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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(MARK ONE) FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-16162
CHILDREN'S COMPREHENSIVE SERVICES, INC.
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(Exact name of registrant as specified in its charter)
Tennessee 62-1240866
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
805 South Church Street, Murfreesboro, Tennessee 37130
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (615) 896-3100
-----------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $ .01
-----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of voting and non-voting stock held by non-affiliates
of the Company as of September 19, 1997 was $109,293,113 and $-0-, respectively.
The number of shares outstanding of the issuer's common stock, par value $ .01
per share, as of September 19, 1997 was 7,774,633.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual meeting of shareholders to be
held November 12, 1997 are incorporated by reference into Part III of this Form
10-K.
Index to Exhibits is Found on Sequentially Numbered Page 63
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PART I
ITEM 1. BUSINESS
GENERAL
Children's Comprehensive Services, Inc., a Tennessee corporation formed
in 1985, and subsidiaries (the "Company") is one of the largest for-profit
providers of education, treatment and juvenile justice 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 have severe psychiatric disorders or who
are emotionally disturbed, behaviorally disordered, developmentally delayed or
learning disabled. The Company also provides a limited range of adult behavioral
services at certain of its locations in response to community demand. The
Company provides its services at facilities located in Alabama, Arkansas,
California, Florida, Kentucky, Louisiana, Michigan, Montana, Tennessee, Texas
and Utah. As of June 30, 1997, the Company was providing education, treatment
and juvenile justice services, either directly or through its management
contract with Helicon Incorporated ("Helicon"), to approximately 2,600 youth and
100 adults.
VENDELL TRANSACTION
In June 1997, the Company acquired substantially all the assets of
Vendell Healthcare, Inc. and its subsidiaries ("Vendell") for approximately
$19,477,000 in cash ($18,768,000 of which was paid at closing and $709,000 of
which was paid in September 1997) and the issuance of 642,978 shares of the
Company's Common Stock valued at approximately $7,600,000. Pursuant to this
acquisition, the Company acquired seven residential treatment facilities and 12
non-residential treatment facilities which the Company believes will enhance its
continuum of youth services.
RECENT DEVELOPMENTS
In July 1997 the Company signed a contract with the Michigan Family
Independence Agency for a 30 bed residential program for seriously disturbed,
adjudicated juvenile offenders, representing an expansion of the Company's
behavioral services program in St. Johns, Michigan. In addition, in August 1997,
the Company entered into new contracts with the Utah Department of Corrections
and various school districts in the State of Arkansas. Under the Utah contract,
the Company will provide a 24-bed observation and assessment, short term
residential program for adjudicated male juvenile offenders at its West Jordan,
Utah facility. Under the Arkansas contracts, the Company will serve up to 80
youth in educational programs designed for unruly, conduct disordered youth at
sites in Little Rock, North Little Rock and Bryant, Arkansas.
THE MARKET FOR THE COMPANY'S SERVICES
The Company believes the market for its services for at risk and
troubled youth is large and growing. 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. Children classified
as requiring special education services comprise a large subset of the at-risk
youth population. Of the 5.1 million children in special education programs
during the 1995-96 school year, 2.6 million were diagnosed as having specific
learning disabilities and over 430,000 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 1995, there were 2.7 million
arrests of juveniles under 18 years of age, accounting for 15% of all violent
crime, 32% of all robbery arrests and 25% of all weapons arrests. The Company
believes that factors contributing to the high rate of youth crime include the
ready availability of firearms, the prevalence of drug addiction, violence
portrayed in
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the media and the increase in the number of single parent homes. In addition, a
recent census projection stated that the juvenile population in the United
States is expected to reach 74 million by the year 2010. At certain of its
facilities, the Company also provides adult programming and treatment in
response to community demand and the need for such services.
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,
treatment and juvenile justice 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 these
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, treatment and juvenile justice services, 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 its 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.
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 or communities. Additionally, at certain of
its facilities, the Company provides treatment services for adults. The
Company's programs, ranging from non-residential family preservation programs to
24-hour secure facilities, are based predominantly on models designed to achieve
behavior modification through therapy, counseling and, when necessary,
pharmaceuticals. 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 licensed physicians and may be administered by Company personnel.
The Company believes that the breadth of the Company's services makes the
Company attractive to members of the community and a broad spectrum of payers,
as well as to local, state and federal governmental agencies. As of June 30,
1997, the Company was providing services directly and through management
contracts with Helicon to approximately 1,800 youth and 60 adults in its
non-residential programs and 800 youth and 40 adults in its residential
programs.
Comprehensive Continuum of Services. The Company offers a comprehensive
continuum of services ranging from non-restrictive programs, such as family
preservation and non-residential special education programs, to acute
psychiatric
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programs, secure residential and medium-security juvenile correctional
facilities. The Company believes its primary emphasis on education, treatment
and juvenile justice, 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 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 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 services offered by the
Company.
NON-RESIDENTIAL PROGRAMS. 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
behavioral day treatment programs, educational day treatment programs,
alternative education programs, diversionary education programs, family
preservation programs, homebound education programs and on-site education
programs in emergency shelters and diagnostic centers. Adult programs provide
primarily behavioral day treatment.
Behavioral Day Treatment Programs. The Company's behavioral day treatment
programs provide therapeutic treatment services to individuals with clinically
definable emotional disorders, including those with severe psychiatric disorders
who are transitioning from acute psychiatric treatment programs to other day
treatment programs, as well as treatment for chemical dependency. Treatment
under these programs includes individual and group therapy, counseling and, in
certain cases, may include pharmaceutical treatment. Each behavioral day
treatment program is overseen by a licensed physician and staffed by one or more
counselors or therapists and registered nurses.
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.
Alternative Education Programs. The Company's alternative education programs
provide educational services to youth who cannot or who are not permitted to
attend public school. These programs are designed to educate at risk youth in a
manner that promotes public safety by reducing disruptive and delinquent
behaviors of students. The principal components of the alternative education
programs include daily computer assisted learning, behavioral counseling, job
placement, transition into public schools, family services and community
service. These programs are designed to provide youth with the education,
credentials and job skills required to be successful adults.
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, as well as delinquent
and status offending youth and youthful sex offenders. These programs, typically
provided in lieu of incarceration, 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
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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 who have medical problems
that prevent them from attending school as well as to 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 PROGRAMS. The Company's residential 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 secure residential
programs, detention programs, acute psychiatric treatment programs, residential
psychiatric treatment programs, residential treatment programs, diagnostic and
evaluation services, therapeutic wilderness programs, and group homes. Adult
programs provide primarily acute psychiatric treatment.
Secure Residential Programs. The Company's secure residential programs house
youth that are placed in such programs by the courts or state agencies. While in
the programs, the youth are provided with a wide range of services designed to
change negative behavior including substance abuse education, group counseling,
physical training, education, a student work program and social skills classes.
Each student receives an individualized service plan tailored to meet his or her
particular needs for the duration of the placement.
Detention Programs. The Company's detention 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 detention 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.
Acute Psychiatric Treatment Programs. The Company's acute psychiatric treatment
programs provide evaluation and stabilization of individuals with severe
psychiatric disorders. Programs are based on a medical model and consist of
structured and intensive medical and/or behavioral treatments including therapy,
counseling and pharmaceuticals. The programs are supervised by licensed
physicians and represent the first step in treating severe psychiatric
disorders.
Residential Psychiatric Treatment Programs. The Company's residential
psychiatric treatment programs provide medical and behavioral treatment to
behaviorally and emotionally disturbed youth who suffer from depression,
chemical dependency and other psychiatric disorders. These treatment programs
are based on a medical model and are designed to achieve behavior modification
through the use of therapy and medical treatment, including pharmaceuticals.
Medical treatment services are provided by licensed physicians who contract with
the Company to provide such services. Services offered at these programs include
therapy groups, drug education and 12-step recovery meetings. A primary goal of
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the Company's residential psychiatric programs is to develop positive support
systems for the adolescents to allow for discharge to a less structured
environment.
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 youthful 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. The Company's diagnostic and evaluation
services are designed to provide short-term evaluation and assessment services
to youth who are in state custody.
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's
wilderness programs are designed to educate youth and teach the discipline and
self-respect necessary to prevent a youth from repeating or engaging in more
serious delinquent behavior.
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.
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The table below sets forth certain information regarding the Company's
non-residential programs operated by the Company directly or through management
contracts with Helicon:
<TABLE>
<CAPTION>
NON-RESIDENTIAL PROGRAMS
Average
Population Commencement
Location Program Type FY 6/30/97 of Operations
- ---------------- ------------------------------------------- ---------- -------------
<S> <C> <C> <C>
COMPANY PROGRAMS
Alabama:
Dothan Behavioral day treatment 16 June 1997
Arkansas:
Little Rock Alternative education -0- June 1997
North Little Rock Alternative education -0- June 1997
California:
San Bernardino Educational day treatment 43 January l980
Grand Terrace Educational day treatment 168 May l985
Beaumont Educational day treatment 33 September l985
Banning Educational day treatment 24 September l985
Victorville Educational day treatment 31 September l987
Mid-Valley Educational day treatment 79 June l988
Ramona Educational day treatment 29 September 1990
Quail Valley Educational day treatment 36 October 1990
Riverside Educational day treatment 109 August 1992
Desert Hot Springs Educational day treatment 4 September 1992
Barstow Educational day treatment 17 April 1994
Chula Vista Educational day treatment 61 February 1994
Steele Canyon Educational day treatment 42 September 1994
Riverside Educational day treatment 23 May 1996
Joshua Tree Educational day treatment 7 September 1996
Riverside Educational day treatment 39 April 1997
Hemet Educational day treatment 14 April 1997
Florida:
Jacksonville Diversionary education 20 September 1995
Highlands County Diversionary education 23 November 1996
Ft. Walton Behavioral day treatment 11 June 1997
Pensacola Behavioral day treatment 19 June 1997
Panama City Behavioral day treatment 16 June 1997
Kentucky:
Bowling Green Behavioral day treatment 17 June 1997
Louisiana:
New Orleans Diversionary education 28 November 1991
New Orleans Family preservation 4 February 1994
</TABLE>
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NON-RESIDENTIAL PROGRAMS (CONTINUED)
<TABLE>
<CAPTION>
Average
Population Commencement
Location Program Type FY 6/30/97 of Operations
- ---------------- ------------------------------------------- ---------- -------------
<S> <C> <C> <C>
Montana:
Butte Behavioral day treatment 18 June 1997
Billings Behavioral day treatment 25 June 1997
Great Falls Behavioral day treatment 20 June 1997
Polson Behavioral day treatment 16 June 1997
Bozeman Behavioral day treatment 20 June 1997
Tennessee:
Nashville Homebound education 88 November 1991
Texas:
Bexar County Alternative education 135 September 1996
Nueces County Alternative education 4 October 1996
Houston Alternative education 20 June 1997
Houston Behavioral day treatment 5 June 1997
HELICON PROGRAMS
Tennessee:
Murfreesboro Family preservation 18 July 1988
Murfreesboro Educational day treatment 23 September 1990
Murfreesboro Diversionary education 40 February 1994
Nashville Diversionary education 40 October 1990
Various On-site educational services in
emergency shelters and diagnostic
centers 359 September 1993
Covington Diversionary education 30 August 1994
Clarksville Diversionary education 40 September 1994
</TABLE>
The table below sets forth certain information regarding residential
programs operated by the Company directly or through management contracts with
Helicon:
RESIDENTIAL PROGRAMS
<TABLE>
<CAPTION>
Average
Licensed Population Commencement
Location Program Type Capacity FY 6/30/97 of Operations
- ---------------- ------------------------------------------- -------- ---------- --------------
<S> <C> <C> <C> <C>
COMPANY PROGRAMS
Alabama:
Tuscaloosa Detention program 27 23 September 1989
Tuscumbia Detention program 25 22 October 1992
Jasper Therapeutic wilderness program 20 20 November 1994
Eutaw Therapeutic wilderness program 20 16 May 1995
Selma Therapeutic wilderness program 26 17 February 1996
Eufaula Secure residential program 90 57 August 1996
Arkansas:
Benton Acute psychiatric and residential
psychiatric treatment 77 65 June 1997
Florida:
Panama City Acute psychiatric and residential
psychiatric treatment 80 38 June 1997
Kentucky:
Bowling Green Acute psychiatric and residential
treatment 72 49 June 1997
Michigan:
St. Johns Acute psychiatric and secure
residential program 63 10 June 1997
Montana:
Butte Acute psychiatric and residential
psychiatric treatment and detention
program 52 45 June 1997
</TABLE>
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RESIDENTIAL PROGRAMS (CONTINUED)
<TABLE>
<CAPTION>
Average
Licensed Population Commencement
Location Program Type Capacity FY 6/30/97 of Operations
- ---------------- ------------------------------------------- -------- ---------- --------------
<S> <C> <C> <C> <C>
Tennessee:
Murfreesboro Residential treatment 34 34 July l989
Newbern Residential treatment 32 32 July 1990
Clarksville Diagnostic and evaluation services 25 25 May 1992
Johnson City Detention program 12 9 November 1985
Jackson Residential treatment 54 33 December 1996
Texas:
Houston Acute psychiatric and residential
psychiatric treatment 140 45 June 1997
Utah:
West Jordan Acute psychiatric and residential
treatment 80 35 June 1997
HELICON PROGRAMS
California:
Mid-Valley Residential treatment 84 80 June l988
Ramona Residential psychiatric treatment 40 34 November 1984
Riverside Residential treatment 120 113 August 1992
Various 6-Bed group homes 36 29 November 1994
Riverside Secure residential program 30 26 May 1996
</TABLE>
In addition to the programs described above, the Company manages
psychiatric units for elderly patients in general medical/surgical hospitals in
two locations in Little Rock, Arkansas in exchange for a fixed monthly fee and
reimbursement of expenses.
OPERATIONAL PROCEDURES
The Company's programs are designed to provide a range of consistent,
high quality and cost-effective education, treatment and juvenile justice
services to meet a wide variety of needs for the various segments of the at risk
and troubled youth population as well as, at some facilities, adult populations.
All acute and certain other facilities of the Company admit patients 24 hours
per day, seven days a week. 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 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 its
programs. The Company's direct care staff includes teachers, counselors, mental
health professionals (including psychiatrists and psychologists), 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. Physician members of the
direct care staff are generally independent contractors who also maintain a
private practice. In the case of physicians who relocate their practices near
Company facilities, the Company may guarantee a minimum income to such
physicians for a limited period, such as one year.
