<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark one) FORM 10-Q
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended
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OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF l934
For the transition period from April 1, 1996 to June 30, 1996
Commission File Number 0-16162
CHILDREN'S COMPREHENSIVE SERVICES, INC.
----------------------------------------
(Exact name of registrant as specified in its charter)
Tennessee 62-1240866
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
805 South Church Street, Murfreesboro, Tennessee 37130
- ------------------------------------------------ ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (615) 896-3100
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $ .01 Par Value, outstanding at August 2, 1996 - 5,499,160
- ------------------------------------------------------------------------
shares.
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Index to Exhibits is Found on Page 18
Page 1 of 20
<PAGE> 2
INDEX
CHILDREN'S COMPREHENSIVE SERVICES, INC.
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets--June 30, 1996
and March 31, 1996. . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income--
Three months ended June 30, 1996 and 1995 . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows--
Three months ended June 30, 1996 and 1995 . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements--
June 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 2. Management's Discussion and
Analysis of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . 16
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
June 30, March 31,
1996 1996
-------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 3,318,000 $ 2,427,000
Accounts receivable, net of allowance
for doubtful accounts of $143,000
at June 30 and $146,000 at March 31 4,025,000 4,468,000
Prepaid expenses 300,000 303,000
Other current assets 404,000 254,000
----------- -----------
TOTAL CURRENT ASSETS 8,047,000 7,452,000
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $4,994,000 at June 30
and $4,803,000 at March 31 14,183,000 14,306,000
NOTE RECEIVABLE 217,000 217,000
OTHERASSETS AND DEFERRED CHARGES, at cost,
net of accumulated amortization of
$346,000 at June 30 and $332,000 at
March 31 135,000 147,000
----------- -----------
TOTAL ASSETS $22,582,000 $22,122,000
=========== ===========
</TABLE>
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Continued)
<TABLE>
<CAPTION>
June 30, March 31,
1996 1996
------------ -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 540,000 $ 658,000
Current maturities - long-term debt 206,000 201,000
Accrued employee compensation 997,000 1,570,000
Accrued other expenses 595,000 648,000
Deferred revenue 160,000 160,000
Income taxes payable 492,000 311,000
------------ -----------
TOTAL CURRENT LIABILITIES 2,990,000 3,548,000
DEFERRED TAXES PAYABLE 125,000 125,000
LONG-TERM DEBT 6,000,000 6,052,000
OTHER LIABILITIES 365,000 365,000
------------ -----------
TOTAL LIABILITIES 9,480,000 10,090,000
------------ -----------
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 5,494,785 shares at
June 30 and 5,378,726 shares at March 31 55,000 54,000
Additional paid-in capital 25,638,000 25,422,000
Accumulated (deficit) (12,591,000) (13,444,000)
------------ -----------
TOTAL SHAREHOLDERS' EQUITY 13,102,000 12,032,000
------------ -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 22,582,000 $22,122,000
============ ===========
</TABLE>
See notes to consolidated financial statements.
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revenues:
Operating revenues $ 6,482,000 $ 5,518,000
Management fee income 311,000 106,000
----------- -----------
TOTAL REVENUES 6,793,000 5,624,000
----------- -----------
Operating expenses:
Employee compensation and benefits 4,063,000 3,415,000
Purchased services and other
expenses 1,182,000 1,086,000
Depreciation and amortization 191,000 264,000
Related party rent 25,000 25,000
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TOTAL OPERATING EXPENSES 5,461,000 4,790,000
----------- -----------
Income from operations 1,332,000 834,000
Other (income) expense:
Interest:
Banks and other 200,000 211,000
Related parties -0- 29,000
Interest income (32,000) (2,000)
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TOTAL OTHER (INCOME) EXPENSE, NET 168,000 238,000
----------- -----------
Income before income taxes 1,164,000 596,000
Provision for income taxes 311,000 89,000
----------- -----------
NET INCOME $ 853,000 $ 507,000
----------- -----------
Net income per common share:
Primary $ .15 $ .09
=========== ===========
Fully diluted $ .15 $ .09
=========== ===========
</TABLE>
See notes to consolidated financial statements.
