. The Company will
not file any amendment or supplement to the Registration Statement (either
before or after it becomes effective), any Preliminary Prospectus or the
Prospectus of which you have not been furnished with a copy a reasonable
time prior to such filing or to which you reasonably object or which is not
in compliance with the Act and the Rules and Regulations.
(b) The Company will prepare and file with the Commission, promptly
upon your request, any amendments or supplements to the Registration
Statement or the Prospectus which in your judgment may be necessary or
advisable to enable the several Underwriters to continue the distribution
of the Common Shares and will use its best efforts to cause the same to
become effective as promptly as possible. The Company will fully and
completely comply with the provisions of Rule 430A of the Rules and
Regulations with respect to information omitted from the Registration
Statement in reliance upon such Rule.
(c) If at any time within the nine-month period referred to in
Section 10(a)(3) of the Act during which a prospectus relating to the
Common Shares is required to be delivered under the Act any event occurs,
as a result of which the Prospectus, including any amendments or
supplements, would include an untrue statement of a material fact, or omit
to state any material fact required to be stated therein or necessary to
make the statements therein not misleading, or if it is necessary at any
time to amend the Prospectus, including any amendments or supplements, to
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<PAGE> 18
comply with the Act or the Rules and Regulations, the Company will promptly
advise you thereof and will promptly prepare and file with the Commission,
at its own expense, an amendment or supplement which will correct such
statement or omission or an amendment or supplement which will effect such
compliance and will use its best efforts to cause the same to become
effective as soon as possible; and, in case any Underwriter is required to
deliver a prospectus after such nine-month period, the Company upon
request, but at the expense of such Underwriter, will promptly prepare such
amendment or amendments to the Registration Statement and such Prospectus
or Prospectuses as may be necessary to permit compliance with the
requirements of Section 10(a)(3) of the Act.
(d) As soon as practicable, but not later than 45 days after the end
of the first quarter ending after one year following the "effective date of
the Registration Statement" (as defined in Rule 158(c) of the Rules and
Regulations), the Company will make generally available to its security
holders an earnings statement (which need not be audited) covering a period
of 12 consecutive months beginning after the effective date of the
Registration Statement which will satisfy the provisions of the last
paragraph of Section 11(a) of the Act.
(e) During such period as a prospectus is required by law to be
delivered in connection with sales by an Underwriter or dealer, the
Company, at its expense, but only for the nine-month period referred to in
Section 10(a)(3) of the Act, will furnish to you and the Selling
Stockholder or mail to your order copies of the Registration Statement, the
Prospectus, the Preliminary Prospectus and all amendments and supplements
to any such documents in each case as soon as available and in such
quantities as you and the Selling Stockholder may request, for the purposes
contemplated by the Act.
(f) The Company shall cooperate with you and your counsel in order to
qualify or register the Common Shares for sale under (or obtain exemptions
from the application of) the Blue Sky laws of such jurisdictions as you
designate, will comply with such laws and will continue such
qualifications, registrations and exemptions in effect so long as
reasonably required for the distribution of the Common Shares. The Company
shall not be required to qualify as a foreign corporation or to file a
general consent to service of process in any such jurisdiction where it is
not presently qualified or where it would be subject to taxation as a
foreign corporation. The Company will advise you promptly of
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<PAGE> 19
the suspension of the qualification or registration of (or any such
exemption relating to) the Common Shares for offering, sale or trading in
any jurisdiction or any initiation or threat of any proceeding for any such
purpose, and in the event of the issuance of any order suspending such
qualification, registration or exemption, the Company, with your
cooperation, will use its best efforts to obtain the withdrawal thereof.
(g) During the period of five years hereafter, the Company will
furnish to the Representatives and, upon request of the Representatives, to
each of the other Underwriters: (i) as soon as practicable after the end of
each fiscal year, copies of the Annual Report of the Company containing the
balance sheet of the Company as of the close of such fiscal year and
statements of income, stockholders' equity and cash flows for the year then
ended and the opinion thereon of the Company's independent public
accountants; (ii) as soon as practicable after the filing thereof, copies
of each proxy statement, Annual Report on Form 10-K, Quarterly Report on
Form 10-Q, Report on Form 8-K or other report filed by the Company with the
Commission, the NASD or any securities exchange; and (iii) as soon as
available, copies of any report or communication of the Company mailed
generally to holders of its Common Stock.
(h) During the period of [120] days after the first date that any of
the Common Shares are released by you for sale to the public, without the
prior written consent of either Montgomery Securities or each of the
Representatives (which consent may be withheld at the sole discretion of
Montgomery Securities or the Representatives, as the case may be), the
Company will not other than pursuant to outstanding stock options and
warrants disclosed in the Prospectus issue, offer, sell, grant options to
purchase or otherwise dispose of any of the Company's equity securities or
any other securities convertible into or exchangeable with its Common Stock
or other equity security.
(i) The Company will apply the net proceeds of the sale of the Common
Shares sold by it substantially in accordance with its statements under the
caption "Use of Proceeds" in the Prospectus.
(j) The Company will use its best efforts to qualify or register its
Common Stock for sale in non-issuer transactions under (or obtain
exemptions from the application of) the Blue Sky laws of the State of
California (and thereby permit market making transactions and secondary
trading in the
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<PAGE> 20
Company's Common Stock in California), will comply with such Blue Sky laws
and will continue such qualifications, registrations and exemptions in
effect for a period of five years after the date hereof.
(k) The Company will use its best efforts to designate the Common
Stock for quotation as a national market system security on the NASD
Automated Quotation System.
You, on behalf of the Underwriters, may, in your sole discretion, waive in
writing the performance by the Company of any one or more of the foregoing
covenants or extend the time for their performance.
SECTION 7. Payment of Expenses. Whether or not the transactions
contemplated hereunder are consummated or this Agreement becomes effective or is
terminated, the Company and, unless otherwise paid by the Company, the Selling
Stockholder agrees to pay all costs, fees and expenses incurred in connection
with the performance of its obligations hereunder and in connection with the
transactions contemplated hereby, including without limiting the generality of
the foregoing, (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees and
expenses of the registrar and transfer agent of the Common Stock, (iii) all
necessary issue, transfer and other stamp taxes in connection with the issuance
and sale of the Common Shares to the Underwriters, (iv) all fees and expenses of
the Company's counsel and the Company's independent accountants, (v) all costs
and expenses incurred in connection with the preparation, printing, filing,
shipping and distribution of the Registration Statement, each Preliminary
Prospectus and the Prospectus (including all exhibits and financial statements)
and all amendments and supplements provided for herein, this Agreement, the
Agreement Among Underwriters, the Selected Dealers Agreement, the Underwriters'
Questionnaire, the Underwriters' Power of Attorney and the Blue Sky memorandum,
(vi) all filing fees, attorneys' fees and expenses incurred by the Company or
the Underwriters in connection with qualifying or registering (or obtaining
exemptions from the qualification or registration of) all or any part of the
Common Shares for offer and sale under the Blue Sky laws, (vii) the filing fee
of the National Association of Securities Dealers, Inc., and (viii) all other
fees, costs and expenses referred to in Item 14 of the Registration Statement.
The Underwriters may deem the Company to be the primary obligor with respect to
all costs, fees and expenses to be paid by the Company and by the Selling
Stockholder. Except as provided in this Section 7, Section 9 and Section 11
hereof, the Underwriters shall pay all of their own expenses, including the fees
and
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disbursements of their counsel (excluding those relating to qualification,
registration or exemption under the Blue Sky laws and the Blue Sky memorandum
referred to above). This Section 7 shall not affect any agreements relating to
the payment of expenses between the Company and the Selling Stockholder.
The Selling Stockholder will pay (directly or by reimbursement) all fees
and expenses incident to the performance of its obligations under this Agreement
which are not otherwise specifically provided for herein, including but not
limited to (i) any fees and expenses of counsel for the Selling Stockholder;
(ii) any fees and expenses of the Agent; and (iii) all expenses and taxes
incident to the sale and delivery of the Common Shares to be sold by the Selling
Stockholder to the Underwriters hereunder.