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
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commitment to its employees' professional development by offering lectures,
classes and training programs, as well as tuition reimbursement benefits.
Quality Assessment. The Company strives to enhance the quality of its program
offerings and the quality of its highly trained and dedicated staff to improve
the positive impact that its programs have on the individuals 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
quality of its various programs. The Company has implemented its Mastery
Achievement Program ("MAP") at the majority of its facilities and expects to
complete implementation at the remaining facilities during fiscal 1998. The MAP
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 MAP 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 MAP, 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.
In addition to measuring performance objectives, the Company has
corporate compliance policies, including an integrity hotline, formulated as a
guide to the ethical and legal conduct of its employees in force at its
principal behavioral residential treatment centers. The Company anticipates
implementing such policies in its remaining facilities during fiscal 1998.
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 providers, as well as school
districts and juvenile courts responsible for special programs for at risk and
troubled youth. The Company also markets certain of its programs to the general
public in an effort to increase community awareness of the Company's facilities.
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.
Marketing to Governmental Agencies. The Company believes that it is able to
design, develop and operate its facilities and programs at a lower cost than
governmental agencies that are responsible for performing such services. The
Company focuses on adherence to proven policies and procedures and efficient
application of financial resources to provide an attractive, cost-effective
alternative to programs operated directly by governmental entities. The Company
generally pursues its governmental business opportunities in one of three ways.
The Company follows 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 receives
unsolicited requests, generally from local school districts, for the operation
of special education programs, or submits unsolicited proposals for new or
revised services. When the Company receives inquiries from or on behalf of
governmental agencies or local school districts, the Company determines whether
there is an existing need for the Company's services, assesses the legal and
political climate and the
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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. 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.
Marketing to the General Public. In marketing its services to the general
public, referral sources and payers, the Company first undertakes market
research to determine the specific behavioral care needs of the communities
served by its facilities. The Company then modifies or develops programs and
services to address those needs and promotes the availability of those programs
and services through the use of community education programs, local talk shows
and newspaper articles, media advertising and yellow pages advertisements.
In addition, Company employees in each facility meet regularly with
potential referral sources, including psychiatrists and other private
physicians, social workers and other community professionals. These
representatives also meet with businesses, managed care organizations and other
referral sources, all in an effort to educate these sources as to the breadth
and quality of the Company's programs.
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 June 30, 1997, the Company was providing consulting, management and marketing
services to Helicon at 12 programs. The Company leases three facilities to
Helicon for the operation of certain of 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 the
fiscal year ended June 30, 1997, and for 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 and 1995,
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 all management fee income to which
it is entitled in the future. As of June 30, 1997, unpaid management fees, lease
payments and advances, plus interest, due to the Company from Helicon totaled
$7,153,000. Based on the current level of operations being maintained by
Helicon, the Company does not anticipate collecting any of, and has fully
reserved, 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 $1,000,000.
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<PAGE> 12
SOURCES OF REVENUE
The Company's residential centers and day treatment centers receive
payments from (i) the federal government and state governments, pursuant to
contracts with such entities, as well as payments under Medicaid Under 21,
Medicare, CHAMPUS and other governmental programs, (ii) Blue Cross and other
private indemnity carriers, health maintenance organizations, preferred provider
organizations and other managed care programs, (iii) self-insured employers and
(iv) patients directly.
MAJOR CUSTOMERS
During the fiscal year ended June 30, 1997, the Company earned
approximately 17% of its revenues under a contract with the Riverside County
Office of Education, Riverside, California, and approximately 12% 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 contracts
with Riverside County and the State of Tennessee have been renewed for the
period beginning July 1, 1997 through June 30, 1998, under substantially the
same terms and conditions as described above.
REIMBURSEMENT
In addition to receiving revenues pursuant to contracts with state and
local governments, the Company receives payment for services from insurance
companies, HMO's, PPO's, Medicare, Medicaid, CHAMPUS and directly from patients.
Medicaid. The Medicaid program, created by the Social Security Amendments of
1965, is designed to provide medical assistance to welfare recipients, indigent
individuals who meet state eligibility standards, and certain individuals who
meet federally specified poverty guidelines. Medicaid is a joint federal and
state program. Each Medicaid program is financed with federal and state funds
and is operated by the state within federal guidelines requiring coverage of
certain individuals and services and allowing wide latitude in covering
additional individuals and services. Reimbursement rates under the Medicaid
program are set by each participating state, and rates and covered services may
vary from state to state according to a federally approved state plan. The
federal government and many states are currently considering ways to limit the
increase in the level of Medicaid funding which, in turn, could adversely affect
future levels of Medicaid reimbursement received by the Company.
Certain states in which the Company's facilities operate levy taxes on
provider costs or revenues, in part, to fund a portion of the Medicaid program.
The Omnibus Budget Reconciliation Act of 1990 (the "1990 Budget Act") directs
that such provider specific taxes and voluntary contributions must be excluded
from the provider's cost base for Medicaid reimbursement purposes. The Company
currently pays provider specific taxes in two states. The Company cannot predict
how these programs might be modified in the future or how the states would
respond to such modification.
In addition to the standard reimbursement rates paid to the Company
under Medicaid programs, several state programs include a financial benefit for
facilities that treat a disproportionately large volume of Medicaid patients as
a percentage of the total patient population of the facility. These
"disproportionate share" benefits, as they are often called, are subject to
annual review and revision by the particular state governments and could be
substantially reduced or eliminated at any point. The likelihood of such
reductions was substantially increased with the recent enactment of the Balanced
Budget Act of 1997, Public Law 105-33 ("BBA"). The BBA substantially reduces the
level of disproportionate share funding provided to states from 1998 to 2002.
The
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<PAGE> 13
savings for the federal government as a result of such reductions are valued at
$10.4 billion. Such reductions in payments will likely result in either
increased state budgetary requirements for furnishing Medicaid services or
further reductions in state payments to providers.
The Company participates in Medicaid Under 21 programs in six states in
which it operates residential facilities. Additionally, the Company may receive
disproportionate share payments under the Medicaid program in three states.
Some states have been granted Medicaid waivers from the federal
government. These waivers allow the state to implement alternative programs and
still receive federal funding. States implementing such programs typically shift
Medicaid beneficiaries to managed care. Several states in which the Company
operates have been granted a Medicaid waiver. In those states, the Company
contracts with a managed care organization to provide services to enrollees who
are covered under the state Medicaid waiver program.
Medicare. Medicare is the federally funded and administered health insurance
program for the aged (individuals age 65 or older) and disabled. The Medicare
program consists of Part A and Part B. Part A covers inpatient services and
services furnished by other institutional health care providers. Part B covers
the services of doctors, suppliers of medical items and outpatient services.
While most health care facilities receive Medicare Part A reimbursement
on a prospective basis based on the patient's diagnosis, psychiatric facilities
are exempt from the Medicare prospective payment system ("PPS") and continue to
be reimbursed on a cost-based system. The 1990 Budget Act, however, directs the
Secretary of Health and Human Services ("HHS") to develop a new prospective
payment methodology for PPS-exempt facilities and to report to Congress on this
matter. As of August 31, 1997, regulations have not been proposed to include
psychiatric facilities in such prospective payment programs.
PPS-exempt facilities are subject to inpatient payment limitations and
incentives established by the Tax Equity and Fiscal Responsibility Act of 1982
("TEFRA"). Under TEFRA, the target rate of permitted increases in cost per case
is established each year by the increase in the cost of a market basket of
hospital goods and services (the "Target Rate"). Facilities with costs less than
the Target Rate per discharge receive their costs plus an additional payment.
Providers with inpatient costs exceeding their Target Rates are subject to a
payment ceiling of 110% of the target amount. The Health Care Financing
Administration ("HCFA"), the agency responsible for administering the Medicare
program, issued a final rule with comment period on August 29, 1997 which
affects PPS-exempt facilities. These rules set forth rate-of-increase limits for
PPS-exempt facilities. There are various effective dates of the rule changes
included in the final rule. In addition, the BBA includes cost containment
provisions limiting the annual increase in payment rates for PPS-exempt
facilities. Under the BBA, PPS-exempt hospitals get a 0% payment update for
fiscal year 1998, then a variable payment update in fiscal years 1999-2002. The
Company has not determined the impact of these regulatory changes and statutory
enactments to the Company. As of June 30, 1997, three Company facilities had
Medicare inpatient utilization and were, therefore, subject to TEFRA payment
limitations and vulnerable to any decrease in Medicare reimbursement.
Annual Cost Reports. In order to receive reimbursement under the Medicare and
Medicaid programs, the Company is required to submit cost reports detailing the
costs incurred by its facilities in providing care to Medicare and Medicaid
enrollees. These cost reports are subject to government audits which may result
in adjustments to the amounts ultimately determined to be due the Company under
these reimbursement programs. These audits often do not result in a final
determination of amounts due to providers under the programs based on costs
until several years have passed. The Company believes, but cannot assure, that
adequate provision has been made for any material adjustments that might result
from all of such audits and that final resolution of all cost reports will not
have a material adverse effect upon the Company's financial position or results
of operations.
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<PAGE> 14
Blue Cross and Commercial Insurance. The Company's facilities provide services
to individuals covered by health care insurance offered by private commercial
insurance carriers, and non-profit hospital service corporations such as Blue
Cross. Blue Cross generally pays facilities covered services at (i) their
established hospital charges, (ii) a percentage thereof, or (iii) rates
negotiated between Blue Cross and the individual facility. Other private
insurance carriers also reimburse their policyholders, or make direct payments
to facilities, for covered services at established charges or a percentage
thereof. Except for patients covered under cost-based Blue Cross plans, as is
the case in Michigan, the privately-insured patient generally is responsible to
the facility for any difference between the amount the insurer paid for covered
items or services and the facility's total charges for the covered items or
services. Private commercial insurance carriers have, over the past few years,
tended toward minimizing lengths of stay in facilities and lowering costs, the
continuation of which could adversely affect the Company and its operations.
GOVERNMENT REGULATION AND HOSPITAL ACCREDITATION
Licensing and Certification. The industry in which the Company operates is
subject to substantial federal, state and local government regulations. Health
care facilities are subject to periodic state licensing inspections and
Medicare, Medicaid and CHAMPUS compliance inspections to determine compliance
with their respective conditions of participation, including standards of care,
staffing, equipment, and cleanliness necessary for continued licensing or
participation in these programs. Contracts entered into between the Company and
federal, state and local governments typically contain substantial reporting
obligations and may require supervision, on-site monitoring and periodic
inspections by representatives of such governmental agencies. In addition, there
are specific laws regulating the civil commitment of psychiatric patients and
the disclosure of information regarding patients being treated for chemical
dependency or behavioral disorders. Many states have adopted a "patient's bill
of rights" which sets forth standards dealing with issues such as using the
least restrictive treatments, insuring patient confidentiality, allowing patient
access to the telephone and mail, allowing the patient to see a lawyer and
requiring the patient to be treated with dignity. The Company believes, but
cannot assure, that its facilities are in substantial compliance with all
applicable laws and regulations governing its operations.
Certificate of Need. Five of the states in which the Company operates have in
effect Certificate of Need ("CON") laws applicable to the services provided by
the Company. Under those laws, a hospital generally must obtain state approval
prior to (i) making capital expenditures in excess of certain threshold amounts,
(ii) expanding or relocating bed capacity or facilities, (iii) acquiring certain
medical equipment, or (iv) instituting certain new services. The general effect
of these laws is to increase the difficulty associated with establishing new or
expanding existing facilities or services. The Company may, however, experience
other adverse effects from state CON requirements or changes in such
requirements, including the possibility that the Company experiences adverse
financial affects because it is unable to expand or modify services in a state
with CON requirements.
Utilization Review. Federal law contains numerous provisions designed to ensure
that services rendered by healthcare facilities to Medicare and Medicaid
patients meet recognized professional standards and are medically necessary, as
well as to ensure that claims for reimbursement are properly filed. These
provisions include a requirement that a sampling of admissions of Medicare and
Medicaid patients must be reviewed by peer review organizations ("PROs") in a
timely manner to determine the medical necessity of the admissions. In addition,
under the Peer Review Improvement Act of 1982 (the "Peer Review Act"), PROs may
deny payment for services provided and, in more extreme cases, have the
authority to recommend to HHS that the provider be fined or excluded from the
Medicare and Medicaid programs.
Each of the Company's acute psychiatric residential facilities has
developed and implemented a quality assurance and improvement program and
implemented procedures for utilization review to meet its obligations under the
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<PAGE> 15
Peer Review Act. In the past, PROs have not denied significant amounts of the
Company's charges. Nevertheless, the activities of PROs and other public and
private utilization review agencies will likely continue to have the effect of
causing physicians who practice at the Company's acute psychiatric residential
facilities to reduce the number of patient admissions or their overall length of
stay. The Company believes that compliance with regulations overseen by PROs has
reduced the number of patient admissions and the length of stays of Medicare and
Medicaid patients.
Fraud and Abuse. Various state and federal laws regulate the relationships
between providers of health care services and their referral sources, including
physicians. Among these laws are the provisions of the Social Security Act
addressing illegal remuneration (the "Anti-Kickback Statute"). The Anti-Kickback
statute prohibits providers from soliciting, receiving, offering or paying,
directly or indirectly, any remuneration in order to induce or arrange for
referrals for items or services reimbursed under the Medicare or Medicaid
programs. A provider that violates the Anti-Kickback Statute may be subjected to
felony criminal penalties and substantial civil sanctions, including possible
exclusion from the Medicare or Medicaid programs.
In order to provide guidance to health care providers with respect to
the Anti-Kickback Statute, the Office of Inspector General ("OIG"), in July 1991
and November 1992, issued final regulations creating certain "safe harbors."
These "safe harbors" set out requirements which, if met by an individual or
entity, insulate that individual or entity from an enforcement action under the
Anti-Kickback Statute. New proposed safe harbors were issued in September 1993,
with additional clarifications being issued in July 1994. Compliance with the
Anti-Kickback safe harbors is not required by law. However, failure to comply
means that a provider is not assured of protection from investigation or
prosecution under this statute.