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 853,000 $ 507,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 191,000 202,000
Amortization -0- 62,000
Amortization of deferred loan costs 14,000 24,000
Changes in operating assets and liabilities:
Decrease in accounts receivable 443,000 389,000
Decrease in prepaid expenses 3,000 13,000
(Increase) in other current assets (150,000) (50,000)
(Decrease) in accounts payable (118,000) (262,000)
(Decrease) in accrued employee compensation (573,000) (259,000)
Increase (decrease) in accrued expenses (53,000) 65,000
Increase in income taxes payable 181,000 39,000
Increase in deferred revenue -0- 15,000
----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 791,000 745,000
----------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment (68,000) (46,000)
(Increase) in other assets (2,000) -0-
----------- -----------
NET CASH (USED) BY
INVESTING ACTIVITIES $ (70,000) $ (46,000)
----------- -----------
</TABLE>
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------------
1996 1995
---------- -----------
<S> <C> <C>
FINANCING ACTIVITIES
Proceeds from revolving lines of credit $ -0- $ 1,417,000
Principal payments on revolving lines of
credit and long-term borrowings (47,000) (1,458,000)
Principal payments on long-term
borrowings - related parties -0- (14,000)
Proceeds from issuance of Common Stock 217,000 -0-
Stock issue/registration costs -0- (23,000)
----------- -----------
NET CASH PROVIDED (USED)
BY FINANCING ACTIVITIES 170,000 (78,000)
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 891,000 621,000
Cash and cash equivalents at
beginning of period 2,427,000 69,000
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CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 3,318,000 $ 690,000
=========== ===========
See notes to consolidated financial statements.
</TABLE>
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1996
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Certain reclassifications have been made in the consolidated
financial statements for the three month period ended June 30, 1995, to conform
to the presentation of the financial statements for the three month period
ended June 30, 1996. Operating results for the three month period ended June
30, 1996 are not necessarily indicative of the results that may be expected for
the fiscal year ending March 31, 1997. For further information, refer to the
financial statements and footnotes thereto for the fiscal year ended March 31,
1996.
NOTE B -- NET INCOME PER COMMON SHARE
The computation of net income per common share is based on the weighted average
number of shares outstanding and common stock equivalents, consisting of
dilutive stock options and warrants.
NOTE C -- SUBSEQUENT EVENT
In July 1996, the Company filed a Registration Statement on Form S-2 with the
Securities and Exchange Commission covering the proposed public offering of
2,500,000 shares of the Company's Common Stock. Of the shares being offered,
1,500,000 shares are being offered by the Company, and 1,000,000 shares are
being offered by certain shareholders of the Company, primarily T. Rowe Price
Strategic Partners Fund II, L.P. If the offering is successfully completed, the
Company intends to use the net proceeds from the offering to repay outstanding
indebtedness, to finance expansion of the Company's programs, including
possible acquisitions, and for general corporate purposes.
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<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and this Quarterly Report on Form 10-Q contain
forward-looking statements and should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere herein.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes", "anticipates", "plans", "expects"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause the Company's actual
results to differ materially from those indicated by such forward-looking
statements. These factors include, without limitation, those set forth under
"Business - Risk Factors" in the Company's Annual Report on Form 10-K for the
fiscal year ended March 31, 1996.
GENERAL
As of June 30, 1996, the Company was providing education and treatment
services to approximately 1,700 at risk and troubled youth pursuant to
contracts with governmental agencies to manage 39 programs in 5 states. These
services were provided directly or through the Company's management contract
with Helicon, Incorporated ("Helicon"), a Section 501(c)(3) not-for-profit
corporation. 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 a Consulting and
Marketing Agreement, effective as of August 1992, by and between Helicon and
the Company (the "Helicon Agreement"). As of June 30, 1996, the Company was
providing consulting, management and marketing services to Helicon at 12
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. During the three months ended June 30,
1996, the Company recognized all of the management fee income to which it was
entitled. However, 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 June 30, 1996, unpaid management fees, lease payments and
advances, plus interest, due the Company from Helicon totaled $6,653,000. Based
on the current level of operations being maintained by Helicon, the Company
does not anticipate collecting any of
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<PAGE> 10
this amount. The Company has fully reserved this amount, and future payments
received from Helicon on this amount, if any, will be recognized by the
Company on the cash basis. The Helicon Agreement expires September 1, 1999. The
Company has also 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 income. 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 tax rate
because of the utilization of tax net operating loss carryforwards for which no
tax benefit had previously been recognized. At March 31, 1996, the Company had
net operating loss carryforwards of $5,741,000, utilization of which is subject
to annual limitations pursuant to the provisions of Internal Revenue Code
Section 382.