SECTION 8. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Firm Common
Shares on the First Closing Date and the Optional Common Shares on the Second
Closing Date shall be subject to the accuracy of the representations and
warranties on the part of the Company and the Selling Stockholder herein set
forth as of the date hereof and as of the First Closing Date or the Second
Closing Date, as the case may be, to the accuracy of the statements of Company
officers and the Selling Stockholder made pursuant to the provisions hereof, to
the performance by the Company and the Selling Stockholder of their respective
obligations hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 P.M. (or, in the case of a registration statement filed pursuant
to Rule 462(b) of the Rules and Regulations relating to the Common Shares,
not later than 10:00 P.M.), Washington, D.C. Time, on the date of this
Agreement, or at such later time as shall have been consented to by you; if
the filing of the Prospectus, or any supplement thereto, is required
pursuant to Rule 424(b) of the Rules and Regulations, the Prospectus shall
have been filed in the manner and within the time period required by Rule
424(b) of the Rules and Regulations; and prior to such Closing Date, no
stop order suspending the effectiveness of the Registration Statement shall
have been issued and no proceedings for that purpose shall have been
instituted or shall be pending or, to the knowledge of the Company, the
Selling Stockholder or you, shall be contemplated by the Commission; and
any request of the Commission for inclusion of additional information in
the Registration Statement, or
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otherwise, shall have been complied with to your satisfaction.
(b) You shall be satisfied that since the respective dates as of
which information is given in the Registration Statement and Prospectus,
(i) there shall not have been any change in the capital stock other than
pursuant to the exercise of outstanding options and warrants disclosed in
the Prospectus of the Company or any of its subsidiaries or any material
change in the indebtedness (other than in the ordinary course of business)
of the Company or any of its subsidiaries, (ii) except as set forth or
contemplated by the Registration Statement or the Prospectus, no material
verbal or written agreement or other transaction shall have been entered
into by the Company or any of its subsidiaries, which is not in the
ordinary course of business or which could result in a material reduction
in the future earnings of the Company and its subsidiaries, (iii) no loss
or damage (whether or not insured) to the property of the Company or any of
its subsidiaries shall have been sustained which materially and adversely
affects the condition (financial or otherwise), business, results of
operations or prospects of the Company and its subsidiaries, (iv) no legal
or governmental action, suit or proceeding affecting the Company or any
of its subsidiaries which is material to the Company and its subsidiaries
or which affects or may affect the transactions contemplated by this
Agreement shall have been instituted or threatened and (v) there shall not
have been any material change in the condition (financial or otherwise),
business, management, results of operations or prospects of the Company and
its subsidiaries which makes it impractical or inadvisable in the judgment
of the Representatives to proceed with the public offering or purchase
the Common Shares as contemplated hereby.
(c) There shall have been furnished to you, as Representatives of the
Underwriters, on each Closing Date, in form and substance satisfactory to
you, except as otherwise expressly provided below:
(i) An opinion of Bass, Berry & Sims PLC, counsel for the
Company and the Selling Stockholder, addressed to the Underwriters and
dated the First Closing Date, or the Second Closing Date (in the
latter case with respect to the Selling Stockholder only), as the case
may be, to the effect that:
(1) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing
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<PAGE> 23
as a corporation in good standing under the laws of its
jurisdiction of incorporation, is duly qualified to do business
as a foreign corporation and is in good standing in all other
jurisdictions where the ownership or leasing of properties or the
conduct of its business requires such qualification, except for
jurisdictions in which the failure to so qualify would not have a
material adverse effect on the Company and its subsidiaries, and
has full corporate power and authority to own its properties and
conduct its business as described in the Registration Statement;
(2) The authorized, issued and outstanding capital stock of
the Company is as set forth under the caption "Capitalization" in
the Prospectus; all necessary and proper corporate proceedings
have been taken in order to authorize validly such authorized
Common Stock; all outstanding shares of Common Stock (including
the Firm Common Shares and any Optional Common Shares) have been
duly and validly issued, are fully paid and nonassessable, were
not issued in violation of or subject to any preemptive rights or
other rights to subscribe for or purchase any securities and
conform to the description thereof contained in the Prospectus;
without limiting the foregoing, there are no preemptive or other
rights to subscribe for or purchase any of the Common Shares to
be sold by the Company hereunder;
(3) All of the issued and outstanding shares of the
Company's subsidiaries have been duly and validly authorized and
issued, are fully paid and nonassessable and are owned
beneficially by the Company free and clear of all liens,
encumbrances, equities, claims, security interests, voting trusts
or other defects of title whatsoever;
(4) The certificates evidencing the Common Shares to be
delivered hereunder are in due and proper form under Tennessee
law, and when duly countersigned by the Company's transfer agent
and registrar, and delivered to you or upon your order against
payment of the agreed consideration therefor in accordance with
the provisions of this Agreement, the Common Shares represented
thereby will be duly authorized and validly issued, fully paid
and nonassessable, will not have been issued
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in violation of or subject to any preemptive rights or other
rights to subscribe for or purchase securities and will conform
in all respects to the description thereof contained in the
Prospectus;
(5) Except as disclosed in or specifically contemplated by
the Prospectus, to the best of such counsel's knowledge, there
are no outstanding options, warrants or other rights calling for
the issuance of, and no commitments, plans or arrangements to
issue, any shares of capital stock of the Company or any security
convertible into or exchangeable for capital stock of the
Company;
(6)(a) The Registration Statement has become effective
under the Act, and, to the best of such counsel's knowledge, no
stop order suspending the effectiveness of the Registration
Statement or preventing the use of the Prospectus has been issued
and no proceedings for that purpose have been instituted or are
pending or contemplated by the Commission; any required filing of
the Prospectus and any supplement thereto pursuant to Rule 424(b)
of the Rules and Regulations has been made in the manner and
within the time period required by such Rule 424(b);
(b) The Registration Statement, the Prospectus and each
amendment or supplement thereto (except for the financial
statements and schedules and financial and statistical data
included therein as to which such counsel need express no
opinion) comply as to form in all material respects with the
requirements of the Act and the Rules and Regulations.
(c) To the best of such counsel's knowledge, there are no
franchises, leases, contracts, agreements or documents of a
character required to be disclosed in the Registration Statement
or Prospectus or to be filed as exhibits to the Registration
Statement which are not disclosed or filed, as required;
(d) To the best of such counsel's knowledge, there are no
legal or governmental actions, suits or proceedings pending or
threatened against the Company which are required to be described
in the Prospectus which are not described as required;
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(e) The documents incorporated by reference in the
Prospectus (except for any financial statements and schedules
included in such documents as to which such counsel need express
no opinion), when they were filed with the Commission, complied
as to form in all material respects with the requirements of the
Exchange Act and the rules and regulations of the Commission
thereunder; and such counsel has no reason to believe that any of
such documents (except for any financial statements and schedules
included in such documents as to which such counsel need express
no opinion), when they were so filed, contained an untrue
statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light
of the circumstances under which they were made when such
documents were so filed, not misleading; and
(f) The statements under "Business--Regulations,"
"Description of Capital Stock" and "Shares Eligible for Future
Sale" in the Prospectus, insofar as such statements constitute a
summary of documents referred to therein or of matters of law or
legal conclusions, fairly summarize and fairly present, in all
material respects, the information called for with respect to
such documents, matters of law and legal conclusions.