The Company and its subsidiaries have entered into various types of
agreements with physicians and other health care providers in the ordinary
course of operating its facilities, many of which provide for payments to such
persons by the Company as compensation for their services. The most common of
these include medical director and provider agreements with physicians. In
addition, the Company and its subsidiaries have entered into various leases,
management contracts and managed care contracts. Although all of these
contracts, one of which, for example, includes a requirement that contracts with
physicians set the aggregate amount of physician compensation in advance, do
not satisfy all the applicable criteria contained in the Anti-Kickback statute
safe harbor regulations that relate to such arrangements the Company believes
that such contracts do not violate the Anti-Kickback Statute because all of
such arrangements (i) are intended to achieve legitimate business purposes,
(ii) provide compensation that is based on fair market value for items or
services that are actually provided, and (iii) are not dependent on the volume
or value of referrals. However, there can be no assurance that (i) government
enforcement agencies will not assert that certain of these arrangements are in
violation of the Anti-Kickback Statute or (ii) the Anti-Kickback Statute will
ultimately be interpreted by the courts in a manner consistent with the
Company's practices. Additional proposed safe harbors are expected to be
published in the near future by the OIG, including a safe harbor for physician
recruitment. The Company is unable to predict whether its recruitment
arrangements with physicians will comply with any safe harbor regarding
physician recruitment, if adopted.
In 1989, Congress passed the legislation commonly referred to as the
Stark Bill ("Stark I") as part of the Omnibus Budget Reconciliation Act of 1989.
Stark I went into effect on January 1, 1992. Stark I prohibited certain
physician referrals to clinical laboratories in which the physician or close
family member has a "financial relationship." In 1993, Congress passed an
amendment to Stark I which became effective on January 1, 1995. This amendment
is commonly referred to as "Stark II" (collectively "Stark") and expanded the
scope of the referral prohibition to cover referrals for any of 12 "designated
health services." "Designated health services" includes both inpatient and
outpatient hospital services. Thus, Stark prohibits a physician from referring
Medicare patients to an entity in which that physician or a member of the
physician's immediate family
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<PAGE> 16
has a "financial relationship" for the provision of inpatient and outpatient
hospital services. "Financial relationship" is defined to include both direct
and indirect "ownership interests in" and "compensation arrangements with" the
entity. Stark provides certain exceptions that exempt certain compensation
arrangements and ownership interests from the statute's prohibitions including
the rental of space and equipment, and certain personal services and management
contracts. At this time, the regulations implementing Stark II have not been
issued but are anticipated to be issued prior to the end of 1997.
The Company has attempted to tailor its financial relationships with
physicians in such a way as not to violate Stark II and similar state statutes.
However, there can be no assurance that (i) government enforcement agencies will
not contend that certain of these financial relationships are in violation of
the Stark legislation, (ii) that the Stark legislation will ultimately be
interpreted by the courts in a manner consistent with the Company's practices,
or (iii) regulations will be issued in the future that will result in an
interpretation by the courts in a manner inconsistent with the Company's
practices. The frequency of federal government investigations and prosecutions
of health care providers under these statutes has increased substantially during
the past twelve months and is expected to continue to grow during the
foreseeable future. Such prosecutions and investigations are expensive to defend
and injurious to a provider's reputation, even when no illegal conduct is
ultimately found. If the federal government were to undertake an investigation
or prosecution of the Company, it would likely have a material effect on the
Company and its operations.
State Legislation. In addition to the statutes mentioned above, some of the
states in which the Company operates also have laws (i) that prohibit
corporations and other entities from employing physicians and practicing
medicine, (ii) that prohibit certain direct and indirect payments or
fee-splitting arrangements between health care providers, and (iii) that
prohibit conduct similar to that prohibited by the Anti-Kickback Statute and
Stark II. In addition, some states restrict certain business relationships
between physicians and pharmacies. Possible sanctions for violation of these
restrictions include loss of licensure and civil and criminal penalties. The
specific content and scope of these statutes vary from state to state, are often
vague and have received infrequent interpretation by the state courts and
regulatory agencies. Although the Company exercises care in an effort to
structure its arrangements with health care providers to comply with the
relevant state statutes, and although management believes that the Company is in
compliance with these laws, there can be no assurance that (i) governmental
officials charged with responsibility for enforcing these laws will not assert
that the Company or certain transactions in which it is involved are in
violation of such laws, and (ii) such state laws will ultimately be interpreted
by the courts in a manner consistent with the practices of the Company, either
of which could have a material adverse effect on the Company.
Other Fraud and Abuse Laws. Various federal statutes impose severe criminal and
civil liability on health care providers that make false statements relating to
claims for payments under the Medicare, Medicaid and other government health
care programs. One of the primary statutes utilized by the government and
private citizens ("whistleblowers") has been the Federal False Claims Act
("FCA"). The FCA imposes liability on individuals or entities that knowingly
present or cause to be presented a false or fraudulent claim for payment to the
United States government. Knowingly includes not only having actual knowledge of
the falsity of the claim but also acting in reckless disregard of the truth or
falsity of the claim. This statute allows for the imposition of a civil penalty
of up to $10,000 for each false claim submitted or caused to be submitted to the
government and three times the amount of the damage to the government. A number
of states have adopted similar laws that impose criminal and civil liability for
the submission of false claims.
In August, 1996, Congress enacted the Health Insurance Portability and
Accountability Act ("HIPAA"), which generally became effective January 1, 1997.
HIPAA strengthens federal health care fraud and abuse law enforcement efforts.
Among other things, the new legislation (i) adds several new offenses, (ii)
expands the scope of certain existing laws by including private health insurance
plans as well as the Medicare and Medicaid programs, (iii) increases penalties
for certain existing offenses, and (iv) significantly increases funding for
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<PAGE> 17
health care fraud and abuse detection and prosecution efforts, including
authorizing informants to share in recoveries and establishing a national health
care fraud and abuse data bank.
Among other things, HIPAA prohibits submitting a claim for
reimbursement based on a code that the person knows or "should know" will result
in a greater payment than the code "the person knows or should know" is
applicable to the item or service actually provided. HIPAA also prohibits
offering any inducements to beneficiaries in order to influence them to order or
receive Medicare or Medicaid covered items or services from a particular
provider or practitioner.
The new offenses created by HIPAA and the substantial increase in
funding devoted to health care fraud and abuse enforcement which resulted from
HIPAA, will significantly increase the likelihood that any particular health
care company will be scrutinized and investigated by federal, state and/or local
law enforcement officials. In addition, the increased penalties will strengthen
the ability of enforcement agencies to effect more numerous and larger monetary
settlements with health care providers and businesses than was previously the
case.
Healthcare Reform Initiatives. The Clinton Administration and Congress continue
to focus on health care, including Medicare, with an emphasis on curtailing and
lowering the costs of health care in this country. The BBA represents a
significant step on the part of the President and Congress on this front. The
BBA includes substantial cost-containment measures, allows for the further
expansion of managed care in the Medicare environment and increases several
fraud and abuse penalties. At this time, it is uncertain if any other
significant legislation will be enacted during the upcoming sessions of
Congress. The Company cannot predict which, if any, legislative proposals will
be adopted and, if adopted, the effect such legislation would have on the
Company's business.
Accreditation. All of the Company's facilities providing acute psychiatric
treatment programs have been accredited by the Joint Commission on Accreditation
of Healthcare Organizations ("JCAHO"). The JCAHO is a voluntary national
organization which undertakes a comprehensive review for purposes of
accreditation of health care facilities. In general, hospitals and certain other
health care facilities are initially surveyed by JCAHO within 12 months after
the commencement of operations and resurveyed at triennial intervals thereafter.
JCAHO accreditation is important to maintaining relationships with both public
and private insurers, including Medicare, Medicaid, Blue Cross and other private
insurers. The Company believes that all of its facilities providing acute
psychiatric treatment programs are presently in material compliance with all
JCAHO standards of accreditation. The JCAHO review process is subjective to some
degree, however, and there can be no assurance that the Company's facilities
will be able to maintain their accreditation.
COMPETITION
The youth education, treatment and juvenile justice 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,
for-profit and not-for-profit hospitals and governmental agencies that are
responsible for juvenile justice and 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 programs and the reputation
of its personnel. Competitors of the Company may initiate programs similar to
those provided by the Company without substantial capital investment or
experience in management of education, treatment or juvenile justice programs.
Many of the Company's competitors have greater resources than the Company.
Although the Company believes that its facilities compete favorably within local
markets on the basis of, among other things, the range and variety of clinical
programs offered, its expertise in child and adolescent programs, its methods of
managing its operations and utilization of case management systems, and its
commitment to continuous quality improvement and customer service, 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
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and public acceptance. Certain not-for-profit entities may offer youth 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 June 30, 1997, the Company had 1,265 full-time employees and 713
part-time employees. Of these 1,978 employees, 69 were corporate or regional
administrative staff and 1,909 were involved in program and facility operation
and management. Approximately 80 of the Company's employees are covered by a
Collective Bargaining Agreement between the Company's Butte, Montana facility
and the Rivendell Federation of Health Care Employees, MFT, AFT, AFL-CIO, which
agreement was ratified in December 1996 by the employees who are part of the
Collective Bargaining Unit. The term of the contract expires in December 1997.
In conjunction with the hiring of such employees by the Company, the Collective
Bargaining Unit agreed to certain modifications to the contract. The Company
believes that its relations with its employees are good.
INSURANCE
The Company maintains a $21 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. The Company requires that physicians practicing
at its facilities carry medical malpractice insurance to cover their respective
individual professional liabilities. 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 insurance, the
contracting agency may terminate its agreement with the Company. The Company
believes it is in compliance in all material respects with respect to these
requirements.
RISK FACTORS
In order for the Company to utilize the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, investors are hereby cautioned
that forward looking statements in this report based upon current expectations
involve a number of risks and uncertainties that could cause the Company's
actual results to differ materially from those projected. Accordingly, investors
should consider the following important factors, among others, in reviewing this
report: potential termination or non-renewal of the Company's contracts with
Riverside County, California and the State of Tennessee, upon which the Company
was dependent for approximately 29% of its revenues in fiscal 1997; failure of
governments and governmental agencies that contract with the Company to meet
their payment obligations to the Company or to refer youth to the Company's
programs; decreases in the levels of Medicaid and Medicare funding, which would
likely decrease the Medicaid and Medicare reimbursements received by the
Company's facilities; termination of, or the Company's inability to renew,
contracts on an annual basis; the dependence of the Company's future growth on
the number of youth programs available for privatization and the ability to
obtain awards for such contracts; the Company's inability to integrate Vendell
and its operations, and the operations of any future acquired entities, into the
operations of the Company; the inability of the Company to make additional
attractive acquisitions on favorable terms; future changes in governmental rules
and regulations that could adversely affect the Company's operations; the
Company's failure to fully comply with federal and state laws and other
governmental rules and regulations and any resulting investigations,
prosecutions or settlements; reductions in reimbursements by third party payers
and increasing managed care penetration; increasingly stringent length of stay
and admissions criteria; public resistance to privatization of youth education,
treatment and juvenile justice services; negative publicity generated by
opposition to the Company's facilities by residents in areas surrounding
proposed sites; potential
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<PAGE> 19
claims or litigation by participants in the Company's programs arising from
contact with the Company's facilities, programs, personnel or participants;
Helicon's inability to pay future management fees or lease payments, which
collectively represent a significant portion of the Company's business;
dependence on certain key personnel and the ability to attract and retain
additional qualified personnel; competition with for-profit and not-for-profit
entities and governmental agencies responsible for youth education, treatment
and juvenile justice services; seasonality and quarterly fluctuations in
revenues; and the effect of certain anti-takeover provisions in the Company's
charter and bylaws and under Tennessee law. The Company undertakes no obligation
to publicly release any revisions to any forward-looking statements contained
herein to reflect events or circumstances occurring after the date hereof or to
reflect the occurrence of unanticipated events.
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<PAGE> 20
ITEM 2. PROPERTIES
The table below sets forth certain information regarding the Company's
properties:
<TABLE>
<CAPTION>
Number of
State Nature of Occupation Facilities
- ---------------- -------------------- ----------
<S> <C> <C>
Non-Residential:
Alabama Lease 1
Arkansas Lease 2
California Own 4
California Lease 13
Florida Lease 5
Kentucky Own 1
Louisiana Lease 1
Montana Lease 5
Tennessee Lease 1
Texas Own 1
Texas Lease 1
Texas Right to occupy (1) 1
Residential:
Alabama Right to occupy (1) 6
Arkansas Own 1
Florida Own 1
Kentucky Own 1
Michigan Own 1
Montana Own 1
Tennessee Own 2
Tennessee Right to occupy (1) 2
Tennessee Lease 1
Texas Own 1
Utah Own 1
</TABLE>
- ----------
(1) The Company acquired a right to occupy the facilities indicated
rent-free for the duration of the Company's contracts to provide these
programs.
The Company owns its non-residential office and educational treatment
center in Grand Terrace, California, its educational treatment centers in
Victorville, Hemet and Riverside, California, its residential treatment centers
in Murfreesboro and Newbern, Tennessee, and its behavioral treatment centers in
Arkansas, Florida, Kentucky, Michigan, Montana, Texas and Utah. The Company
leases all other facilities on a short-term basis (generally one to five years)
in the particular locality where it conducts its programs. For the fiscal year
ended June 30, 1997, the Company's total rental expense for property was
approximately $671,000. 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 education and treatment programs in Alabama, Tennessee and
Texas. The Company owns real estate and improvements in Riverside and Ramona,
California, and Murfreesboro, Tennessee which it leases to Helicon pursuant to
lease agreements which expire July 31, 2019, December 31, 1997 and January 31,
1999, respectively.
The Company owns its corporate headquarters office building located in
Murfreesboro, Tennessee. This office building contains approximately 8,800
square feet of office space. The Company also leases corporate office space in
Nashville, Tennessee of approximately 10,000 square feet. The Company believes
its facilities are suitable for its current operations and programs.
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<PAGE> 21
ITEM 3. LEGAL PROCEEDINGS
In October 1995, a civil action was filed in the Circuit Court of Colbert
County, Alabama, against the Company and certain of the Company's employees in
connection with the circumstances surrounding the alleged wrongful death of a
juvenile enrolled at the Company's wilderness program in Jasper, Alabama. The
Company's investigation 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 did not have a material 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 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.
The Hearing Auditors' Report of Findings was issued in March 1996, and in April
1996, the Company filed a Request for Formal Hearing. The Formal Hearing has not
been completed. A provision for liability of approximately $201,000 is included
in accrued other expenses at June 30, 1997.
The Company is involved in various other legal proceedings, none of which
are expected to have a material effect on the Company's financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders during the fourth quarter of the
fiscal year.