The Company's quarterly results may fluctuate significantly as a result of
a variety of factors, including the timing of the opening of new programs. When
the Company opens a new program, the program may be unprofitable until the
program population, and net revenues contributed by the program, approach
intended levels, primarily because the Company initially staffs its programs
based on such intended population levels. During the quarter ended June 30,
1996, the Company executed contracts for three new programs, two of which will
open during the quarter ending September 30, 1996. 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 quarter ending September 30, 1996.
In July 1996, the Company filed a Registration Statement on Form S-2 with
the Securities and Exchange Commission covering the proposed public offering of
2,500,000 shares of the Company's Common Stock. Of the shares being offered,
1,500,000 shares are being offered by the Company, and 1,000,000 shares are
being offered by certain shareholders of the Company, primarily T. Rowe
Price Strategic Partners Fund II, L.P.
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<PAGE> 11
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 income:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
------------------
1996 1995
------ ------
<S> <C> <C>
Operating revenues 95.4% 98.1%
Management fee income 4.6 1.9
----- -----
Total revenues 100.0 100.0
----- -----
Employee compensation and benefits 59.8 60.7
Purchased services and other expenses 17.4 19.3
Depreciation and amortization 2.8 4.7
Related party rent .4 .5
----- -----
Total operating expenses 80.4 85.2
----- -----
Income from operations 19.6 14.8
Interest expense 2.9 4.3
Interest income (.5) (.1)
Provision for income taxes 4.6 1.6
----- -----
Net income 12.6% 9.0%
===== =====
</TABLE>
Results of Operations
Three Months Ended June 30, 1996 and June 30, 1995
Total revenues for the three months ended June 30, 1996 increased
$1,169,000, or 20.8%, to $6,793,000 as compared to $5,624,000 for the three
months ended June 30, 1995. Operating revenues for the three months ended June
30, 1996 increased $964,000, or 17.5%, to $6,482,000 as compared to $5,518,000
for the three months ended June 30, 1995. The increase in operating revenues
results primarily from the opening of three new programs during fiscal 1996
which were in operation throughout the entire three months ended June 30, 1996,
and from significant increases in student enrollment at four of the Company's
programs.
Management fee income recognized under the Helicon Agreement increased
$205,000 to $311,000 for the three months ended June 30, 1996 as compared to
$106,000 for the three months ended June 30, 1995. Additional management fee
income of $217,000 for the three months ended June 30, 1995 was not recognized
by the Company due to the inability of Helicon to pay those amounts.
Employee compensation and benefits for the three months ended June 30, 1996
increased $648,000, or 19.0%, to $4,063,000 as compared to $3,415,000 for the
three months ended June 30, 1995. As a percentage of total revenues, employee
compensation and benefits decreased to 59.8% for the three months ended June
30, 1996 from 60.7% for the three months ended June 30, 1995. The increase in
employee compensation and benefits over the same period in the prior year
results primarily from the opening of three new programs during fiscal 1996
which were in operation throughout the entire three months ended June 30, 1996,
from significant expansion at two of the Company's programs, and from an
increase in the amounts accrued under the Company's incentive compensation
plans.
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<PAGE> 12
Purchased services and other expenses for the three months ended June 30,
1996 increased $96,000, or 8.8%, to $1,182,000 as compared to $1,086,000 for
the three months ended June 30, 1995. As a percentage of total revenues,
purchased services and other expenses decreased to 17.4% for the three months
ended June 30, 1996 from 19.3% for the three months ended June 30, 1995. The
increase in purchased services and other expenses over the same period in the
prior year is attributable primarily to the opening of three new programs
during fiscal 1996 which were in operation throughout the entire three months
ended June 30, 1996, and from increases in consulting, audit and travel
expenses, net of a reduction in legal expense.
Depreciation and amortization for the three months ended June 30, 1996
decreased $73,000, or 27.7%, to $191,000 as compared to $264,000 for the three
months ended June 30, 1995. The decrease in depreciation and amortization
compared to the same period in the prior year is attributable primarily to the
reduction in amortization of non-competition agreements from approximately
$62,000 for the three months ended June 30, 1995 to $-0- for the three months
ended June 30, 1996.