(7) The Company has full right, power and authority to
enter into this Agreement and to sell and deliver the Common
Shares to be sold by it to the several Underwriters; this
Agreement has been duly and validly authorized by all necessary
corporate action by the Company, has been duly and validly
executed and delivered by and on behalf of the Company, and is a
valid and binding agreement of the Company in accordance with its
terms, except as enforceability may be limited by general
equitable principles, bankruptcy, insolvency, reorganization,
moratorium or other laws affecting creditors' rights generally
and except as to those provisions relating to indemnity or
contribution for liabilities arising under the Act as to which no
opinion need be expressed; and no approval, authorization, order,
consent, registration, filing, qualification, license or permit
of or with any court, regulatory, administrative or other
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governmental body is required for the execution and delivery of
this Agreement by the Company or the consummation of the
transactions contemplated by this Agreement, except such as have
been obtained and are in full force and effect under the Act and
such as may be required under applicable Blue Sky laws in
connection with the purchase and distribution of the Common
Shares by the Underwriters and the clearance of such offering
with the NASD;
(8) The execution and performance of this Agreement and the
consummation of the transactions herein contemplated will not
conflict with, result in the breach of, or constitute, either by
itself or upon notice or the passage of time or both, a default
under, any agreement, mortgage, deed of trust, lease, franchise,
license, indenture, permit or other instrument known to such
counsel to which the Company or any of its subsidiaries is a
party or by which the Company or any of its subsidiaries or any
of its or their property may be bound or affected which is
material to the Company and its subsidiaries, or violate any of
the provisions of the certificate of incorporation or bylaws, or
other organizational documents, of the Company or any of its
subsidiaries or, so far as is known to such counsel, violate any
statute, judgment, decree, order, rule or regulation of any court
or governmental body having jurisdiction over the Company or any
of its subsidiaries or any of its or their property;
(9) Neither the Company nor any subsidiary is in violation
of its certificate of incorporation or bylaws, or other
organizational documents, or to the best of such counsel's
knowledge, in breach of or default with respect to any provision
of any agreement, mortgage, deed of trust, lease, franchise,
license, indenture, permit or other instrument known to such
counsel to which the Company or any such subsidiary is a party or
by which it or any of its properties may be bound or affected,
except where such default would not materially adversely affect
the Company and its subsidiaries; and, to the best of such
counsel's knowledge, the Company and its subsidiaries are in
compliance with all laws, rules, regulations, judgments, decrees,
orders and statutes of any court or jurisdiction to which they
are subject,
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except where noncompliance would not materially adversely affect
the Company and its subsidiaries;
(10) To the best of such counsel's knowledge, no holders of
securities of the Company have rights which have not been waived
to the registration of shares of Common Stock or other
securities, because of the filing of the Registration Statement
by the Company or the offering contemplated hereby;
(11) To the best of such counsel's knowledge, this Agreement
and the Stockholder's Agreement have been duly authorized,
executed and delivered by or on behalf of the Selling
Stockholder; the Agent has been duly and validly authorized to
act as the custodian of the Common Shares to be sold by each the
Selling Stockholder; and the performance of this Agreement and
the Stockholder's Agreement and the consummation of the
transactions herein contemplated by the Selling Stockholder will
not result in a breach of, or constitute a default under, any
indenture, mortgage, deed of trust, trust (constructive or
other), loan agreement, lease, franchise, license or other
agreement or instrument to which the Selling Stockholder is a
party or by which the Selling Stockholder or any of its
properties may be bound, or violate any statute, judgment,
decree, order, rule or regulation known to such counsel of any
court or governmental body having jurisdiction over the Selling
Stockholder or any of properties; and to the best of such
counsel's knowledge, no approval, authorization, order or consent
of any court, regulatory body, administrative agency or other
governmental body is required for the execution and delivery of
this Agreement or the Stockholder's Agreement or the consummation
by the Selling Stockholder of the transactions contemplated by
this Agreement, except such as have been obtained and are in full
force and effect under the Act and such as may be required under
the rules of the NASD and applicable Blue Sky laws;
(12) To the best of such counsel's knowledge, the Selling
Stockholder has full right, power and authority to enter into
this Agreement and the Stockholder's Agreement and to sell,
transfer and deliver the Common Shares to be sold on such Closing
Date by the Selling Stockholder hereunder
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and good and marketable title to such Common Shares so sold, free
and clear of all liens, encumbrances, equities, claims,
restrictions, security interests, voting trusts, or other defects
of title whatsoever, has been transferred to the Underwriters
(whom counsel may assume to be bona fide purchasers) who have
purchased such Common Shares hereunder; and
(13) To the best of such counsel's knowledge, this Agreement
and the Stockholder's Agreement are valid and binding agreements
of the Selling Stockholder in accordance with their terms except
as enforceability may be limited by general equitable principles,
bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors' rights generally and except with respect to
those provisions relating to indemnities or contributions for
liabilities under the Act, as to which no opinion need be
expressed.
(14) No transfer taxes are required to be paid in connection
with the sale and delivery of the Common Shares to the
Underwriters hereunder.
In rendering such opinion, such counsel may rely as to the
matters set forth in paragraphs (12), (13) and (14), on opinions of
other counsel retained by the Selling Stockholder, as to matters of
local law, on opinions of local counsel, and as to matters of fact, on
certificates of the Selling Stockholder and of officers of the Company
and of governmental officials, in which case their opinion is to state
that they are so doing and that the Underwriters are justified in
relying on such opinions or certificates and copies of said opinions
or certificates are to be attached to the opinion. Such counsel shall
also include a statement to the effect that nothing has come to such
counsel's attention that would lead such counsel to believe that
either at the effective date of the Registration Statement or at the
applicable Closing Date the Registration Statement or the Prospectus,
or any such amendment or supplement (other than the financial
statements, financial schedules and other financial or statistical
data included therein), contains any untrue statement of a material
fact or omits to state a material fact required to be stated therein
or necessary to make the statements therein not misleading. Such
counsel shall also permit Hale and Dorr, as counsel to
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the Underwriters, to rely on such opinion (insofar as it relates to
matters of Tennessee law) in rendering their opinion pursuant to
Section 8(c)(ii) hereof;
(ii) Such opinion or opinions of Hale and Dorr, counsel for the
Underwriters dated the First Closing Date or the Second Closing Date,
as the case may be, with respect to the incorporation of the Company,
the sufficiency of all corporate proceedings and other legal matters
relating to this Agreement, the validity of the Common Shares, the
Registration Statement and the Prospectus and other related matters as
you may reasonably require, and the Company and the Selling
Stockholder shall have furnished to such counsel such documents and
shall have exhibited to them such papers and records as they may
reasonably request for the purpose of enabling them to pass upon such
matters. In connection with such opinions, such counsel may rely on
representations or certificates of officers of the Company and
governmental officials.
(iii) A certificate of the Company executed by the Chairman of the
Board or President and the chief financial or accounting officer of
the Company, dated the First Closing Date or the Second Closing Date,
as the case may be, to the effect that:
(1) The representations and warranties of the Company set
forth in Section 2 of this Agreement are true and correct as of
the date of this Agreement and as of the First Closing Date or
the Second Closing Date, as the case may be, and the Company has
complied with all the agreements and satisfied all the conditions
on its part to be performed or satisfied on or prior to such
Closing Date;
(2) The Commission has not issued any order preventing or
suspending the use of the Prospectus or any Preliminary
Prospectus filed as a part of the Registration Statement or any
amendment thereto; no stop order suspending the effectiveness of
the Registration Statement has been issued; and to the best of
the knowledge of the respective signers, no proceedings for that
purpose have been instituted or are pending or contemplated
under the Act;
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(3) Each of the respective signers of the certificate has
carefully examined the Registration Statement and the Prospectus;
in his opinion and to the best of his knowledge, the Registration
Statement and the Prospectus and any amendments or supplements
thereto contain all statements required to be stated therein
regarding the Company and its subsidiaries; and neither the
Registration Statement nor the Prospectus nor any amendment or
supplement thereto includes any untrue statement of a material
fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not
misleading;
(4) Since the initial date on which the Registration
Statement was filed, no agreement, written or oral, transaction
or event has occurred which should have been set forth in an
amendment to the Registration Statement or in a supplement to or
amendment of any prospectus which has not been disclosed in such
a supplement or amendment;
(5) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, and
except as disclosed in or contemplated by the Prospectus, there
has not been any material adverse change or a development
involving a material adverse change in the condition (financial
or otherwise), business, properties, results of operations,
management or prospects of the Company and its subsidiaries; and
no legal or governmental action, suit or proceeding is pending or
threatened against the Company or any of its subsidiaries which
is material to the Company and its subsidiaries, whether or not
arising from transactions in the ordinary course of business, or
which may adversely affect the transactions contemplated by this
Agreement; since such dates and except as so disclosed, neither
the Company nor any of its subsidiaries has entered into any
verbal or written agreement or other transaction which is not in
the ordinary course of business or which could result in a
material reduction in the future earnings of the Company or
incurred any material liability or obligation, direct, contingent
or indirect, made any change in its capital stock, made any
material change in its short-term debt or funded debt or
repurchased or otherwise acquired any of the Company's capital
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stock; and the Company has not declared or paid any dividend, or
made any other distribution, upon its outstanding capital stock
payable to stockholders of record on a date prior to the First
Closing Date or Second Closing Date; and
(6) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus and except
as disclosed in or contemplated by the Prospectus, the Company
and its subsidiaries have not sustained a material loss or damage
by strike, fire, flood, windstorm, accident or other calamity
(whether or not insured).
(iv) On the First Closing Date or the Second Closing Date, as the
case may be, a certificate, dated such Closing Date and addressed to
you, signed by or on behalf of the Selling Stockholder to the effect
that the representations and warranties of the Selling Stockholder in
this Agreement are true and correct, as if made at and as of the First
Closing Date or the Second Closing Date, as the case may be, and the
Selling Stockholder has complied with all the agreements and satisfied
all the conditions on his part to be performed or satisfied prior to
the First Closing Date or the Second Closing Date, as the case may be.
(v) On the date before this Agreement is executed and also on
the First Closing Date and the Second Closing Date a letter addressed
to you, as Representatives of the Underwriters, from Ernst & Young
LLP, independent accountants, the first one to be dated the day before
the date of this Agreement, the second one to be dated the First
Closing Date and the third one (in the event of a Second Closing) to
be dated the Second Closing Date, in form and substance satisfactory
to you.