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<PAGE> 22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock trades on The Nasdaq Stock Market's National
Market under the symbol "KIDS". The following table sets forth the high and low
sale prices for each full quarter within the Company's past two fiscal years, as
well as for the quarter ended June 30, 1996. High and low sale prices for the
fiscal year ended March 31, 1996 have been retroactively adjusted to reflect the
Company's 1 for 2 reverse stock split of the Common Stock effected March 21,
1996.
<TABLE>
<CAPTION>
Year Ended June 30, 1997 High Low
------------------------------ ------ ------
<S> <C> <C> <C>
Quarter Ended: June 30 15 7/8 10 1/2
March 31 14 10 3/4
December 31 19 12
September 30 25 1/4 15 1/2
Transitional Period Ended
June 30, 1996
------------------------------
Quarter Ended: June 30 27 9 3/4
Year Ended March 31, l996
------------------------------
Quarter Ended: March 31 11 7/8 6 7/8
December 31 8 5 3/4
September 30 7 1/2 4 1/2
June 30 5 1/2 4 1/2
</TABLE>
HOLDERS
As of September 19, 1997 the Company had approximately 282 shareholders of
record of its Common Stock.
DIVIDENDS
The Company has never declared or paid a cash dividend on its Common
Stock. It is the present policy of the Company's Board of Directors to retain
all available earnings to support operations; therefore, the Company does not
anticipate declaring or paying cash dividends on its Common Stock for the
foreseeable future. The declaration and payment of cash dividends in the future
will be determined based on a number of factors, including the Company's
earnings, financial condition, liquidity requirements, restrictions in financing
agreements and other factors deemed relevant by the Board of Directors. The
Company's current revolving credit agreement prohibits the Company from
declaring dividends in excess of 25% of the Company's net income during any
fiscal year.
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<PAGE> 23
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information for the year ended
June 30, 1997, the three months ended June 30, 1996, (pursuant to the Company's
change in its fiscal year end from March 31 to June 30) and the years ended
March 31, 1996, 1995, 1994, and 1993 has been derived from the financial
statements of the Company and should be read in conjunction with the financial
statements, the related notes thereto and other financial information included
elsewhere herein.
<TABLE>
<CAPTION>
Year Ended Three Months Year Ended March 31,
June 30, Ended June 30, ---------------------------------------------------
1997 1996 1996 1995 1994 1993
---------- -------------- -------- -------- ------- -------
(In thousands of dollars, except per share data)
Statement of Income Data:
Revenue:
<S> <C> <C> <C> <C> <C> <C>
Operating revenue(1) $ 34,812 $ 6,482 $ 23,630 $ 20,575 $ 18,849 $ 24,541
Management fee income 1,376 311 1,036 367 -0- -0-
-------- ------- -------- -------- -------- --------
Total revenue 36,188 6,793 24,666 20,942 18,849 24,541
-------- ------- -------- -------- -------- --------
Operating Expenses:
Employee compensation and benefits 22,315 4,063 15,010 12,676 11,619 16,605
Purchased services and other
expenses 7,413 1,182 4,628 3,969 3,601 7,235
Depreciation and amortization 1,013 191 1,025 1,080 1,277 2,072
Other operating expenses 101 25 101 101 193 595
-------- ------- -------- -------- -------- --------
Total operating expenses 30,842 5,461 20,764 17,826 16,690 26,507
-------- ------- -------- -------- -------- --------
Income (loss) from operations 5,346 1,332 3,902 3,116 2,159 (1,966)
Interest (income) expense, net (654) 168 833 1,187 1,397 1,136
Other (income) expense, net (15) -0- -0- (44)(2) 455(3) 7,674(4)
-------- ------- --------- -------- -------- --------
Income (loss) before income taxes
and extraordinary item 6,015 1,164 3,069 1,973 307 (10,776)
Provision (benefit) for income taxes (8) 311 491 69 -0- -0-
-------- ------- -------- -------- -------- --------
Income before extraordinary item 6,023 853 2,578 1,904 307 (10,776)
Extraordinary item, net of tax 377 -0- 54 -0- -0- -0-
-------- ------- -------- -------- -------- --------
Net income (loss) $ 5,646 $ 853 $ 2,524 $ 1,904 $ 307 $(10,776)
======== ======= ======== ======== ======== ========
Net income (loss) per share:
Fully diluted(5) $ .79 $ .15 $ .44 $ .37 $ .08 $ (3.52)
Dividends declared per share -- -- -- -- -- --
Balance Sheet Data:
Working capital (deficit) 23,952 5,057 3,904 1,422 (9,847) (11,279)
Total assets 69,448 22,582 22,122 19,449 20,146 21,330
Long term debt and capital
lease obligations 11,655 6,000 6,052 6,924 8 1,312
Shareholders' equity $49,751 $13,102 $ 12,032 $ 9,456 $ 5,786 $ 4,788
</TABLE>
(1) The Company's transfer, effective January 1, 1993, of its California
residential treatment operations to Helicon is the principal reason for
the decline in operating revenue for fiscal 1994 compared to fiscal
1993.
(2) Amount consists of write down of property of $122, net of other income
of $166.
(3) Amount consists of write off of advances to Helicon of $1,024, net of
other income of $569.
(4) Amount consists of write off of advances to Helicon of $1,145, write
off of costs in excess of net assets of purchased businesses of $5,188,
write off of deferred costs of $567, provision for restructuring
expenses of $759 and loss on disposition of property of $15.
(5) Net income (loss) per share--fully diluted--for fiscal 1995, 1994, and
1993 has been retroactively adjusted to reflect the 1 for 2 reverse
split of the Company's Common Stock effected March 21, 1996.
-23-
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and this Annual Report on Form 10-K contains
forward-looking statements and should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere herein.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes", "anticipates", "plans", "expects" and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the Company's actual results
to differ materially from those indicated by such forward-looking statements.
These factors include, without limitation, those set forth above under
"Business--Risk Factors." The Company undertakes no obligation to publicly
release any revisions to any forward-looking statements contained herein to
reflect events or circumstances occurring after the date hereof or to reflect
the occurrence of unanticpated events.
GENERAL
As of June 30, 1997, the Company was providing education, treatment and
juvenile justice services, either directly or through management contracts with
Helicon, to approximately 2,600 youth and 100 adults. Revenues under the
Company's programs are recognized as services are rendered. The Company's
programs are delivered in both non-residential and residential settings, with
the majority of the Company's revenues currently generated by non-residential
programs. The Company's nonresidential programs, which historically have
generated higher operating margins than the Company's residential facilities,
generally receive revenues based on per diem rates. The Company's residential
facilities generally receive revenues under either fixed fee contracts or at
per diem rates.
In June 1997, the Company acquired substantially all the assets of
Vendell Healthcare, Inc. and its subsidiaries ("Vendell") for approximately
$19,477,000 in cash ($18,768,000 of which was paid at closing and $709,000 of
which was paid in September 1997) and the issuance of 642,978 shares of the
Company's Common Stock valued at approximately $7,600,000. Pursuant to this
acquisition, the Company acquired seven residential treatment facilities and 12
non-residential treatment facilities which the Company believes will enhance its
continuum of youth services.
The Company receives management fee income from Helicon for consulting,
management and marketing services rendered pursuant to the Helicon Agreement. As
of June 30, 1997, the Company was providing consulting, management and marketing
services to Helicon at 12 programs. In addition, Helicon also leases three
facilities owned by the Company to operate certain of 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 the fiscal year ended June 30, 1997, and for 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 and 1995, the Company did not recognize all of the management fee income to
which it was entitled due to the inability of Helicon to pay these amounts. The
Helicon Agreement expires September 1, 1999. At June 30, 1997, unpaid management
fees, lease payments and advances, plus interest, due the Company from Helicon
totaled $7,153,000. The Company has fully reserved this amount. Future payments
received from Helicon on these amounts, if any, will be recognized by the
Company on the cash basis. The Company has also guaranteed Helicon's obligations
under a bank line of credit in the amount of $1,000,000. See "--Liquidity and
Capital Resources."
-24-
<PAGE> 25
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 tax rate
primarily because of the utilization of tax net operating loss carryforwards for
which no tax benefit had been recognized prior to the quarterly period ended
December 31, 1996. The Company currently has regular tax net operating loss
carryforwards of $2,112,000, 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's population, and net revenues contributed by the program, approach
intended levels, primarily because the Company staffs its programs in
anticipation of achieving such levels. The Company's quarterly results may also
be impacted by seasonality, as revenues generated by youth education and
treatment services are generally seasonal in nature, fluctuating with the
academic school year.
RESULTS OF OPERATIONS
Due to the change in fiscal year end, the presentations of the Company's
financial position and results of operations for the year ended June 30, 1997
are not comparable to the presentations of its financial position and results of
operations for the year ended March 31, 1996.
The following table sets forth, for the periods indicated, the percentage
relationship to total revenues of certain items in the Company's statements of
income:
<TABLE>
<CAPTION>
Year Ended Three Months Year Ended Year Ended
June 30, Ended June 30, March 31, March 31,
1997 1996 1996 1995
---------- -------------- ---------- ---------
<S> <C> <C> <C> <C>
Operating revenues 96.2% 95.4% 95.8% 98.2%
Management fee income 3.8 4.6 4.2 1.8
----- ----- ----- -----
TOTAL REVENUES 100.0 100.0 100.0 100.0
----- ----- ----- -----
Employee compensation
and benefits 61.6 59.8 60.8 60.5
Purchased services and
other expenses 20.5 17.4 18.8 19.0
Depreciation and
amortization 2.8 2.8 4.2 5.1
Related party rent .3 .4 .4 .5
----- ----- ----- ---
TOTAL OPERATING EXPENSES 85.2 80.4 84.2 85.1
----- ----- ----- -----
Income from operations 14.8 19.6 15.8 14.9
Other (income) expense:
Interest expense .9 2.9 3.5 5.7
Interest income (2.7) (.5) (.1) --
Other income -- -- -- (.8)
Write down of property -- -- -- .6
Provision for income
taxes -- 4.6 2.0 .3
Extraordinary item,
net of tax 1.0 -- .2 --
----- ----- ----- -----
NET INCOME 15.6% 12.6% 10.2% 9.1%
===== ===== ===== =====
</TABLE>
-25-
<PAGE> 26
FISCAL 1997 (YEAR ENDED JUNE 30, 1997) VERSUS FISCAL 1996 (YEAR ENDED MARCH 31,
1996)
Total revenues for fiscal 1997 increased by $11,522,000 or 46.7% to
$36,188,000, as compared to $24,666,000 for fiscal 1996. Total operating
revenues for fiscal 1997 increased by $11,182,000 or 47.3% to $34,812,000, as
compared to $23,630,000 for fiscal 1996. The increase in operating revenues
results primarily from the opening of eight new programs during fiscal 1997 and
from significant increases in student enrollment at seven of the Company's
programs. Additionally, approximately $3,300,000 of the increase in operating
revenues over the prior fiscal year is attributable to the Company's June 1997
purchase of substantially all the assets of Vendell Healthcare, Inc.
("Vendell").
Management fee income recognized under the Helicon Agreement for fiscal
1997 increased $253,000, or 24.4%, to $1,289,000, as compared to $1,036,000 for
fiscal 1996. Additional management fee income of $87,000 was recognized under
management contracts acquired pursuant to the Vendell asset purchase. Management
fee income of $217,000 for fiscal 1996 was not recognized by the Company due to
the inability of Helicon to pay those amounts.
Employee compensation and benefits for fiscal 1997 increased $7,305,000,
or 48.7%, to $22,315,000, as compared to $15,010,000 for fiscal 1996. As a
percentage of total revenues, employee compensation and benefits increased to
61.6% for fiscal 1997 from 60.8% for fiscal 1996. The increase in employee
compensation and benefits over the prior year results primarily from the
addition of employees to support the growth in the number and scope of the
Company's programs, from the Vendell asset purchase, and from inefficiencies
experienced during the early stages of certain programs.
Purchased services and other expenses for fiscal 1997 increased
$2,785,000, or 60.2%, to $7,413,000, as compared to $4,628,000 for fiscal 1996.
As a percentage of total revenues, purchased services and other expenses
increased to 20.5% for fiscal 1997 from 18.8% for fiscal 1996. The increase in
purchased services and other expenses over the prior year results primarily from
the Company's growth, both from new programs and from the Vendell asset
purchase, as well as from increases in consulting, investor relations, legal and
travel expenses.
Depreciation and amortization decreased $12,000, or 1.2%, to $1,013,000
for fiscal 1997 from $1,025,000 for fiscal 1996. The decrease in depreciation
and amortization over the prior fiscal year is attributable primarily to the
reduction in amortization of non-competition agreements from approximately
$250,000 in fiscal 1996 to $-0- in fiscal 1997, net of depreciation and
amortization incurred at one of the Company's programs opened during fiscal 1997
and from depreciation associated with the Vendell asset purchase.
Income from operations increased $1,444,000, or 37.0%, to $5,346,000 for
fiscal 1997 from $3,902,000 for fiscal 1996, and decreased as a percentage of
total revenues to 14.8% for fiscal 1997 from 15.8% for fiscal 1996, as a result
of the factors described above.
Interest expense decreased $548,000, or 63.1%, to $321,000 for fiscal 1997
from $869,000 for fiscal 1996. The decrease in interest expense over the prior
fiscal year is attributed principally to the prepayment of the Company's
long-term debt on October 1, 1996 and the related elimination of deferred loan
cost amortization, net of interest incurred in June 1997 pursuant to the Vendell
asset purchase.
Interest income for fiscal 1997 increased $939,000 to $975,000, as
compared to $36,000 for fiscal 1996. The increase in interest income over the
prior year is attributable primarily to the increase in cash available for
investment from operations and from the Company's public offering of stock
completed in August 1996.
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<PAGE> 27
Provision for income tax expense for fiscal 1997 decreased $499,000 to
$(8,000) from $491,000 for fiscal 1996. The decrease in provision for income tax
expense compared to the prior year results primarily from a nonrecurring credit
to income tax expense of $1,783,000, related to the reversal of a portion of the
valuation allowance against the Company's deferred tax assets during the period
ended December 31, 1996, net of the impact of an increase in the Company's
effective tax rate.
Loss on early extinguishment of debt for fiscal 1997 of $612,000, before
the related income tax benefit of $235,000, resulted from the prepayment of the
Company's outstanding indebtedness to National Health Investors, Inc. As a
result of the prepayment of this debt, the Company incurred a prepayment penalty
of approximately $493,000, and wrote off deferred loan costs totalling $119,000.