Income from operations for the three months ended June 30, 1996 increased
$498,000, or 59.7%, to $1,332,000 as compared to $834,000 for the three months
ended June 30, 1995, and increased as a percentage of total revenues to 19.6%
for the three months ended June 30, 1996 from 14.8% for the three months ended
June 30, 1995 as a result of the factors described above.
Interest expense for the three months ended June 30, 1996 decreased
$40,000, or 16.7%, to $200,000 as compared to $240,000 for the three months
ended June 30, 1995. The decrease in interest expense is attributed primarily
to a reduction in the average balance of debt outstanding and to a decrease in
the amortization of deferred loan costs.
Interest income increased $30,000 to $32,000 for the three months ended
June 30, 1996 as compared to $2,000 for the three months ended June 30, 1995.
The increase in interest income over the same period in the prior year is
attributable primarily to the increase in cash available for investment.
Provision for income taxes for the three months ended June 30, 1996
increased $222,000, or 249.4%, to $311,000 as compared to $89,000 for the three
months ended June 30, 1995. The Company's effective tax rate is less than the
statutory tax rate because of the utilization of tax net operating loss
carryforwards for which no tax benefit had previously been recognized.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for the three months ended June 30,
1996 was $791,000 on net income of $853,000 as compared to $745,000 on net
income of $507,000 for the three months ended June 30, 1995. Working capital at
June 30, 1996 was $5,057,000, as compared to $3,904,000 at March 31, 1996.
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<PAGE> 13
Cash used by investing activities was $70,000 for the three months ended
June 30, 1996 as compared to $46,000 for the three months ended June 30, 1995,
due primarily to an increase in cash outlays for the purchase of property and
equipment. Cash of $170,000 was provided by financing activities for the three
months ended June 30, 1996 as compared to a use of $78,000 for the three months
ended June 30, 1995, due primarily to the receipt of proceeds of $217,000 from
the issuance of shares of the Company's Common Stock (through the exercise of
stock options and warrants) during the three months ended June 30, 1996.
In September 1994, the Company executed agreements with National Health
Investors, Inc. ("NHI") and T. Rowe Price Strategic Partners Fund II, L.P.
("Strategic Partners"), pursuant to which the Company refinanced all of its
existing short-term obligations through five-year term loans from NHI and
Strategic Partners 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 Strategic Partners
term loan, resulting in the retirement of the outstanding obligation under that
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 June 30, 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 June 30, 1996, the amount due under the revenue participation agreement was
approximately $25,000. The agreement with NHI also requires the Company to
provide a debt service reserve equal to six months' payments of principal and
interest, an amount which totals approximately $460,000. This reserve was
established through the execution of an irrevocable letter of credit. Security
under the NHI agreement consists primarily of a first priority lien on
substantially all of the Company's real estate, improvements and equipment.
In September 1994, the Company also obtained a $2.5 million one-year
revolving line of credit from First American National Bank ("FANB"). This line
of credit, which was renewed in September 1995 for an additional term of one
year, bears interest at prime + 3/4% (9% as of June 30, 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.
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<PAGE> 14
Availability under the Company's line of credit is limited to the lesser of
$2.0 million or eighty-five percent of eligible accounts receivable of the
Company. Additionally, availability under the line of credit has been reduced
by approximately $460,000 as the issuance of the letter of credit in favor of
NHI for the debt service reserve referred to above reduced the Company's
available credit by a like amount. As there were no borrowings outstanding
under the line of credit at June 30, 1996, availability under the line of
credit was approximately $1,540,000.
The loan agreement with NHI and the FANB line of credit require the Company
to comply with certain restrictive covenants with respect to its business and
operations and to maintain certain financial ratios that become more stringent
over time. The restrictive covenants under these agreements 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.
If the Company's proposed public offering is successfully completed, the
Company plans to use a portion of the net proceeds from the offering to repay,
in October 1996, all of the Company's outstanding indebtedness to NHI. Pursuant
to the terms of the agreement with NHI, 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. As a result of the repayment
of this debt, the Company expects to incur a pre-tax extraordinary charge of
approximately $620,000, approximately $500,000 of which represents the
prepayment penalty. There can be no assurance, however, that the offering will
be consummated. In the event the offering is not consummated, the Company
intends to pay the NHI indebtedness as due in accordance with the NHI loan
agreement.