(vi) On or before the First Closing Date, letters from each of
the Selling Stockholder, each director and officer of the Company, in
form and substance satisfactory to you, confirming that for a period
of [120] days after the first date that any of the Common Shares are
released by you for sale to the public, such person will not directly
or indirectly sell or offer to sell or otherwise dispose of any shares
of Common Stock or any right to acquire such shares without the prior
written consent of either Montgomery Securities or each of the
Representatives, which consent may be withheld at
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the sole discretion of Montgomery Securities or each of the
Representatives, as the case may be.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are satisfactory to you and
to Hale and Dorr, counsel for the Underwriters. The Company shall furnish you
with such manually signed or conformed copies of such opinions, certificates,
letters and documents as you request. Any certificate signed by any officer of
the Company and delivered to the Representatives or to counsel for the
Underwriters shall be deemed to be a representation and warranty by the Company
to the Underwriters as to the statements made therein.
If any condition to the Underwriters' obligations hereunder to be satisfied
prior to or at the First Closing Date is not so satisfied, this Agreement at
your election will terminate upon notification by you as Representatives to the
Company and the Selling Stockholder without liability on the part of any
Underwriter, the Company or the Selling Stockholder except for the expenses to
be paid or reimbursed by the Company and by the Selling Stockholder pursuant to
Sections 7 and 9 hereof and except to the extent provided in Section 11 hereof.
SECTION 9. Reimbursement of Underwriters' Expenses. Notwithstanding any
other provisions hereof, if this Agreement shall be terminated by you pursuant
to Section 8, or if the sale to the Underwriters of the Common Shares at the
First Closing is not consummated because of any refusal, inability or failure on
the part of the Company or the Selling Stockholder to perform any agreement
herein or to comply with any provision hereof, the Company agrees to reimburse
you and the other Underwriters upon demand for all out-of-pocket expenses that
shall have been reasonably incurred by you and them in connection with the
proposed purchase and the sale of the Common Shares, including but not limited
to fees and disbursements of counsel, printing expenses, travel expenses,
postage, telegraph charges and telephone charges relating directly to the
offering contemplated by the Prospectus. Any such termination shall be without
liability of any party to any other party except that the provisions of this
Section, Section 7 and Section 11 shall at all times be effective and shall
apply.
SECTION 10. Effectiveness of Registration Statement. You, the Company and
the Selling Stockholder will use your, its and its best efforts to cause the
Registration Statement to become effective, to prevent the issuance of any stop
order suspending the effectiveness of the Registration Statement and, if such
stop
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order be issued, to obtain as soon as possible the lifting thereof.
SECTION 11. Indemnification. (a) The Company and the Selling Stockholder,
jointly and severally, agree to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of the Act
against any losses, claims, damages, liabilities or expenses, joint or several,
to which such Underwriter or such controlling person may become subject, under
the Act, the Exchange Act, or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of the
Company), insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof as contemplated below) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement, any Preliminary Prospectus, the Prospectus, or
any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state in any of them a material fact required to
be stated therein or necessary to make the statements in any of them not
misleading, or arise out of or are based in whole or in part on any inaccuracy
in the representations and warranties of the Company or the Selling Stockholder
contained herein or any failure of the Company or the Selling Stockholder to
perform their respective obligations hereunder or under law; and will reimburse
each Underwriter and each such controlling person for any legal and other
expenses as such expenses are reasonably incurred by such Underwriter or such
controlling person in connection with investigating, defending, settling,
compromising or paying any such loss, claim, damage, liability, expense or
action; provided, however, that neither the Company nor the Selling Stockholder
will be liable in any such case to the extent that any such loss, claim, damage,
liability or expense arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with the
information furnished to the Company pursuant to Section 4 hereof. The Company
and the Selling Stockholder may agree, as among themselves and without limiting
the rights of the Underwriters under this Agreement, as to their respective
amounts of such liability for which they each shall be responsible. In addition
to its other obligations under this Section 11(a), the Company and the Selling
Stockholder agrees that, as an interim measure during the pendency of any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, or any
inaccuracy in the representations and warranties of the
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Company or the Selling Stockholder herein or failure to perform its obligations
hereunder, all as described in this Section 11(a), it will reimburse each
Underwriter on a quarterly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Company's
or the Selling Stockholder's obligation to reimburse each Underwriter for such
expenses and the possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, each Underwriter
shall promptly return it to the Company together with interest, compounded
daily, determined on the basis of the prime rate (or other commercial lending
rate for borrowers of the highest credit standing) announced from time to time
by Bank of America NT&SA, San Francisco, California (the "Prime Rate"). Any
such interim reimbursement payments which are not made to an Underwriter within
30 days of a request for reimbursement, shall bear interest at the Prime Rate
from the date of such request. This indemnity agreement will be in addition to
any liability which the Company or the Selling Stockholder may otherwise have.
(b) Each Underwriter will severally indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the Registration
Statement, the Selling Stockholder and each person, if any, who controls the
Company or the Selling Stockholder within the meaning of the Act, against any
losses, claims, damages, liabilities or expenses to which the Company, or any
such director, officer, Selling Stockholder or controlling person may become
subject, under the Act, the Exchange Act, or other federal or state statutory
law or regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of such
Underwriter), insofar as such losses, claims, damages, liabilities or expenses
(or actions in respect thereof as contemplated below) arise out of or are based
upon any untrue or alleged untrue statement of any material fact contained in
the Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, in reliance upon and in conformity with the information
furnished to the Company pursuant to Section 4 hereof; and will reimburse the
Company, or any such
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director, officer, the Selling Stockholder or controlling person for any legal
and other expense reasonably incurred by the Company, or any such director,
officer, the Selling Stockholder or controlling person in connection with
investigating, defending, settling, compromising or paying any such loss, claim,
damage, liability, expense or action. In addition to its other obligations
under this Section 11(b), each Underwriter severally agrees that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in this Section 11(b) which relates to
information furnished to the Company pursuant to Section 4 hereof, it will
reimburse the Company (and, to the extent applicable, each officer, director,
controlling person or the Selling Stockholder) on a quarterly basis for all
reasonable legal or other expenses incurred in connection with investigating or
defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Underwriters' obligation to reimburse the Company (and, to
the extent applicable, each officer, director, controlling person or the Selling
Stockholder) for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction. To
the extent that any such interim reimbursement payment is so held to have been
improper, the Company (and, to the extent applicable, each officer, director,
controlling person or the Selling Stockholder) shall promptly return it to the
Underwriters together with interest, compounded daily, determined on the basis
of the Prime Rate. Any such interim reimbursement payments which are not made
to the Company within 30 days of a request for reimbursement, shall bear
interest at the Prime Rate from the date of such request. This indemnity
agreement will be in addition to any liability which such Underwriter may
otherwise have.
(c) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under this
Section, notify the indemnifying party in writing of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party for contribution or
otherwise than under the indemnity agreement contained in this Section or to the
extent it is not prejudiced as a proximate result of such failure. In case any
such action is brought against any indemnified party and such indemnified party
seeks or intends to seek indemnity from an indemnifying party, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with all other indemnifying
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parties similarly notified, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be a conflict between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of its election so to
assume the defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified party
under this Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed such counsel in connection with the
assumption of legal defenses in accordance with the proviso to the next
preceding sentence (it being understood, however, that the indemnifying party
shall not be liable for the expenses of more than one separate counsel, approved
by the Representatives in the case of paragraph (a), representing the
indemnified parties who are parties to such action) or (ii) the indemnifying
party shall not have employed counsel reasonably satisfactory to the indemnified
party to represent the indemnified party within a reasonable time after notice
of commencement of the action, in each of which cases the fees and expenses of
counsel shall be at the expense of the indemnifying party.