Loss on early extinguishment of debt for fiscal 1996 of $64,000, before the
related income tax benefit of $10,000, resulted from the write off of deferred
loan costs associated with the Company's term loan with T. Rowe Price Strategic
Partners Fund II, L.P. ("Strategic Partners") which was repaid.
THREE MONTHS ENDED JUNE 30, 1996 VERSUS 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.
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
-27-
<PAGE> 28
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 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.
FISCAL 1996 (YEAR ENDED MARCH 31, 1996) VERSUS FISCAL 1995 (YEAR ENDED MARCH 31,
1995)
Total revenues for fiscal 1996 increased by $3,724,000 or 17.8% to
$24,666,000, as compared to $20,942,000 for fiscal 1995. Total operating
revenues for fiscal 1996 increased by $3,055,000 or 14.8% to $23,630,000, as
compared to $20,575,000 for fiscal 1995. The increase in operating revenues
results primarily from the opening of three new programs during fiscal 1996,
from the opening of two programs during fiscal 1995 which were in operation
throughout all of fiscal 1996, and from significant increases in student
enrollment at four of the Company's programs. Additionally, an increase in the
per diem rate at the Company's California campuses, effective in July 1995,
generated approximately 8% of the increase in operating revenues.
Management fee income recognized under the Helicon Agreement for fiscal
1996 increased $669,000, or 182.3%, to $1,036,000, as compared to $367,000 for
fiscal 1995. Additional management fee income of $217,000 for fiscal 1996 and
$703,000 for fiscal 1995 was not recognized by the Company due to the inability
of Helicon to pay these amounts.
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
60.8% for fiscal 1996 from 60.5% for fiscal 1995. The increase in employee
compensation and benefits over the same period in the prior year results
primarily from the opening in fiscal 1996 of three new programs, from the impact
of two programs opened during fiscal 1995 which were in operation throughout all
of fiscal 1996 and from increased staffing requirements at certain other
programs. The Company also increased corporate and regional personnel costs in
fiscal 1996, primarily for operations support, business development and quality
assurance to support the growth and expansion of the Company's operations.
-28-
<PAGE> 29
Purchased services and other expenses for fiscal 1996 increased $659,000,
or 16.6%, to $4,628,000, as compared to $3,969,000 for fiscal 1995. As a
percentage of total revenues, purchased services and other expenses decreased to
18.8% for fiscal 1996 from 19.0% for fiscal 1995. The increase in purchased
services and other expenses over the same period in the prior year results
primarily from the opening of three new programs, from the impact of two
programs opened during fiscal 1995 which were in operation throughout all of
fiscal 1996, from significant expansion at one of the Company's programs, and
from increases in consulting, business development, legal, investor relations
and travel expense.
Depreciation and amortization decreased $55,000, or 5.1%, to $1,025,000
for fiscal 1996 from $1,080,000 for fiscal 1995. Depreciation and amortization
for fiscal 1996 and 1995 includes amortization expense of $250,000 under the
Company's non-competition agreements. These agreements were completely amortized
at March 31, 1996.
Income from operations increased $786,000, or 25.2%, to $3,902,000 for
fiscal 1996 from $3,116,000 for fiscal 1995, and increased as a percent of total
revenues to 15.8% for fiscal 1996 from 14.9% for fiscal 1995, as a result of the
factors described above.
Interest expense decreased $319,000, or 26.9%, to $869,000 for fiscal 1996
from $1,188,000 for fiscal 1995. The decrease in interest expense is
attributable primarily to a reduction in the average balance of debt outstanding
and to a decrease in the amortization of deferred loan costs.
Other income during fiscal 1996 decreased by $166,000, or 100.0%, to $-0-,
as compared to $166,000 for fiscal 1995. Other income for fiscal 1995 consisted
primarily of $150,000 received by the Company pursuant to a settlement of
certain workers compensation litigation.
Provision for income tax expense increased $422,000 to $491,000 for fiscal
1996 from $69,000 for fiscal 1995. The Company's effective tax rate is
significantly less than the statutory tax rate because of the utilization of tax
net operating loss carryforwards for which no tax benefit had previously been
recognized. The increase in the Company's effective tax rate over the same
period in the prior year results from the presence of annual limitations on the
utilization of the net operating loss carryforwards pursuant to Internal Revenue
Code Section 382.
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for fiscal 1997 was $4,491,000 on
net income of $5,646,000 as compared to $3,461,000 for fiscal 1996 on net income
of $2,524,000. Working capital at June 30, 1997 was $23,952,000, as compared to
$5,057,000 at June 30, 1996, and the current ratio at June 30, 1997 was 4.1:1,
as compared to 2.7:1 at June 30, 1996.
Cash used by investing activities was $23,061,000 for fiscal 1997 as
compared to $232,000 for fiscal 1996. The increase in fiscal 1997 as compared to
fiscal 1996 is due primarily to the purchase of the Vendell assets and to an
increase in cash outlays for the purchase of property and equipment. Cash
provided by financing activities was $28,893,000 for fiscal 1997 as compared to
cash used by financing activities of $871,000 for fiscal 1996, due primarily to
the receipt of net proceeds of $23,359,000 from the issuance of shares of the
Company's Common Stock in its public offering of Common Stock completed in
August 1996.
In September 1994, the Company obtained a $2.5 million one-year revolving
line of credit from First American National Bank ("FANB"). 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 the granting of Helicon's line of credit, the Company agreed to guarantee
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<PAGE> 30
Helicon's performance under such line. In November 1996, Helicon's line, and the
Company's guarantee, were increased to $1 million. At June 30, 1997, there were
no amounts outstanding under Helicon's line of credit.
The Company's $2.0 million line of credit matured on September 30, 1996,
and, on November 8, 1996, the Company entered into a new loan and security
agreement with FANB. Under the terms of this agreement, FANB has made available
to the Company, for acquisition financing and working capital requirements, a
revolving line of credit for up to $13,000,000. The initial term of the
agreement extends through November 1, 1999. The credit facility bears interest
at either (i) the one, two or three month LIBOR rate plus an applicable margin,
which ranges between 1.35% and 2.10% and is dependent on the ratio of funded
debt to operating earnings or (ii) FANB's index rate, at the Company's option.
The line of credit is secured primarily by the Company's accounts receivable and
equipment. The balance outstanding under the line of credit at June 30, 1997,
$11,450,000, was borrowed in June 1997 to fund the cash portion of the Vendell
asset purchase.
The Company's line of credit requires the Company to comply with certain
restrictive covenants with respect to its business and operations and to
maintain certain financial ratios. The restrictive covenants prohibit the
Company, without the prior consent of its lender, from entering into major
corporate transactions, such as a merger, tender offer or sale of its assets,
and from incurring additional indebtedness in excess of $1,000,000. The
agreement also prohibits the Company from declaring dividends in excess of 25%
of net income during any fiscal year.
Capital expenditures during fiscal 1998 are expected to include the
replacement of existing capital assets as necessary, as well as the expenditures
associated with the opening of new programs and facilities, including the
possible purchase of certain real estate and improvements. The Company also may
consider possible strategic acquisitions, including acquisitions of existing
programs and other companies engaged in the youth services business. The
Company, however, has no agreements, arrangements or commitments with respect to
any such acquisitions.
Current obligations, typically due within thirty days or less, are
expected to be funded with cash flow from operations and borrowings under the
Company's line of credit. Management believes that operations, remaining
proceeds from the August 1996 public offering and amounts available under its
line of credit will provide sufficient cash flow for the next twelve months and
that long-term liquidity requirements will be met from cash flow from operations
and outside financing sources.
INFLATION
Inflation has not had a significant impact on the Company's results of
operation since inception. Certain of the Company's existing contracts provide
for annual price increases based upon changes in the Consumer Price Index.
IMPACT OF ACCOUNTING CHANGES
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share" and No. 129, "Disclosure of Information about Capital Structure," which
are required to be adopted on December 31, 1997. At that time, the Company will
be required to change the method currently used to compute earnings per share
and to restate all prior periods. Under the new requirements for calculating
primary earnings per share, the dilutive effect of stock options will be
excluded. The impact of SFAS 128 on the calculation of primary and fully diluted
earnings per share is not expected to be material and the adoption of SFAS No.
129 is not expected to materially alter disclosures presently being provided.
In June 1997,the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for the reporting and display of
comprehensive income and its components. This Statement requires that all items
that are income be
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<PAGE> 31
reported in a financial statement that is displayed with the same prominence as
other financial statements. The Statement was only recently issued, and the
Company has not yet determined the impact of adoption on its disclosure
requirements.
In June 1997, the FASB also issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information," which changes the way public
companies report segment information in annual financial statements and also
requires those companies to report selected segment information in interim
financial reports to shareholders. This Statement is effective for financial
statements for fiscal years beginning after December 15, 1997. This Statement
was only recently issued, and the Company has not yet determined the impact of
adoption on its disclosure requirements.
-31-
<PAGE> 32
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The information called for under Item 7A. is not required for fiscal 1997
as the Company's market capitalization was less than $2.5 billion as of January
28, 1997.
-32-
<PAGE> 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-33-
<PAGE> 34
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. and subsidiaries as of June 30, 1997 and 1996, and
the related consolidated statements of income, shareholders' equity, and cash
flows for the year ended June 30, 1997, the three months ended June 30, 1996,
and each of the two years in the period ended March 31, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Children's Comprehensive Services, Inc. and subsidiaries at June 30, 1997 and
1996, and the consolidated results of their operations and their cash flows for
the year ended June 30, 1997, the three months ended June 30, 1996, and each of
the two years in the period ended March 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
Ernst & Young LLP
Nashville, Tennessee
August 13, 1997
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<PAGE> 35
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
---------------------
1997 1996
------- -------
<S> <C> <C>
(dollars in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $13,641 $ 3,318
Accounts receivable, net of allowance
for doubtful accounts of $2,361
in 1997 and $143 in 1996 16,001 4,025
Prepaid expenses 604 300
Deferred income taxes 362 -0-
Other current assets 1,121 404
------- -------
TOTAL CURRENT ASSETS 31,729 8,047
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $5,908 in 1997 and $4,994
in 1996 36,321 14,183
DEFERRED INCOME TAXES, net of valuation
allowance of $150 in 1997 and
$2,027 in 1996 614 -0-
NOTE RECEIVABLE 217 217
COST IN EXCESS OF NET ASSETS ACQUIRED,
at cost, net of accumulated
amortization of $4 in 1997 and
$-0- in 1996 372 -0-
OTHER ASSETS AND DEFERRED CHARGES, at cost,
net of accumulated amortization of
$91 in 1997 and $346 in 1996 195 135
------- -------
TOTAL ASSETS $69,448 $22,582
======= =======
</TABLE>
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<PAGE> 36
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
June 30,
---------------------
1997 1996
-------- -------
<S> <C> <C>
(dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,620 $ 540
Current maturities - long term debt -0- 206
Current portion - capital leases 40 -0-
Income taxes payable 143 492
Accrued employee compensation 3,062 997
Accrued other expenses 2,744 595
Deferred revenue 168 160
------- -------
TOTAL CURRENT LIABILITIES 7,777 2,990
LONG TERM DEBT 11,450 6,000
OBLIGATION UNDER CAPITAL LEASES 205 -0-
DEFERRED INCOME TAXES -0- 125
OTHER LIABILITIES 265 365
------- -------
TOTAL LIABILITIES 19,697 9,480
------- -------
SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00 per
share--10,000,000 shares authorized -0- -0-
Common stock, par value $ .01 per share
--50,000,000 shares authorized; issued
and outstanding 7,769,656 shares in 1997
and 5,492,201 shares in 1996 78 55
Additional paid-in capital 56,618 25,638
Accumulated (deficit) (6,945) (12,591)
------- -------
TOTAL SHAREHOLDERS' EQUITY 49,751 13,102
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $69,448 $22,582
======= =======
</TABLE>
See notes to consolidated financial statements.
-36-
<PAGE> 37
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended Three Months Ended Year Ended Year Ended
June 30, June 30, March 31, March 31,
1997 1996 1996 1995
---------- ------------------ ---------- -----------
<S> <C> <C> <C> <C>
(In thousands, except per share amounts)
Revenues:
Operating revenues $ 34,812 $ 6,482 $ 23,630 $ 20,575
Management fee income 1,376 311 1,036 367
-------- ------- -------- --------
TOTAL REVENUES 36,188 6,793 24,666 20,942
-------- ------- -------- --------
Operating expenses:
Employee compensation and benefits 22,315 4,063 15,010 12,676
Purchased services and other expenses 7,413 1,182 4,628 3,969
Depreciation and amortization 1,013 191 1,025 1,080
Related party rent 101 25 101 101
-------- ------- -------- --------
TOTAL OPERATING EXPENSES 30,842 5,461 20,764 17,826
-------- ------- -------- --------
Income from operations 5,346 1,332 3,902 3,116
Other (income) expense:
Interest:
Banks and other 321 200 820 968
Related parties -0- -0- 49 220
Interest income (975) (32) (36) (1)
Write down of property -0- -0- -0- 122
Other income (15) -0- -0- (166)
-------- ------- -------- --------
TOTAL OTHER (INCOME) EXPENSE, NET (669) 168 833 1,143
-------- ------- -------- --------
Income before income taxes and
extraordinary item 6,015 1,164 3,069 1,973
Provision (benefit) for income taxes (8) 311 491 69
-------- ------- -------- --------
Income before extraordinary item 6,023 853 2,578 1,904
Extraordinary item:
Loss on early extinguishment of debt,
net of income tax benefit of $235
in 1997 and $10 in 1996 377 -0- 54 -0-
-------- ------- -------- --------
NET INCOME $ 5,646 $ 853 $ 2,524 $ 1,904
======== ======= ======== ========
Earnings per common share:
Income before extraordinary item $ .84 $ .15 $ .46 $ .38
Extraordinary item (.05) -0- (.01) -0-
-------- ------- -------- --------
NET INCOME $ .79 $ .15 $ .45 $ .38
======== ======= ======== ========
Earnings per common share- assuming full dilution:
Income before extraordinary item $ .84 $ .15 $ .45 $ .37
Extraordinary item (.05) -0- (.01) -0-
-------- ------- -------- --------
NET INCOME $ .79 $ .15 $ .44 $ .37
======== ======= ======== ========
Weighted average shares outstanding:
Primary 7,175 5,763 5,596 5,045
Fully diluted 7,175 5,780 5,688 5,115
</TABLE>
See notes to consolidated financial statements.