Following the repayment of the NHI indebtedness, the provisions of the loan
agreement with NHI 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 the completion of its proposed
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. In July 1996, the
Company entered into an agreement to purchase, for $690,000, real property
currently being utilized by Helicon for certain of its Tennessee programs.
Closing for this transaction is scheduled for January 1997. 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.
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<PAGE> 15
Current obligations, typically due within thirty days or less, are expected
to be funded with cash flow from operations and borrowings under the Company's
line of credit. Management believes that operations and amounts available under
its line of credit will provide sufficient cash flow for the next twelve months
and that long-term liquidity requirements will be met from cash flow from
operations and outside financing sources. If the proposed public offering is
consummated, the Company intends to use the net proceeds to repay outstanding
indebtedness as described above, to finance future expansion of the Company's
programs, including possible acquisitions, and for general corporate purposes.
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.
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 adopted SFAS 121 effective April 1, 1996. Adoption of SFAS 121 had no
effect 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 adopted SFAS 123 effective April 1, 1996, but
does not plan to change the method of accounting for these plans.
-15-
<PAGE> 16
PART II. OTHER INFORMATION
Item 1. 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. In July 1996, the Company reached a
confidential settlement of this lawsuit which will not have an adverse effect
on the Company's financial condition or results of operations.
Item 6. Exhibits and Reports on Form 8-K:
(a) The following exhibit is included herein:
(11) Statement re: computation of earnings per share.
(27) Financial Data Schedule. (SEC use only)
(b) Reports on Form 8-K:
There were no reports on Form 8-K for the three months ended June 30,
1996.
-16-
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHILDREN'S COMPREHENSIVE SERVICES, INC.
---------------------------------------
(Registrant)
Date: May 2, 1997 /s/ WILLIAM J BALLARD
-----------------------------------------
William J Ballard
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: May 2, 1997 /s/ DONALD B. WHITFIELD
-----------------------------------------
Donald B. Whitfield
Vice President of Finance, Secretary
and Treasurer (Principal Financial
and Accounting Officer)
-17-
<PAGE> 18
Exhibit Index
Exhibit No. Page
11 Computation of Per Share Earnings 19
27 Financial Data Schedule (SEC use only) 20
-18-
<PAGE> 1
EXHIBIT 11--STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended
June 30,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
PRIMARY
Average shares outstanding 5,418,525 5,355,891
Net effect of dilutive stock
options and warrants--based
on the treasury stock method
using average market price 344,844 200,992
---------- ----------
TOTAL 5,763,369 5,556,883
========== ==========
Net income $ 853,000 $ 507,000
========== ==========
Per share amount $ .15 $ .09
========== ==========
FULLY DILUTED
Average shares outstanding 5,418,525 5,355,891
Net effect of dilutive stock
options and warrants--based
on the treasury stock method
using the higher of ending
or average market price 361,796 200,992
---------- ----------
TOTAL 5,780,321 5,556,883
========== ==========
Net income $ 853,000 $ 507,000
========== ==========
Per share amount $ .15 $ .09
========== ==========
</TABLE>
The number of shares and per share amounts for the three months ended June 30,
1995 have been retroactively adjusted to reflect the Company's 1 for 2 reverse
stock split, effected March 21, 1996.
-19-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CHILDREN'S COMPREHENSIVE SERVICES, INC. FOR THE THREE
MONTHS ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,318,000
<SECURITIES> 0
<RECEIVABLES> 4,168,000
<ALLOWANCES> 143,000
<INVENTORY> 0
<CURRENT-ASSETS> 8,047,000
<PP&E> 19,177,000
<DEPRECIATION> 4,994,000
<TOTAL-ASSETS> 22,582,000
<CURRENT-LIABILITIES> 2,990,000
<BONDS> 6,000,000
0
0
<COMMON> 55,000
<OTHER-SE> 13,047,000
<TOTAL-LIABILITY-AND-EQUITY> 22,582,000
<SALES> 0
<TOTAL-REVENUES> 6,793,000
<CGS> 0
<TOTAL-COSTS> 5,461,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 200,000
<INCOME-PRETAX> 1,164,000
<INCOME-TAX> 311,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 853,000
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
</TABLE>