(d) If the indemnification provided for in this Section 11 is required by
its terms but is for any reason held to be unavailable to or otherwise
insufficient to hold harmless an indemnified party under paragraphs (a), (b) or
(c) in respect of any losses, claims, damages, liabilities or expenses referred
to herein, then each applicable indemnifying party shall contribute to the
amount paid or payable by such indemnified party as a result of any losses,
claims, damages, liabilities or expenses referred to herein (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company, the Selling Stockholder and the Underwriters from the offering of the
Common Shares or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the Company, the Selling Stockholder and the Underwriters in connection
with
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the statements or omissions or inaccuracies in the representations and
warranties herein which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The
respective relative benefits received by the Company, the Selling Stockholder
and the Underwriters shall be deemed to be in the same proportion, in the case
of the Company and the Selling Stockholder as the total price paid to the
Company and to the Selling Stockholder, respectively, for the Common Shares sold
by them to the Underwriters (net of underwriting commissions but before
deducting expenses), and in the case of the Underwriters as the underwriting
commissions received by them bears to the total of such amounts paid to the
Company and to the Selling Stockholder and received by the Underwriters as
underwriting commissions. The relative fault of the Company, the Selling
Stockholder and the Underwriters shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact or the inaccurate
or the alleged inaccurate representation and/or warranty relates to information
supplied by the Company, the Selling Stockholder or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The amount paid or payable by a
party as a result of the losses, claims, damages, liabilities and expenses
referred to above shall be deemed to include, subject to the limitations set
forth in subparagraph (c) of this Section 11, any legal or other fees or
expenses reasonably incurred by such party in connection with investigating or
defending any action or claim. The provisions set forth in subparagraph (c) of
this Section 11 with respect to notice of commencement of any action shall apply
if a claim for contribution is to be made under this subparagraph (d); provided,
however, that no additional notice shall be required with respect to any action
for which notice has been given under subparagraph (c) for purposes of
indemnification. The Company, the Selling Stockholder and the Underwriters
agree that it would not be just and equitable if contribution pursuant to this
Section 11 were determined solely by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other method
of allocation which does not take account of the equitable considerations
referred to in the immediately preceding paragraph. Notwithstanding the
provisions of this Section 11, no Underwriter shall be required to contribute
any amount in excess of the amount of the total underwriting commissions
received by such Underwriter in connection with the Common Shares underwritten
by it and distributed to the public. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute
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pursuant to this Section 11 are several in proportion to their respective
underwriting commitments and not joint.
(e) It is agreed that any controversy arising out of the operation of the
interim reimbursement arrangements set forth in Sections 11(a) and 11(b) hereof,
including the amounts of any requested reimbursement payments and the method of
determining such amounts, shall be settled by arbitration conducted under the
provisions of the Constitution and Rules of the Board of Governors of the New
York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of
the NASD. Any such arbitration must be commenced by service of a written demand
for arbitration or written notice of intention to arbitrate, therein electing
the arbitration tribunal. In the event the party demanding arbitration does not
make such designation of an arbitration tribunal in such demand or notice, then
the party responding to said demand or notice is authorized to do so. Such an
arbitration would be limited to the operation of the interim reimbursement
provisions contained in Sections 11(a) and 11(b) hereof and would not resolve
the ultimate propriety or enforceability of the obligation to reimburse expenses
which is created by the provisions of such Sections 11(a) and 11(b) hereof.
SECTION 12. Default of Underwriters. It shall be a condition to this
Agreement and the obligation of the Company and the Selling Stockholder to sell
and deliver the Common Shares hereunder, and of each Underwriter to purchase the
Common Shares in the manner as described herein, that, except as hereinafter in
this paragraph provided, each of the Underwriters shall purchase and pay for all
the Common Shares agreed to be purchased by such Underwriter hereunder upon
tender to the Representatives of all such shares in accordance with the terms
hereof. If any Underwriter or Underwriters default in their obligations to
purchase Common Shares hereunder on either the First or Second Closing Date and
the aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed to purchase on such Closing Date does not exceed
10% of the total number of Common Shares which the Underwriters are obligated to
purchase on such Closing Date, the non-defaulting Underwriters shall be
obligated severally, in proportion to their respective commitments hereunder, to
purchase the Common Shares which such defaulting Underwriters agreed but failed
to purchase on such Closing Date. If any Underwriter or Underwriters so default
and the aggregate number of Common Shares with respect to which such default
occurs is more than the above percentage and arrangements satisfactory to the
Representatives and the Company for the purchase of such Common Shares by other
persons are not made within 48 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or
-38-
<PAGE> 39
the Company or the Selling Stockholder except for the expenses to be paid by the
Company and the Selling Stockholder pursuant to Section 7 hereof and except to
the extent provided in Section 11 hereof.
In the event that Common Shares to which a default relates are to be
purchased by the non-defaulting Underwriters or by another party or parties, the
Representatives or the Company shall have the right to postpone the First or
Second Closing Date, as the case may be, for not more than five business days in
order that the necessary changes in the Registration Statement, Prospectus and
any other documents, as well as any other arrangements, may be effected. As
used in this Agreement, the term "Underwriter" includes any person substituted
for an Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
SECTION 13. Effective Date. This Agreement shall become effective
immediately as to Sections 7, 9, 11, 14 and 16 and, as to all other provisions,
(i) if at the time of execution of this Agreement the Registration Statement has
not become effective, at 2:00 P.M., California time, on the first full business
day following the effectiveness of the Registration Statement, or (ii) if at the
time of execution of this Agreement the Registration Statement has been declared
effective, at 2:00 P.M., California time, on the first full business day
following the date of execution of this Agreement; but this Agreement shall
nevertheless become effective at such earlier time after the Registration
Statement becomes effective as you may determine on and by notice to the Company
or by release of any of the Common Shares for sale to the public. For the
purposes of this Section 13, the Common Shares shall be deemed to have been so
released upon the release for publication of any newspaper advertisement
relating to the Common Shares or upon the release by you of telegrams (i)
advising Underwriters that the Common Shares are released for public offering,
or (ii) offering the Common Shares for sale to securities dealers, whichever may
occur first.
SECTION 14. Termination. Without limiting the right to terminate this
Agreement pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company by notice to you
and the Selling Stockholder or by you by notice to the Company and the
Selling Stockholder at any time prior to the time this Agreement shall
become effective as to all its provisions, and any such termination shall
be without liability on the part of the Company or the Selling Stockholder
to any Underwriter (except for the expenses to be
-39-
<PAGE> 40
paid or reimbursed by the Company and the Selling Stockholder pursuant to
Sections 7 and 9 hereof and except to the extent provided in Section 11
hereof) or of any Underwriter to the Company or, the Selling Stockholder
(except to the extent provided in Section 11 hereof).
(b) This Agreement may also be terminated by you prior to the First
Closing Date by notice to the Company (i) if additional material
governmental restrictions, not in force and effect on the date hereof,
shall have been imposed upon trading in securities generally or minimum or
maximum prices shall have been generally established on the New York Stock
Exchange or on the American Stock Exchange or in the over the counter
market by the NASD, or trading in securities generally shall have been
suspended on either such Exchange or in the over the counter market by the
NASD, or a general banking moratorium shall have been established by
federal, New York or California authorities, (ii) if an outbreak of major
hostilities or other national or international calamity or any substantial
change in political, financial or economic conditions shall have occurred
or shall have accelerated or escalated to such an extent, as, in the
judgment of the Representatives, to affect adversely the marketability of
the Common Shares, (iii) if any adverse event shall have occurred or shall
exist which makes untrue or incorrect in any material respect any statement
or information contained in the Registration Statement or Prospectus or
which is not reflected in the Registration Statement or Prospectus but
should be reflected therein in order to make the statements or information
contained therein not misleading in any material respect, or (iv) if there
shall be any action, suit or proceeding pending or threatened, or there
shall have been any development or prospective development involving
particularly the business or properties or securities of the Company or any
of its subsidiaries or the transactions contemplated by this Agreement,
which, in the reasonable judgment of the Representatives, may materially
and adversely affect the Company's business or earnings and makes it
impracticable or inadvisable to offer or sell the Common Shares. Any
termination pursuant to this subsection (b) shall without liability on the
part of any Underwriter to the Company or the Selling Stockholder or on the
part of the Company or the Selling Stockholder to any Underwriter (except
for expenses to be paid or reimbursed by the Company and the Selling
Stockholder pursuant to Sections 7 and 9 hereof and except to the extent
provided in Section 11 hereof.
SECTION 15. Failure of the Selling Stockholder to Sell and Deliver.
If the Selling Stockholder shall fail to sell
-40-
<PAGE> 41
and deliver to the Underwriters the Common Shares to be sold and delivered
by such Selling Stockholder at the First Closing Date or the Second
Closing, as the case may be, under the terms of this Agreement, then the
Underwriters may at their option, by written notice from you to the Company
and the Selling Stockholder, either (i) terminate this Agreement without
any liability on the part of any Underwriter or, except as provided in
Sections 7, 9 and 11 hereof, the Company or the Selling Stockholder, or
(ii) purchase the shares which the Company and the Selling Stockholder has
agreed to sell and deliver in accordance with the terms hereof. In the
event of a failure by the Selling Stockholder to sell and deliver as
referred to in this Section, either you or the Company shall have the right
to postpone the Closing Date for a period not exceeding seven business days
in order that the necessary changes in the Registration Statement,
Prospectus and any other documents, as well as any other arrangements, may
be effected.