-37-
<PAGE> 38
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>
(dollars in thousands)
Balance at April 1, 1994 3,688,811 $37 $23,621 $(17,872) $ 5,786
Stock issued:
Exercise of warrant 1,662,080 17 1,831 1,848
Exercise of options 5,000 -0- 10 10
Stock registration costs (92) (92)
Net income for the year 1,904 1,904
--------- --- ------- -------- ------
Balance at March 31, 1995 5,355,891 54 25,370 (15,968) 9,456
Stock issued:
Exercise of options 22,875 -0- 63 63
Stock redeemed:
Fractional shares redeemed from
one for two reverse split (40) -0- -0- -0-
Warrant adjustment 16 16
Stock registration costs (27) (27)
Net income for the year 2,524 2,524
--------- --- ------- -------- -------
Balance at March 31, 1996 5,378,726 54 25,422 (13,444) 12,032
Stock issued:
Exercise of warrant 50,000 -0- 100 100
Exercise of options 66,059 1 116 117
Net income for the period 853 853
--------- --- ------- -------- -------
Balance at June 30, 1996 5,494,785 55 25,638 (12,591) 13,102
Stock issued:
Exercise of options 56,893 1 63 64
Public offering,
net of issue costs of $1,841 1,575,000 16 23,343 23,359
Acquisition of assets of
Vendell Healthcare, Inc. 642,978 6 7,593 7,599
Stock registration costs (19) (19)
Net income for the year 5,646 5,646
--------- --- ------- -------- -------
Balance at June 30, 1997 7,769,656 $78 $56,618 $(6,945) $49,751
========= === ======= ======== =======
</TABLE>
See notes to consolidated financial statements.
-38-
<PAGE> 39
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended Three Months Ended Year Ended Year Ended
June 30, June 30, March 31, March 31,
1997 1996 1996 1995
------------ ----------------- ----------- ----------
<S> <C> <C> <C> <C>
(in thousands)
OPERATING ACTIVITIES
Net income $ 5,646 $ 853 $ 2,524 $ 1,904
Adjustments to reconcile net income to
net cash provided by operating
activities:
Deferred income taxes (1,101) -0- -0- -0-
Depreciation 935 191 775 830
Amortization 78 -0- 250 250
Amortization of deferred loan costs 31 14 74 163
Provision for bad debts (155) -0- 38 83
Write down of property -0- -0- -0- 122
Other (7) -0- 19 (16)
Loss on early extinguishment of debt 119 -0- 64 -0-
Changes in operating assets and
liabilities, net of effects from
purchase of assets of Vendell
Healthcare, Inc. and AR&D, Inc:
Accounts receivable (1,928) 443 (1,074) (289)
Prepaid expenses 224 3 (37) 62
Other current assets (445) (150) (120) (51)
Accounts payable 16 (118) -0- (99)
Accrued employee compensation (72) (573) 854 (290)
Accrued other expenses 1,591 (53) (25) (451)
Income taxes payable (349) 181 242 69
Deferred revenue 8 -0- (23) 31
Other liabilities (100) -0- (100) (100)
-------- ------- -------- --------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 4,491 791 3,461 2,218
-------- ------- -------- --------
INVESTING ACTIVITIES
Purchase of assets of Vendell
Healthcare, Inc. (19,477) -0- -0- -0-
Purchase of assets of AR&D, Inc. (999) -0- -0- -0-
Purchase of property and equipment (2,458) (68) (252) (359)
Proceeds from sale of property and
equipment 11 -0- 38 15
Other assets (138) (2) (18) (233)
-------- ------- -------- --------
NET CASH (USED) BY
INVESTING ACTIVITIES $(23,061) $ (70) $ (232) $ (577)
-------- ------- -------- --------
</TABLE>
-39-
<PAGE> 40
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
Year Ended Three Months Ended Year Ended Year Ended
June 30, June 30, March 31, March 31,
1997 1996 1996 1995
---------- ----------------- ---------- ---------
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES
Proceeds from revolving lines
of credit, long-term
borrowings and capital lease
obligations $11,695 $ -0- $ 3,436 $ 15,246
Principal payments on revolving
lines of credit, long-term
borrowings and capital lease
obligations (6,206) (47) (3,612) (16,265)
Principal payments on notes
payable and long-term
borrowings - related parties -0- -0- (731) (1,197)
Principal payments on mortgage
notes payable -0- -0- -0- (1,300)
Proceeds from issuance of Common
Stock, net 23,423 217 63 1,858
Stock registration costs (19) -0- (27) (92)
-------- ------- ------- --------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 28,893 170 (871) (1,750)
------- ------- ------- --------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 10,323 891 2,358 (109)
Cash and cash equivalents at
beginning of period 3,318 2,427 69 178
------- ------- ------- --------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $13,641 $ 3,318 $ 2,427 $ 69
======= ======= ======= ========
SUPPLEMENTAL INFORMATION
Income taxes paid $ 1,107 $ -0- $ 239 $ -0-
Interest paid 271 1,174 793 956
</TABLE>
See notes to consolidated financial statements.
-40-
<PAGE> 41
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Children's Comprehensive Services, Inc. and its subsidiaries
(the Company) provide a broad range of services, with emphasis on education,
treatment and juvenile justice services for at risk and troubled youth,
primarily to federal, 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 and treatment programs and
both open and secured residential treatment centers in Alabama, Arkansas,
California, Florida, Kentucky, Louisiana, Michigan, Montana, Tennessee, Texas
and Utah. The Company also provides consulting, management and marketing
services to a not-for-profit corporation which provides similar services.
Basis of Consolidation -- The consolidated financial statements include
the accounts of Children's Comprehensive Services, Inc. and its subsidiaries.
All significant intercompany transactions and balances have been eliminated.
Change in Fiscal Year End -- In March 1997, the Board of Directors voted
to change the Company's fiscal year end from March 31 to June 30, effective with
the three month period ended June 30, 1996.
Cash Equivalents -- The Company considers all highly liquid investments
with a maturity of four 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 over the term of
the related loans. Amortization of deferred loan costs is included in interest
expense.
Cost in Excess of Net Assets Acquired -- The cost in excess of net
assets acquired is amortized using the straight-line method over periods ranging
from fifteen to twenty-five years.
Revenue Recognition -- Revenues from youth education, treatment and
juvenile justice contracts with governmental entities are recognized as services
are rendered. Revenues from acute psychiatric and behavioral day treatment
services are recognized as such services are rendered, at the Company's
estimated net realizable amounts from the recipient, third party payors and
others for the service rendered. The receivables arising from such contracts or
services 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.
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<PAGE> 42
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 approximate
fair value.
Accounts Receivable and Accounts Payable -- The carrying amounts
reported approximate fair value.
Long Term Debt and Capital Leases -- The carrying amounts reported
approximate fair value. The fair value of the Company's long term debt
and capital leases are estimated using discounted cash flow analyses,
based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
Long-Lived Assets - - In March 1995, the FASB issued Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and
undiscounted cash flows estimated to be generated by those assets are less than
the assets carrying amount. Accordingly, when indicators of impairment are
present, the Company periodically evaluates the carrying value of property and
equipment and intangibles.
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 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.
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
1996 and 1995 financial statements to conform to the 1997 presentation.
-42-
<PAGE> 43
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B--ACQUISITIONS
In April 1997, the Company acquired substantially all the assets of
AR&D, Inc. ("ARD"). Based in Riverside, California, ARD operated two schools for
special education children. The acquisition has been accounted for as a
purchase. The total consideration paid was approximately $999,000. Cost in
excess of net assets acquired of approximately $376,000 will be amortized over
fifteen years. Operations of ARD have been included in the consolidated income
statements from April 1997 through June 1997.
In June 1997, the Company acquired substantially all the assets of
Vendell Healthcare, Inc. and its subsidiaries ("Vendell"). Based in Nashville,
Tennessee, Vendell operated residential facilities for adolescents and adults.
The residential facilities are located in seven states. The Vendell asset
acquisition was accounted for as a purchase. The total consideration paid
consisted of approximately $18,768,000 in cash and $7,600,000 (642,978 shares)
in shares of the Company's Common Stock. Of the $18,768,000 in cash,
approximately $3,900,000 was deposited in escrows to cover certain offsets and
contingencies. The $18,768,000 in cash included approximately $6,368,000 used by
the Company to purchase the net working capital of Vendell, an amount which was
estimated at closing. The final net working capital of Vendell has been
determined to be approximately $7,077,000. The difference, $709,000, is included
in accrued other expenses at June 30, 1997. Also included in accrued other
expenses is approximately $494,000 of health insurance claims under Vendell's
self-funded health insurance program.
The Company's financial statements for the year ended June 30, 1997,
for the three months ended June 30, 1996 and for the year ended March 31, 1996
do not include the results of operations for Vendell for the periods prior to
June 2, 1997, the effective date of the acquisition. The following summarizes
the unaudited consolidated pro forma results of operations, assuming the
acquisition had occurred at the beginning of the fiscal year ended June 30, 1997
and, for comparability purposes due to the change in the Company's fiscal year
end from March 31 to June 30, the twelve months ended June 30, 1996:
<TABLE>
<CAPTION>
Year Ended Twelve Months Ended
June 30, June 30,
1997 1996
---------- -------------------
<S> <C> <C>
Revenue $84,346,000 $ 82,686,000
Income (loss) before
extraordinary item 9,537,000 (24,780,000)
Net income (loss) 9,089,000 (24,834,000)
Net income (loss) per
common share $ 1.17 $ (3.86)
</TABLE>
NOTE C--PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment consists of: June 30,
--------------------------
1997 1996
----------- ------------
<S> <C> <C>
Land and improvements $ 3,387,000 $ 1,491,000
Buildings and improvements 33,613,000 14,826,000
Furniture and equipment 4,907,000 2,860,000
Construction in progress 322,000 -0-
----------- -----------
42,229,000 19,177,000
Less accumulated depreciation (5,908,000) (4,994,000)
----------- -----------
$36,321,000 $14,183,000
=========== ===========
</TABLE>
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<PAGE> 44
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D--CAPITAL LEASE OBLIGATIONS
Equipment under capital leases of $245,000 and $-0- has been
included in property and equipment as of June 30, 1997 and 1996. The related
accumulated amortization balances totaled $-0- and $-0-, respectively.
Future minimum payments, by fiscal year and in the aggregate, under the
capital leases are as follows:
<TABLE>
<S> <C>
1998 $ 62,000
1999 62,000
2000 62,000
2001 62,000
2002 63,000
--------
Total minimum lease payments 311,000
Amount representing interest (66,000)
--------
Present value of minimum lease
payments (including $40,000 classified
as current) $245,000
========
</TABLE>
NOTE E--NOTE RECEIVABLE
On September 29, 1995, the Company sold its idle residential treatment
center in Ramona, California for $255,000, receiving a cash down payment of
$38,000 and a note receivable of $217,000. The note receivable bears interest at
7% per annum, and is due September 29, 1998. The Company realized a gain of
$67,000 on the sale of this property. Of this amount, $10,000 was recognized as
income during the year ended March 31, 1996. The balance, $57,000, will be
recognized as income upon collection of the underlying note receivable.
NOTE F--HELICON INCORPORATED
Helicon, Incorporated ("Helicon"), a 501(c)(3) tax exempt company not
affiliated with the Company, operates youth treatment programs in California and
youth education programs in Tennessee. 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 in the amount of 6% of the monthly
gross revenue of Helicon's programs. The management agreement expires September
1, 1999. Management fee income totaled $1,289,000, $1,036,000, and $367,000 for
the years ended June 30, 1997, March 31, 1996, and March 31, 1995, respectively,
and $311,000 for the three months ended June 30, 1996. Additional management fee
income of $217,000 and $703,000 for the years ended March 31, 1996 and 1995,
respectively, was not recognized due to the inability of Helicon to pay these
amounts.
-44-
<PAGE> 45
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F--HELICON INCORPORATED (continued)
The Company also leases real property to Helicon. Real estate and
improvements with a cost of $10,290,000 and a carrying value of $8,768,000 were
leased, under operating lease arrangements, to Helicon at June 30, 1997. Future
minimum rental income due under these operating leases as of June 30, 1997 is as
follows:
<TABLE>
<S> <C>
Year ending June 30:
1998 $ 877,700
1999 776,000
2000 720,000
2001 720,000
2002 720,000
2003 and thereafter 12,300,000
-----------
Total $16,113,700
===========
</TABLE>
Lease income totaled $892,000, $857,000 and $857,000 for the years
ended June 30, 1997, March 31, 1996 and March 31, 1995, respectively, and
$214,000 for the three months ended June 30, 1996.
Prior to fiscal 1995, Helicon was unable to pay either management fees
or lease payments. Additionally, the Company advanced Helicon $1,024,000 during
fiscal 1994 and $1,145,000 during fiscal 1993. At June 30, 1997, 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 $1,566,000. The total amount due, $7,153,000, 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 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, which was increased in November
1996 to $1 million. This line of credit bears interest at prime + 3/4% (9.25% at
June 30, 1997) and matures in September 1997. The Company facilitated Helicon in
this process by agreeing to reduce its then existing 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. At June 30, 1997, the balance outstanding
under Helicon's line of credit was $-0-.
NOTE G--LINE OF CREDIT
The Company's $2.0 million line of credit with FANB matured on
September 30, 1996, and, on November 8, 1996, the Company entered into a new
loan and security agreement with FANB. Under the terms of this agreement, FANB
has made available to the Company, for acquisition financing and working capital
requirements, a revolving line of credit for up to $13,000,000. The initial term
of the agreement extends through November 1, 1999. The credit facility bears
interest at either (i) the one, two or three month LIBOR rate plus an applicable
margin, which ranges between 1.35% and 2.10% and is dependent on the ratio of
funded debt to operating earnings or (ii) FANB's index rate, at the Company's
option. The line of credit is secured primarily by the Company's accounts
receivable and equipment.
45
<PAGE> 46
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G--LINE OF CREDIT (continued)
The Company's line of credit with FANB requires the Company to comply
with certain restrictive covenants with respect to its business and operations
and to maintain certain financial ratios. The restrictive covenants under this
agreement prohibit the Company, without the prior consent of its lender, from
entering into major corporate transactions, such as a merger, tender offer or
sale of its assets, and from incurring additional indebtedness in excess of
$1,000,000. The agreement also prohibits the Company from declaring dividends in
excess of 25% of the Company's net income during any fiscal year.