SECTION 16. Representations and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers, of the Selling Stockholder and
of the several Underwriters set forth in or made pursuant to this Agreement
will remain in full force and effect, regardless of any investigation made
by or on behalf of any Underwriter or the Company or any of its or their
partners, officers or directors or any controlling person, or the Selling
Stockholder, as the case may be, and will survive delivery of and payment
for the Common Shares sold hereunder and any termination of this Agreement.
SECTION 17. Notices. All communications hereunder shall be in
writing and, if sent to the Representatives shall be mailed, delivered or
telegraphed and confirmed to you at 600 Montgomery Street, San Francisco,
California 94111, Attention: Kent Penwell, with a copy to David Sylvester,
Hale and Dorr, 1455 Pennsylvania Avenue, N.W., Washington, D.C. 20004; and
if sent to the Company or the Selling Stockholder shall be mailed,
delivered or telegraphed and confirmed to the Company at 805 South Church
Street, Murfreesboro, Tennessee 37130, with a copy to Bass, Berry & Sims
PLC, 2700 First American center, Nashville, Tennessee 37238, Attention:
Leigh Walton. The Company, the Selling Stockholder or you may change the
address for receipt of communications hereunder by giving notice to the
others.
SECTION 18. Successors. This Agreement will inure to the benefit of
and be binding upon the parties hereto,
-41-
<PAGE> 42
including any substitute Underwriters pursuant to Section 12 hereof, and to
the benefit of the officers and directors and controlling persons referred
to in Section 11, and in each case their respective successors, personal
representatives and assigns, and no other person will have any right or
obligation hereunder. No such assignment shall relieve any party of its
obligations hereunder. The term "successors" shall not include any
purchaser of the Common Shares as such from any of the Underwriters merely
by reason of such purchase.
SECTION 19. Representation of Underwriters. You will act as
Representatives for the several Underwriters in connection with all
dealings hereunder, and any action under or in respect of this Agreement
taken by you jointly or by Montgomery Securities, as Representatives, will
be binding upon all the Underwriters.
SECTION 20. Partial Unenforceability. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement
shall not affect the validity or enforceability of any other Section,
paragraph or provision hereof. If any Section, paragraph or provision of
this Agreement is for any reason determined to be invalid or unenforceable,
there shall be deemed to be made such minor changes (and only such minor
changes) as are necessary to make it valid and enforceable.
SECTION 21. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws (and not the laws pertaining
to conflicts of laws) of the State of California.
SECTION 22. General. This Agreement constitutes the entire agreement
of the parties to this Agreement and supersedes all prior written or oral
and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed
in several counterparts, each one of which shall be an original, and all of
which shall constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect
the construction or interpretation of this Agreement. This Agreement may
be amended or modified, and the observance of
-42-
<PAGE> 43
any term of this Agreement may be waived, only by a writing signed by the
Company, the Selling Stockholder and you.
Any person executing and delivering this Agreement as Attorney-in-fact
for the Selling Stockholder represents by so doing that he has been duly
appointed as Attorney-in-fact by the Selling Stockholder pursuant to a
validly existing and binding Power of Attorney which authorizes such
Attorney-in-fact to take such action. Any action taken under this
Agreement by any of the Attorneys-in-fact will be binding on the Selling
Stockholder.
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed copies hereof,
whereupon it will become a binding agreement between among the Company, the
Selling Stockholder and the several Underwriters including you, all in
accordance with its terms.
Very truly yours,
THE COMPANY:
CHILDREN'S COMPREHENSIVE SERVICES, INC.
By:____________________________________
President
THE SELLING STOCKHOLDER:
T. ROWE PRICE STRATEGIC PARTNERS
FUND II, L.P.
By:____________________________________
(Attorney-in-fact)
-43-
<PAGE> 44
The foregoing Underwriting Agreement
is hereby confirmed and accepted by
us in San Francisco, California as of
the date first above written.
MONTGOMERY SECURITIES
EQUITABLE SECURITIES CORPORATION
LEHMAN BROTHERS INC.
Acting as Representatives of the
several Underwriters named in
the attached Schedule A.
By MONTGOMERY SECURITIES
By:______________________________
Partner
-44-
<PAGE> 45
SCHEDULE A
<TABLE>
<CAPTION>
Number of Firm
Common Shares
Name of Underwriter to be Purchased
- ------------------- ---------------
<S> <C>
Montgomery Securities.....................
Equitable Securities, Inc.................
Lehman Brothers Inc.......................
TOTAL.......................... ---------
2,500,000
=========
</TABLE>
A-1
<PAGE> 46
SCHEDULE B
<TABLE>
<CAPTION>
Number of Firm
Common Shares to
be Sold by Selling
Name of Selling Stockholder Stockholder
- --------------------------- ------------------
<S> <C>
T. Rowe Price Strategic
Partners Fund II, L.P.
TOTAL.......................... ---------
1,000,000
=========
</TABLE>
B-1
<PAGE> 1
Exhibit 5
BASS, BERRY & SIMS PLC
A PROFESSIONAL LIMITED LIABILITY COMPANY
ATTORNEYS AT LAW
2700 FIRST AMERICAN CENTER 1700 RIVERVIEW TOWER
NASHVILLE, TENNESSEE 37238-2700 POST OFFICE BOX 1509
TELEPHONE (615) 742-6200 KNOXVILLE, TENNESSEE 37901-1509
TELECOPIER (615) 742-6293 TELEPHONE (423) 521-6200
TELECOPIER (423) 521-6234
June 18, 1996
Children's Comprehensive Services, Inc.
805 South Church Street
Murfreesboro, Tennessee 37130
Re: Registration Statement on Form S-2
Ladies and Gentlemen:
We have acted as your counsel in connection with your preparation of a
Registration Statement on Form S-2 (the "Registration Statement") to be filed by
you with the Securities and Exchange Commission on June 16, 1996, covering
2,875,000 shares of common stock, par value $.01 per share (the "Common Stock"),
of Children's Comprehensive Services, Inc. (the "Company") to be sold by the
Company and certain of the Company's shareholders (the "Selling Shareholders")
to the underwriters represented by Montgomery Securities, Lehman Brothers Inc.
and Equitable Securities Corporation (the "Underwriters") for public
distribution pursuant to the Underwriting Agreement between the Company, the
Selling Shareholders and the Underwriters to be filed as an exhibit to the
Registration Statement. Such 2,875,000 shares of Common Stock include (i)
1,725,000 shares to be sold by the Company (including 225,000 shares that may be
purchased by the Underwriters upon the exercise of an option to cover
over-allotments), and (ii) 1,150,000 shares (including 150,000 shares that may
be purchased by the Underwriters upon the exercise of an option to cover
over-allotments) to be sold by the Selling Shareholders.
In connection with this opinion, we have examined and relied upon such
records, documents, certificates, and other instruments as in our judgment are
necessary or appropriate in order to express the opinions hereinafter set forth
and have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, and the conformity to original documents
of all documents submitted to us as certified or photostatic copies.
Based on the foregoing and such other matters as we have deemed relevant,
we are of the opinion that the shares of Common Stock to be sold by the Company,
when issued and delivered in the manner and on the terms described in the
Registration Statement (after the same is declared effective), will be validly
issued, fully paid, and nonassessable, and that the shares of Common Stock to be
sold by the Selling Shareholders are validly issued, fully paid, and
nonassessable.
We hereby consent to the reference to our law firm in the Registration
Statement under the capiton "Legal Matters" and to the use of this opinion as an
exhibit to the Registration Statement.
Very Truly Yours,
/s/ Bass Berry & Sims PLC
<PAGE> 1
Exhibit 10.20
Contract Number S-95-15-1
---------
RIVERSIDE COUNTY SUPERINTENDENT OF SCHOOLS
3939 Thirteenth Street/P.O. Box 868
Riverside, California 92502
MASTER CONTRACT
FOR NONPUBLIC, NONSECTARIAN SCHOOL/AGENCY SERVICES
(Education Code Sections 56365 et seq.)
This Agreement, made and entered into this 17th day of August, 1995,
between DALE S. HOLMES, Riverside County Superintendent of Schools, hereinafter
referred to as the "SUPERINTENDENT," and Advocate Schools, hereinafter referred
to as the "CONTRACTOR" for the purposes of providing special education or
related services to individuals with exceptional needs under the authorization
of Education Code Sections 56366.5 and 56740; and
The SUPERINTENDENT determined that the need for such services exists;
CONTRACTOR is a nonpublic school or agency holding all required certificates
and licenses; and that CONTRACTOR is capable of and willing to provide such
services;
In consideration of the mutual promises contained herein, it is mutually
agreed between the parties as follows:
1. INDEPENDENT CONTRACTOR STATUS: This contract is by and between two
independent agents and is not intended to and shall not be construed to
create the relationship of agent, servant, employee, partnership, joint
venture or association.
2. For the purpose of this contract, a parent is the natural parent, legal
guardian or surrogate.
3. CONTRACTOR shall provide appropriately credentialed teachers or licensed
personnel consistent with the California Administrative Code, Title 5,
the California Education Code and SUPERINTENDENT requirements, as
specified, to provide service(s) to pupils under this general contract,
unless a written waiver has been granted by the Superintendent of Public
Instruction. CONTRACTOR shall be responsible for verification of
credentials and licenses held by its employees, agents and subcontractors.
Credentials shall be on file at SUPERINTENDENT'S office.
CONTRACTOR shall immediately notify SUPERINTENDENT and provide copies of
appropriate credential(s) and/or license(s) if change of staff occurs
which directly affects the pupils.
Page 1 of 7
<PAGE> 2
Contract Number S-95-15-1
---------
4. SUPERINTENDENT shall provide CONTRACTOR with copy of each pupil's
Individualized Education Prgram. SUPERINTENDENT will provide pupils a
program of instruction within the nonpublic school or agency which is
consistent with each pupil's Individualized Education Program as specified
in the Individual Service Contract/Agreement. The program of instruction
shall be described in writing and a copy provided to SUPERINTENDENT prior
to the effective date of this contract.
5. CONTRACTOR shall allow periodic monitoring of the pupil's instructional
program by SUPERINTENDENT and shall be invited to participate in the
review of the pupil's progress by the SUPERINTENDENT. Representatives of
SUPERINTENDENT shall have access to observe the pupil at work, to monitor
the instructional setting, to interview CONTRACTOR, and to review the
pupil's progress. CONTRACTOR agrees that SUPERINTENDENT representative may
make unannounced monitoring visits upon presentation of identification at
site office.
6. GRADUATION REQUIREMENTS: If the pupil is of secondary school age, the
SUPERINTENDENT will list the course requirements to be satisfied by the
CONTRACTOR leading toward graduation and specify levels of proficiency in
basic skills as measured by SUPERINTENDENT approved proficiency tests.
7. CONTRACTOR will provide for reasonable parental visits to all the school
facilities including, but not limited to, the instructional setting
attended by the pupil, school and recreational activity areas and pupil's
living quarters.
8. CONTRACTOR'S operating programs with residential components shall cooperate
with parents' reasonable requests for pupil visits in their home
including, but not limited to, holidays and weekends.
9. Progress reports and other data required for review shall be sent by
CONTRACTOR to SUPERINTENDENT no later than (see student's Individualized
Education Program).
An updated report shall be submitted if there is no current progress
report when pupils are scheduled for a review by the SUPERINTENDENT'S
Individualized Education Program team or when a pupil is terminated.
10. CONTRACTOR agrees to provide a written accident report to the
SUPERINTENDENT when a pupil has suffered an injury that requires
medical attention.
11. CONTRACTOR shall immediately report to SUPERINTENDENT, if a pupil is
removed from school by the parent, or if the pupil absents himself from
school without permission.
12. In the event of five (5) consecutive days of a pupil's excused absence,
CONTRACTOR shall immediately notify SUPERINTENDENT thereof in writing.
SUPERINTENDENT shall not be responsible for any payment of more than five
(5) consecutive days of excused
Page 2 of 7
<PAGE> 3
absence unless a written time extension is granted by SUPERINTENDENT;
and in no event shall SUPERINTENDENT be responsible for any payment of
more than ten (10) consecutive days of excused absence.
13. CHANGE OF RESIDENCE: CONTRACTOR shall notify SUPERINTENDENT in writing of
pupil's changes of residence within three (3) days after CONTRACTOR
becomes aware of said change. CONTRACTOR shall notify parents in writing
of their obligation to notify CONTRACTOR of changes of pupil's residence.
If CONTRACTOR neglects to follow these procedures, costs for services
delivered after CONTRACTOR becomes aware of a pupil's change of residence
to another SUPERINTENDENT shall be assumed by CONTRACTOR.
14. CONTRACTOR assures SUPERINTENDENT that it does not discriminate on the
basis of race, religion, sex, national origin, age or disability in
employment or operation of its programs.
15. No charge of any kind to parents shall be made by SUPERINTENDENT for
mandated educational and designated instruction and services, including
screening or interviews which may occur prior to a pupil's enrollment,
under the terms of this contract.
16. CONTRACTOR shall keep attendance of each pupil daily and shall report
attendance monthly to SUPERINTENDENT. Such attendance shall be kept on
attendance registers approved by SUPERINTENDENT and the original and
copies of such registers shall be filed with monthly invoices to
SUPERINTENDENT within thirty (30) days of the close of the school month.
Separate attendance registers must be submitted for all related services
as specified on Individualized Education Program. Original attendance
registers submitted to the SUPERINTENDENT with invoices for payment must
be completed by the service provider whose signature must appear on said
register. CONTRACTOR is responsible for verifying accuracy of said
registers and for informing service providers of their personal
responsibility for the completion and accuracy of said attendance
registers. CONTRACTOR shall permit SUPERINTENDENT representatives, upon
reasonable notice, to meet with staff of CONTRACTOR for the purpose of
auditing attendance reporting.
17. A unit of service for payment purposes is equivalent to one day of
attendance or excused absence as defined in Education Code Section
46010. SUPERINTENDENT shall not be responsible for payment of services
for days on which a pupil's attendance or absence does not qualify for
reimbursement under state law. Per diem rates for pupils whose
Individualized Education Programs authorize less than a full instructional
day may be adjusted.
Page 3 of 7
<PAGE> 4
Contract Number S-95-15-1
---------
18. RATE SCHEDULE: Educational service(s) offered by CONTRACTOR in accordance
with the Individualized Education Program and the charges for such
service(s) during the term of this contract, shall be as follows:
<TABLE>
<CAPTION>
Rate Period
------- ---------
<S> <C> <C>
a. Basic Education Program
(Specify)
Education Program $118.00 per day
b. Related Services
(1) *Transportation per
------- ------
(2) (a) Counseling - Group per
------- ------
(b) Counseling - Individual $ 88.56 per hour
------- ------
(3) Adapted Physical Education per
------- ------
(4) Language/Speech Therapy $ 60.00 per hour
------- ------
(5) Room and Board per
------- ------
(6) Occupational and Physical Therapy $100.00 per hour
--------------------------------- ------- ------
(7) One-on-One Aide $ 88.56 per day
--------------------------------- ------- ------
(8) **Sign Language Aide $ 63.00 per day
--------------------------------- ------- ------
</TABLE>
*TRANSPORTATION
1-20 Miles $ 12.32
21-35 Miles $ 21.80
36-50 Miles $ 28.02
51-75 Miles $ 43.61
76-95 Miles $ 58.38
96-120 Miles $ 63.94
121-171 Miles $ 80.16
172-220 Miles $108.12
TRANSPORTATION OF STUDENTS WITH UNEXCUSED OR TRUANT ABSENCES WILL BE REIMBURSED
AT 50% OF THE DAILY TRANSPORTATION RATE FOR NO MORE THAN FIVE (5) CONSECUTIVE
DAYS OF UNEXCUSED OR TRUANT ABSENCES. IN NO EVENT SHALL SUPERINTENDENT BE
RESPONSIBLE FOR PAYMENT FOR MORE THAN FIVE (5) CONSECUTIVE DAYS OF UNEXCUSED OR
TRUANT ABSENCES.
**FOR ONE STUDENT ONLY: DAVID JOHNSON
NOT TO EXCEED 215 DAYS
19. In no event shall the total dollar amount of this contract exceed the sum
of $4,700,000.00.
20. PAYMENT DEMAND: CONTRACTOR shall submit written demand monthly for
payment. Said demand shall be made in the manner prescribed by the
SUPERIN-
Page 4 of 7
<PAGE> 5
Contract Number S-95-15-1
---------
TENDENT. CONTRACTOR shall submit said demands for payment for services
rendered no later than (30) days from the end of the attendance accounting
period in which said services are actually rendered. Upon approval of
said payment demand, SUPERINTENDENT shall make payment in an amount equal
to the number of creditable days of attendance multiplied by the agreed
upon unit amount. Payment shall be made within forty-five (45) days of
receipt by the SUPERINTENDENT of invoices properly submitted.