NOTE H--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. ("Strategic Partners"). The Company obtained 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 1997, the Company used
approximately $6,158,000 of the net proceeds from its public offering of stock
(See Note J) to prepay all of the Company's outstanding indebtedness to NHI. The
Company incurred a prepayment penalty of approximately $493,000, and wrote off
deferred loan costs of approximately $119,000, in connection with the early
extinguishment of the NHI loan. During fiscal 1996, the Company made unscheduled
principal payments of approximately $708,000 towards the Strategic Partners
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 Strategic Partners loan.
In June 1997, the Company borrowed $11,450,000 under its line of credit
with FANB (See Note G) to fund the cash portion of the Vendell asset purchase.
(See Note B.) This amount bears interest at FANB's index rate (8.5% at June 30,
1997).
Future principal maturities of long-term debt are as follows at June 30, 1997:
<TABLE>
<S> <C>
Year Ending June 30:
1998 $ -0-
1999 -0-
2000 11,450,000
-----------
Total 11,450,000
Less current portion -0-
-----------
Total long-term $11,450,000
===========
</TABLE>
46
<PAGE> 47
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I--INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets as of June 30,
1997 and June 30, 1996 are as follows:
<TABLE>
<CAPTION>
June 30,
---------------------------------
1997 1996
---------- -----------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization $ 421,000 $ 311,000
Other 125,000 125,000
---------- -----------
Total deferred tax liabilities 546,000 436,000
---------- -----------
Deferred tax assets:
Net operating loss and credit
carryforwards 1,289,000 1,935,000
Accrued expenses 361,000 381,000
Other 22,000 22,000
---------- -----------
Total deferred tax assets 1,672,000 2,338,000
Valuation allowance for deferred
tax assets (150,000) (2,027,000)
---------- -----------
Net deferred tax assets 1,522,000 311,000
---------- -----------
Net deferred tax liabilities (assets) $ (976,000) $ 125,000
========== ===========
</TABLE>
Management has evaluated the need for a valuation allowance for all or
a portion of the deferred tax assets. Based upon taxable income in prior
carryback years and from the forecast of future pretax book income, management
determined in fiscal 1997 that $1,877,000 of the deferred tax assets as of June
30, 1996 would more likely than not be realized. Accordingly, $1,877,000 of the
valuation allowance was released in the second quarter of the year ended June
30, 1997. A valuation allowance of $150,000 has been recorded for certain net
operating loss carryforwards which will not likely be realized. The valuation
allowance decreased by $1,877,000 during the year ended June 30, 1997.
47
<PAGE> 48
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I--INCOME TAXES (continued)
Income tax expense (benefit) is allocated in the financial statements as
follows:
<TABLE>
<CAPTION>
Year Ended Three Months Ended Year Ended Year Ended
June 30, June 30, March 31, March 31,
1997 1996 1996 1995
--------- ------------------ ---------- ----------
<S> <C> <C> <C>
Income before extraordinary
item $ (8,000) $311,000 $491,000 $69,000
Extraordinary item (235,000) -0- (10,000) -0-
--------- -------- -------- -------
Total $(243,000) $311,000 $481,000 $69,000
========= ======== ======== =======
</TABLE>
The provision (benefit) for income taxes applicable to income before
extraordinary item is as follows:
<TABLE>
<CAPTION>
Year Ended Three Months Ended Year Ended Year Ended
June 30, June 30, March 31, March 31,
1997 1996 1996 1995
----------- ------------------ ----------- ---------
<S> <C> <C> <C>
Current:
Federal $ 718,000 $283,000 $364,000 $36,000
State 375,000 28,000 127,000 33,000
----------- -------- -------- -------
1,093,000 311,000 491,000 69,000
----------- -------- -------- -------
Deferred:
Federal (1,100,000) -0- -0- -0-
State (1,000) -0- -0- -0-
----------- -------- -------- -------
(1,101,000) -0- -0- -0-
----------- -------- -------- -------
Provision (benefit) for
income taxes $ (8,000) $311,000 $491,000 $69,000
=========== ======== ======== =======
</TABLE>
The reconciliation of income tax attributable to income before
extraordinary item computed at the federal statutory tax rates to income tax
expense (benefit) is as follows:
<TABLE>
<CAPTION>
Year Ended Three Months Ended Year Ended Year Ended
June 30, June 30, March 31, March 31,
1997 1996 1996 1995
----------- ------------------ ---------- -------
<S> <C> <C> <C>
Income tax expense at
federal statutory rate $ 2,045,000 $ 396,000 $1,043,000 $ 660,000
Change in valuation
allowance (1,877,000) (363,000) (648,000) (620,000)
Provision for (reversal
of) previously recorded
tax accruals (478,000) 259,000 -0- -0-
State income tax, net of
federal benefit 258,000 19,000 84,000 22,000
Nondeductible expenses 44,000 -0- 12,000 7,000
----------- -------- ---------- ---------
Provision (benefit) for
income taxes $ (8,000) $ 311,000 $ 491,000 $ 69,000
=========== ========= ========== =========
</TABLE>
At June 30, 1997, the Company had regular tax net operating loss
carryforwards of $2,112,000 which expire from 2002 through 2010. Utilization
of $700,000 of the net operating loss carryforwards is subject to an annual
limitation of $40,000 pursuant to Internal Revenue Code Section 382.
48
<PAGE> 49
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J--SHAREHOLDERS' EQUITY
Public Offering of Stock -- On August 22, 1996, the Company completed a public
offering of 2,645,000 shares of Common Stock, 1,575,000 shares of which were
sold by the Company and 1,070,000 shares of which were sold by certain
shareholders of the Company. Net proceeds to the Company, after underwriting
discount and offering expenses, were approximately $23,359,000. Supplemental pro
forma net income per share (unaudited) assumes that the proceeds from the
Company's public offering of stock were received as of July 1, 1996, and
immediately used to retire the Company's long-term debt whose balance, as of
that time, was $6,206,000. Supplemental pro forma net income per share totaled
$.81 for fiscal 1997.
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. The number of shares and per share
amounts in the consolidated financial statements for the years ended March 31,
1996 and 1995 have been retroactively adjusted to reflect the reverse stock
split.
Warrants -- The following table sets forth outstanding warrants as of June 30,
1997, June 30, 1996, March 31, 1996 and March 31, 1995 for the purchase of the
Company's Common Stock:
<TABLE>
<CAPTION>
Exercise Weighted Average
Warrants Shares Prices Exercise Price
- ---------------------------- --------- ----------- ----------------
<S> <C> <C> <C>
Outstanding at April 1, 1994 1,802,080 $1.11-16.50 $ 1.68
Granted 8,000 6.25 6.25
Exercised (1,662,080) 1.11 1.11
Expired/Exchanged (90,000) 3.25-16.50 12.08
---------- ----------- ------
Outstanding at March 31, 1995 58,000 2.00-6.25 2.59
Granted 9,616 5.20 5.20
Exercised -- -- --
Expired/Exchanged (8,000) 6.25 6.25
---------- ----------- ------
Outstanding at March 31, 1996 59,616 2.00- 5.20 2.52
Granted -- -- --
Exercised (50,000) 2.00 2.00
Expired/Exchanged -- -- --
---------- ----------- ------
Outstanding at June 30, 1996 9,616 5.20 5.20
Granted -- -- --
Exercised -- -- --
Expired/Exchanged -- -- --
---------- ----------- ------
Outstanding at June 30, 1997 9,616 $ 5.20 $ 5.20
========== =========== ======
</TABLE>
49
<PAGE> 50
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J--SHAREHOLDERS' EQUITY (continued)
Stock Options -- The following table sets forth outstanding stock options under
the Company's stock option plans as of June 30, 1997, June 30, 1996, March 31,
1996, and March 31, 1995 for the purchase of the Company's Common Stock:
<TABLE>
<CAPTION>
Option Weighted Average
Options Shares Prices Exercise Price
- ---------------------------- ------- ------------ --------------
<S> <C> <C> <C>
Outstanding at April 1, 1994 266,425 $ .62- 8.00 $ 3.38
Granted 138,750 3.25- 6.13 3.41
Exercised (5,000) 1.125-3.00 2.06
Forfeited (5,000) 5.75- 8.00 6.88
------- ------------- ------
Outstanding at March 31, 1995 395,175 .62- 8.00 4.99
Granted 89,250 5.25 5.25
Exercised (22,875) 1.125-5.75 2.77
Forfeited (47,500) 7.00- 8.00 7.05
------- ------------- ------
Outstanding at March 31, 1996 414,050 .62- 7.00 3.38
Granted 64,500 15.38 15.38
Exercised (66,059) .62- 5.25 1.92
Forfeited -- -- --
------- ------------- ------
Outstanding at June 30, 1996 412,491 .62-15.38 5.49
Granted 235,250 12.00-18.00 13.18
Exercised (56,893) .62- 5.25 .96
Forfeited (2,398) 5.25-15.38 7.78
------- ------------- ------
Outstanding at June 30, 1997 588,450 $ .62-18.00 $ 8.99
======= ============= ------
</TABLE>
Options exercisable and shares available for future grant are as follows:
<TABLE>
<CAPTION>
June 30, June 30, March 31, March 31,
1997 1996 1996 1995
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Options exercisable 295,785 295,009 336,050 395,175
Shares available for
grant 338,848 506,700 571,200 612,950
</TABLE>
The following table summarizes information about stock options
outstanding at June 30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------- --------------------------------
Number Number
Outstanding at Weighted Weighted Exercisable at Weighted
Range of June 30, Average Remaining Average Exercise June 30, Average
Exercise Prices 1997 Contractual Life Price 1997 Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ .62- 3.25 144,375 6 $ 2.44 144,375 $ 2.44
5.25- 7.00 144,925 5 5.91 118,838 6.05
12.00-18.00 299,150 9 13.65 32,572 16.28
------------ ------- -------
$ .62-18.00 588,450 295,785
======= =======
</TABLE>
Options exercisable at June 30, 1996, March 31, 1996 and March 31, 1995
had weighted average exercise prices of $3.37, $2.95 and $3.36, respectively.
The Company's 1987 Employee Stock Option Plan expired June 2, 1997, and
no additional options will be awarded under that plan. Included in the options
granted during fiscal 1997 are 65,000 options which have been granted under the
Company's proposed 1997 Stock Incentive Plan. These options, none of which were
exercisable at June 30, 1997, have been granted subject to shareholder approval
at the 1997 Annual Meeting of the proposed 1997 Stock Incentive Plan, and are
excluded from the table below summarizing common shares reserved.
50
<PAGE> 51
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J--SHAREHOLDERS' EQUITY (continued)
The following table summarizes common shares reserved at June 30, 1997:
<TABLE>
<S> <C>
Warrants 9,616
1987 Employee Stock Option Plan 493,450
l989 Stock Option Plan for Non-Employee Directors 70,000
-------
Total common shares reserved 573,066
=======
</TABLE>
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123 "Accounting for Stock-Based Compensation." This new standard defines a
fair value based method of accounting for an employee stock option or similar
equity instrument. This statement gives entities a choice of recognizing related
compensation expense by adopting the new fair value method or to continue to
measure compensation using the intrinsic value approach under Accounting
Principles Board (APB) Opinion No. 25 "Accounting for Stock Issued to
Employees," the former standard. The Company has elected to follow APB No. 25
and related Interpretations in accounting for its stock compensation plans
because, as discussed below, the alternative fair value accounting provided for
under SFAS No. 123 requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB No. 25, because
the exercise price of the Company's employee stock options equals the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, which also requires that the information be determined
as if the Company has accounted for its employee stock options granted
subsequent to March 31, 1995 under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for the years ended June 30, 1997, March 31, 1996 and the three
months ended June 30, 1996: risk-free interest rate of 6.23%; no annual divided
yield; volatility factor of .704 based on weekly closing prices since April
1996; and an expected option life of 6 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
Year Ended Three Months Ended Year Ended
June 30, June 30, March 31,
1997 1996 1996
---------- ------------------ ----------
<S> <C> <C> <C>
Pro forma net income $5,411 $821 $2,466
Pro forma earnings per share
Primary $ .75 $.14 $ .44
Fully diluted .75 .14 .43
</TABLE>
51
<PAGE> 52
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J--SHAREHOLDERS' EQUITY (continued)
Because SFAS No. 123 is applicable only to options granted subsequent
to March 31, 1995, its pro forma effect will not be fully reflected until 1998.
The weighted average fair value per share for options granted during the years
ended June 30, 1997, and March 31, 1996, and the three months ended June 30,
1996 totaled $8.79, $3.02 and $10.45, respectively. The estimated remaining
contractual life of options outstanding is 7.12 years.
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.
Dividends -- The Company's revolving credit agreement (see Note G) prohibits the
Company from declaring dividends in excess of 25% of the Company's net income
during any fiscal year.
NOTE K--EMPLOYEE BENEFIT PLAN
The Company has a Salary Reduction Plan under section 401(k) of the
Internal Revenue Code. Under this plan, employees paid on a salary only basis
may defer not less than 1% and not more than 10% of pre-tax compensation each
year, subject to Internal Revenue Service limitations, through contributions to
a designated investment fund. Under the provisions of the plan, the Company may
contribute a discretionary amount to be determined each year. No contributions
have been made under the plan. Administrative costs under the plan totaled
$25,000, $17,000, and $21,000 for the years ended June 30, 1997, March 31, 1996,
and March 31, 1995, respectively, and $1,000 for the three months ended June 30,
1996.
NOTE L--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 June 30, 1997:
<TABLE>
<S> <C>
Year ending June 30:
1998 $1,396,000
1999 877,000
2000 528,000
2001 159,000
2002 and thereafter 141,000
----------
TOTAL $3,101,000
==========
</TABLE>
Certain of the leases have renewal options of up to 5 years. Total
rental expense for all operating leases and other rental arrangements for the
years ended June 30, 1997, March 31, 1996, and March 31, 1995 was $896,000,
$587,000, and $448,000, respectively, and $167,000 for the three months ended
June 30, 1996. Aggregate future minimum rentals to be received under
noncancelable subleases totaled approximately $337,000 at June 30, 1997.
52
<PAGE> 53
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE M--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
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 did not have an adverse effect on the Company's financial
condition or results of operations.
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. The Hearing Auditors' Report of
Findings was issued in March 1996, and in April 1996, the Company filed a
Request for Formal Hearing. The Formal Hearing has not been completed. A
provision for liability of approximately $201,000 is included in accrued other
expenses at June 30, 1997 and 1996.