21. RIGHT TO WITHHOLD: SUPERINTENDENT has the right to withhold payment to
CONTRACTOR when, in the opinion of SUPERINTENDENT expressed in writing
within ten (10) working days to CONTRACTOR:
a. CONTRACTOR'S performance, in whole or in part, either has not been
carried out or is insufficiently documented;
b. CONTRACTOR has neglected, failed or refused to furnish information or
to cooperate with the inspection, review or audit of its
program, work or records;
c. When service is provided by personnel who are not appropriately
credentialed/licensed or whose credential(s)/license(s) are not
on file as specified in paragraph 3 of this contract;
d. When properly submitted payment demand is not received by
SUPERINTENDENT within thirty (30) days from the end of the
attendance accounting period.
In the event of such an expression of opinion by SUPERINTENDENT,
CONTRACTOR shall have fourteen (14) days from date of receipt
of said writing hereinabove referred to, to correct such deficiency. Upon
written request from SUPERINTENDENT documenting reasonable justification,
SUPERINTENDENT shall agree to an extension of an additional fourteen (14)
days for correction.
22. NOTICES: All notices provided for in this contract shall be in writing
and shall be delivered by certified or registered mail, postage
prepaid. Notices to SUPERINTENDENT shall be mailed to address on first
page of this contract. The effective date of notice shall be the date of
receipt by addressee.
23. DISPUTES: Disagreements between SUPERINTENDENT and CONTRACTOR concerning
the meaning, requirements, or performance of this contract shall be
submitted to the State Superintendent of Public Instruction. The
determination of the Superintendent of Public Instruction shall be made in
writing and shall be binding upon both parties.
24. SUBCONTRACT AND ASSIGNMENT: CONTRACTOR shall not enter into subcontracts
for any of the work contemplated under this contract without first
obtaining
Page 5 of 7
<PAGE> 6
Contract Number S-95-15-1
---------
written approval from SUPERINTENDENT. Such approval shall be
attached and made a part of this contract. Subcontracts may be entered
into only with nonpublic agencies certified by the California State
Department of Education. This contract binds the heirs, successors,
assignees and representative of CONTRACTOR.
25. INSURANCE: During the entire term of this contract and any extension or
modification thereof, CONTRACTOR shall keep in effect a policy or
policies of liability insurance, including coverage of owned and non-owned
automobiles of at least $1,000,000 per occurrence, for all damages arising
out of death, bodily injury, sickness or disease from any one accident or
occurrence, and $1,000,000 for all damages and liabilities arising out of
injury to or destruction of property for each accident or occurrence. Not
later than the effective date of this contract, CONTRACTOR shall provide
SUPERINTENDENT with satisfactory evidence of insurance, naming the
SUPERINTENDENT as additional insured, including a provision for a twenty
(20) calendar day written notice to SUPERINTENDENT before cancellation or
material change, evidencing the above specified coverage. The
SUPERINTENDENT shall at its own cost and expense procure and maintain
insurance under the Worker's Compensation Law of California.
26. COMPLIANCE WITH LAWS: During the term of this agreement, CONTRACTOR shall
comply with all applicable federal, state, State Board of Education,
and local statutes, laws, ordinance, rules and regulations relating to the
required special education services and facilities for individuals with
exceptional needs.
27. AUDIT EXCEPTIONS: CONTRACTOR agrees to accept responsibility for
receiving, replying to, and/or complying with, any audit
exceptions by appropriate state or federal audit agencies occurring as a
result of the CONTRACTOR'S performance of this contract. CONTRACTOR also
agrees to pay to SUPERINTENDENT within thirty (30) days of demand by
SUPERINTENDENT the full amount of SUPERINTENDENT'S liability to the state,
if any, resulting from any audit exceptions, to the extent such are
attributable to CONTRACTOR'S failure to perform properly any of its
obligations under this contract.
28. INSPECTION AND AUDIT: CONTRACTOR shall provide access to or forward
copies of any books, documents, papers, reports, records or other
matter relating to the contract upon request by the SUPERINTENDENT except
as otherwise provided by law.
29. INDEMNIFICATION: CONTRACTOR shall defend, save harmless, and indemnify
SUPERINTENDENT and its officers, agents and employees from all
liabilities and claims for damages for deaqth, sickness or injury to
persons or property including, without limitation, all consequential
damages, from any cause whatsoever arising from or connected with its
service hereunder, whether or not resulting from the negligence of
CONTRACTOR, its agents or employees.
30. CONFLICTS OF INTEREST: CONTRACTOR agrees to furnish, upon request, to
SUPERINTENDENT a valid copy of the most recently adopted partnership
agreements
Page 6 of 7
<PAGE> 7
Contract Number S-95-15-1
---------
or bylaws and articles of the corporation and also a complete and
accurate list of the Governing Board of Directors (or Trustees or
Partners) and to timely update said information as changes in such
governance occur. CONTRACTOR promises and attests that the CONTRACTOR and
any Board of Directors of the CONTRACTOR shall avoid any actual or
potential conflict of interest including, but not limited to, employment
with SUPERINTENDENT.
31. TERM: The term of this agreement shall be from July 1, 1995, to and
including June 30, 1996.
32. TERMINATION: This agreement may be terminated for cause. Cause shall
include nonmaintenance of current nonpublic school/agency
certification. To terminate this contract, either party shall give twenty
(20) calendar days written notice. Upon termination without default of
CONTRACTOR, SUPERINTENDENT shall pay, without duplication, for all
services performed and expenses incurred to date of termination. In
consideration of this payment, CONTRACTOR waives all right to any further
payment or damage, and shall turn over to SUPERINTENDENT everything
pertaining to its services hereunder, possessed by CONTRACTOR or under its
control at the time of termination.
33. MODIFICATIONS AND AMENDMENTS: This contract may be amended only by the
mutual written consent of the parties hereto, except that the
SUPERINTENDENT may unilaterally amend the contract to accomplish the
below-listed changes:
a. Increase in dollar amounts.
b. Administrative changes.
c. Changes as required by law.
The parties hereto have executed this agreement by and through their duly
authorized agents or representatives.
Advocate Schools
DALE S. HOLMES 22365 Barton Road, Suite 300
Riverside County 11980 South Mt. Vernon Avenue
Superintendent of Schools Grand Terrace, CA 92324-5172
-----------------------------
CONTRACTOR
Signed /s/ Signed /s/ Ryan Burns Smith
-------------------- --------------------
Deputy Contractor
Date 18 AUG 95 Date Aug 18, 1995
------------------------ ------------------------
33-0383228
----------------------------
Tax Identification Number
Page 7 of 7
<PAGE> 1
Exhibit 10.25
[CCS LOGO]
June 30, 1996
Dr. Joseph Fernandez
President
Joseph Fernandez & Associates, Inc.
1240 Wellington Terrace
Maitland, Florida 32751
Dear Joe,
This letter sets forth my understanding of the proposed agreement between Joseph
Fernandez & Associates and Children's Comprehensive Services, Inc. (CCS).
Services: Marketing consulting services
Term: July 1, 1996 through June 30, 1997
Compensation: - Monthly payments of $4,167.
- 20,000 CCS stock warrants to be granted to Joseph
Fernandez & Associates for each new program, with a
projected annual operating income of $200,000, which is
started as a result of Joseph Fernandez & Associates'
efforts.
Expenses: All reasonable and customary expenses incurred in
connection with these services will be reimbursed.
If these arrangements are acceptable, please indicate by signing and returning
a copy of this letter.
Yours truly,
/s/ William J Ballard
-----------------
William J Ballard
Chairman & CEO
The proposed arrangements are acceptable to Joseph Fernandez & Associates.
/s/ Joseph A. Fernandez
- ----------------------------- ------------------
Joseph A. Fernandez Date
President
CHILDREN'S COMPREHENSIVE SERVICES, INC.
805 South Church Street - Post Office Box Eight
Murfreesboro, Tennessee - Zip Code 37133-0008
Telephone 615-896-3100 - Facsimile 615-896-5068
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Consolidated Financial Data" and to the use of our report dated May
15, 1996, in the Registration Statement (Form S-2) and related Prospectus of
Children's Comprehensive Services, Inc. for the registration of 2,875,000 shares
of its common stock and to the incorporation by reference therein of our report
dated May 15, 1996, with respect to the consolidated financial statements and
schedule of Children's Comprehensive Services, Inc. included in its Annual
Report (Form 10-K) for the year ended March 31, 1996, filed with the Securities
and Exchange Commission.
ERNST & YOUNG LLP
Nashville, Tennessee
July 15, 1996