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 N--RELATED PARTY TRANSACTIONS
In September 1994, Strategic Partners renewed, for a term of five
years, the $1,000,000 balance outstanding under a 12%, one-year term loan made
to the Company in September 1993. 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
Strategic Partners loan. David L. Warnock, a director of the Company, serves as
a consultant to Strategic Partners and formerly was President of T. Rowe Price
Strategic Partners II, L.P., the general partner of Strategic Partners.
During fiscal 1995 the Company entered into a one-year agreement with
School Improvement Services, Inc. ("SIS") for marketing and consulting services;
Joseph A. Fernandez, Ed.D. ("Dr. Fernandez"), a director of the Company,
formerly served as 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. Pursuant to certain provisions of this agreement, the number of
shares issuable under this warrant was, during fiscal 1996, adjusted to 9,616,
at a purchase price of $5.20 per share. The Company recognized consulting
expense of approximately $16,000 associated with this adjustment during fiscal
1996. 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 consisted 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, and $13,000 for the three months
ended June 30, 1997.
53
<PAGE> 54
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE N--RELATED PARTY TRANSACTIONS (continued)
In June of 1996, the Company entered into a one-year agreement with
Joseph Fernandez and Associates, Inc. for marketing and consulting services. Dr.
Fernandez serves as President of Joseph Fernandez and Associates, Inc. Pursuant
to the terms of this agreement, Joseph Fernandez and Associates, Inc. will be
paid a monthly fee of approximately $4,000 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. Payments under this agreement during fiscal 1997, including
reimbursable expenses, totaled $50,000. During fiscal 1997, pursuant to the
dissolution of SIS, the outstanding warrant for 9,616 shares was cancelled and
reissued to the two principals of SIS. Pursuant to this cancellation, Dr.
Fernandez was issued a warrant for 3,858 shares of the Company's Common Stock,
exercisable through September 30, 2004 at $5.20 per share.
The Company rents certain operating properties from Amy S. Harrison and
Martha A. Petrey, Ph.D., officers and directors of the Company. Payments under
these month-to-month rental arrangements totaled $101,000 for each of the years
ended June 30, 1997, March 31, 1996 and March 31, 1995 and $25,000 for the three
months ended June 30, 1996.
54
<PAGE> 55
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE O--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>
% of Operating
Customer Revenue Revenue
--------------------- ----------- ---------------
<S> <C> <C> <C>
Year Ended Riverside County
June 30, 1997 Office of Education $ 5,822,000 17%
State of Tennessee 4,127,000 12
---------- --
$9,949,000 29%
========== ==
Three Months Riverside County
Ended Office of Education $1,244,000 19%
June 30, 1996 State of Tennessee 881,000 14
---------- --
$2,125,000 33%
========== ==
Year Ended Riverside County
March 31, 1996 Office of Education $5,360,000 23%
State of Tennessee 3,612,000 15
---------- --
$8,972,000 38%
========== ==
Year Ended Riverside County
March 31, 1995 Office of Education $5,080,000 25%
State of Tennessee 3,636,000 17
---------- --
$8,716,000 42%
========== ==
</TABLE>
At June 30, 1997 and 1996, accounts receivable from the above customers
totaled $1,230,000 and $1,233,000, respectively.
55
<PAGE> 56
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE P--UNAUDITED FINANCIAL INFORMATION
In March 1997, the Board of Directors voted to change the Company's
fiscal year end from March 31 to June 30, effective with the three month period
ended June 30, 1996. Unaudited financial information for the three month period
ended June 30, 1995 is as follows:
<TABLE>
<CAPTION>
Three Months Ended
Statement of Income June 30, 1995
- ------------------------------------------- ------------------
<S> <C>
(dollars in thousands, except per
share amounts)
Revenues:
Operating revenues $5,518
Management fee income 106
------
TOTAL REVENUES 5,624
Operating expenses: ------
Employee compensation and benefits 3,415
Purchased services and other expenses 1,086
Depreciation and amortization 264
Related party rent 25
------
TOTAL OPERATING EXPENSES 4,790
------
Income from operations 834
Other (income) expense:
Interest:
Banks and other 211
Related parties 29
Interest income (2)
------
TOTAL OTHER (INCOME) EXPENSE, NET 238
------
Income before income taxes 596
Provision for income taxes 89
------
NET INCOME $ 507
======
Weighted average shares outstanding 5,557
Earnings per common share:
Primary $ .09
======
Assuming full dilution $ .09
======
</TABLE>
56
<PAGE> 57
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE P--UNAUDITED FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Three Months Ended
Statement of Cash Flows June 30, 1995
- ------------------------------------------ ----------------
(in thousands)
<S> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 745
INVESTING ACTIVITIES
Purchase of property and equipment (46)
NET CASH (USED) BY -------
INVESTING ACTIVITIES (46)
-------
FINANCING ACTIVITIES
Proceeds from revolving lines of
credit 1,417
Principal payments on revolving
lines of credit and long-term
borrowings (1,458)
Principal payments on long-term
borrowings - related parties (14)
Stock issue/registration costs (23)
NET CASH (USED) BY -------
FINANCING ACTIVITIES (78)
-------
INCREASE IN CASH AND CASH EQUIVALENTS 621
Cash and cash equivalents at
beginning of period 69
CASH AND CASH EQUIVALENTS -------
AT END OF PERIOD $ 690
=======
</TABLE>
57
<PAGE> 58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
INFORMATION REQUIRED BY ITEM 10 (DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT), ITEM 11 (EXECUTIVE COMPENSATION), ITEM 12 (SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT), AND ITEM 13 (CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS), will be included in the Company's Proxy Statement to
be filed within 120 days of June 30, 1997 and is incorporated herein by
reference.
58
<PAGE> 59
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The following financial statements of Children's Comprehensive
Services, Inc. are included in Part II, Item 8:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets-June 30, 1997 and 1996 35
Consolidated Statements of Income for the Years Ended June 30,
1997, March 31, 1996 and 1995 and for the
Three Months Ended June 30, 1996 37
Consolidated Statements of Shareholders' Equity for the Years
Ended June 30, 1997, March 31, 1996 and 1995 and for the
Three Months Ended June 30, 1996 38
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1997, March 31, 1996 and 1995 and
for the Three Months Ended June 30, 1996 39
Notes to Consolidated Financial Statements 41
(2) Financial Statement Schedules
Schedule II - Valuation and qualifying accounts 62
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
applicable or not required under their related instructions or the
required information is included in the financial statements or notes
thereto.
(3) Management Contracts and Compensatory Plans or Arrangements
1987 Employee Stock Option Plan, as amended, (included herein as
Exhibit 10.4.)
1989 Stock Option Plan for Non-Employee Directors, (included herein as
Exhibit 10.5.)
1997 Stock Incentive Plan, (included herein as Exhibit 10.14.)
(b) Reports on Form 8-K
Form 8-K Reporting Date -- June 2, 1997
Item Reported - - Item 2. Acquisition or Disposition of Assets.
The Company reported the acquisition of substantially all the assets of
Vendell Healthcare, Inc. and its subsidiaries.
(c) Exhibits
The exhibits listed in the accompanying index to exhibits on page 63
are filed as part of this annual report on Form 10-K.
59
<PAGE> 60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CHILDREN'S COMPREHENSIVE SERVICES, INC.
Date: September 29, 1997 By:/s/William J Ballard
-----------------------------
William J Ballard
Chairman, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: September 29, 1997 /s/William J Ballard
-----------------------------
William J Ballard
Chairman, Chief Executive Officer
and Director (Principal Executive
Officer)
Date: September 29, l997 /s/Amy S. Harrison
-----------------------------
Amy S. Harrison
Vice Chairman, President and Director
Date: September 29, 1997 /s/Martha A. Petrey, Ph.D.
-----------------------------
Martha A. Petrey, Ph.D.
Executive Vice President and Director
Date: September 29, 1997 /s/Stephen H. Norris
-----------------------------
Stephen H. Norris
Executive Vice President
Date: September 29, 1997 /s/H. Neil Campbell
-----------------------------
H. Neil Campbell
Executive Vice President
Date: September 29, 1997 /s/Donald B. Whitfield
-----------------------------
Donald B. Whitfield
Vice President - Finance, Secretary
and Treasurer (Principal Financial and
Accounting Officer)
60
<PAGE> 61
Date: September 29, 1997 /s/ Thomas B. Clark
-----------------------------
Thomas B. Clark
Director
Date: September 29, 1997 /s/Joseph A. Fernandez, Ed.D.
-----------------------------
Joseph A. Fernandez, Ed.D.
Director
Date: September 29, 1997 /s/David L. Warnock
-----------------------------
David L. Warnock
Director
61
<PAGE> 62
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
CHILDREN'S COMPREHENSIVE SERVICES, INC.
<TABLE>
<CAPTION>
COL. C--ADDITIONS
- --------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL D. COL E.
- --------------------------------------------------------------------------------------------------------------------------
(1) (2)
Balance Charged to Charged to Balance
at Beginning Costs and Other Accounts- Deductions- at End
DESCRIPTION of Period Expenses Describe Describe of Period
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1997:
Deducted from asset accounts:
Allowance for doubtful
accounts $143,000 $ (155,000) $ 2,373,000(1) $ -0- $2,361,000
-------- ---------- ----------- -------- ----------
Totals $143,000 $ (155,000) $ 2,373,000 $ -0- $2,361,000
======== ========== =========== ======== ==========
Period ended June 30, 1996:
Deducted from asset accounts:
Allowance for doubtful
accounts $146,000 $ -0- $ -0- $ 3,000(2) $ 143,000
-------- ---------- ---------- -------- ----------
Totals $146,000 $ -0- $ -0- $ 3,000 $ 143,000
======== ========== ========== ======== ==========
Year ended March 31, 1996:
Deducted from asset accounts:
Allowance for doubtful
accounts $133,000 $ 38,000 $ -0- $ 25,000(2) $ 146,000
-------- ---------- ---------- -------- ----------
Totals $133,000 $ 38,000 $ -0- $ 25,000 $ 146,000
======== ========== ========== ======== ==========
Year ended March 31, 1995:
Deducted from asset accounts:
Allowance for doubtful
accounts $368,000 $ 83,000 $ -0- $318,000(2) $ 133,000
-------- ---------- ---------- -------- ----------
Totals $368,000 $ 83,000 $ -0- $318,000 $ 133,000
======== ========== ========== ======== ==========
</TABLE>
(1) Addition to allowance for doubtful accounts recognized in conjunction
with the Company's purchase of substantially all the assets of Vendell
Healthcare, Inc.
(2) Uncollectible accounts written off against allowance account.
62
<PAGE> 63
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------- -----------------------
<S> <C>
3.1 Restated Charter, as amended. (1)
3.2 By-Laws. (2)
4.1 Specimen Stock Certificate. (6)
10.1 Non-competition Agreement between Registrant and Amy S. Harrison. (3)
10.2 Non-Competition Agreement between Registrant and Martha A. Petrey. (3)
10.3 Registration Agreement between Registrant and Amy S. Harrison and Martha A. Petrey. (3)
10.4 1987 Employee Stock Option Plan, as amended. (7)
10.5 1989 Stock Option Plan for Non-Employee Directors. (4)
10.6 Assignment and Sublease between Registrant and Helicon Incorporated. (5)
10.7 Warrant Agreement dated October 1, 1996, between the Registrant and
Joseph A. Fernandez.
10.8 Consulting and Marketing Agreement effective as of August 1, 1992,
dated September 22, 1994, by and between the Registrant and Helicon
Incorporated. (7)
10.9 Agreement dated as of August 8, 1997 between the Registrant and
Riverside County, California Superintendent of Schools for special
education services.
10.10 Registration Rights Agreement, dated September 20, 1993, by and between
the Registrant and T. Rowe Price Strategic Partners Fund II, L.P. (8)
10.11 Guaranty and Suretyship Agreement dated January 29, 1996, by and
between First American National Bank, the Registrant and Helicon
Incorporated. (8)
10.12 Loan and Security Agreement between First American National Bank and
the Registrant, dated as of November 8, 1996. (9)
10.13 Asset Purchase Agreement by and among Vendell Healthcare, Inc., the
subsidiaries of Vendell Healthcare, Inc. and the Registrant, dated
February 27, 1997. (10)
10.14 1997 Employee Incentive Plan.
10.15 Amendment to Asset Purchase Agreement by and among Vendell Healthcare,
Inc., the subsidiaries of Vendell Healthcare, Inc. and the Registrant.
(11)
10.16 Second Amendment to Asset Purchase Agreement by and among Vendell
Healthcare, Inc., the subsidiaries of Vendell Healthcare, Inc. and the
Registrant. (11)
10.17 Third Amendment to Asset Purchase Agreement by and among Vendell
Healthcare, Inc., the subsidiaries of Vendell Healthcare, Inc. and the
Registrant. (11)
10.18 Warrant Agreement dated October 1, 1996 between the Registrant and
Kenneth W. Miller.
10.19 Lease Agreement dated September 26, 1989 between the Registrant and the
Equitable Life Assurance Society of the United States.
10.20 First Amendment, dated February 21, 1990, to the lease between the
Registrant and the Equitable Life Assurance Society of the United
States.
10.21 Second Amendment, dated March 1, 1993, to the lease between the
Registrant and the Equitable Life Assurance Society of the United
States.
10.22 Third Amendment, dated October 26, 1993, to the lease between
Registrant and the Equitable Life Assurance Society of the United
States.
11 Statement Re: Computation of Per Share Earnings.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule.
</TABLE>
(1) Incorporated herein by reference from Registrant's Registration
Statement on Form S-2, filed August 15, 1996 (Reg. No. 333-8387).
(2) Incorporated herein by reference from Registrant's Registration
Statement on Form S-1, filed October 11, 1989 (Reg. No. 33-31527).
(3) Incorporated herein by reference from Registrant's Form 8-K, dated
April 12, 1988, reporting the acquisition of Advocate Schools (File No.
0-16162).
63
<PAGE> 64
INDEX TO EXHIBITS (Continued)
(4) Incorporated herein by reference from Registrant's Registration
Statement on Form S-8, filed February 14, 1990 (Reg. No. 2-33-33499).
(5) Incorporated herein by reference from Registrant's Form 10-K for the
fiscal year ended March 31, 1990, dated June 28, 1990 (File No.
0-16162).
(6) Incorporated herein by reference from Registrant's Form 10-K for the
fiscal year ended March 31, 1994, dated June 28, 1994 (File No.
0-16162).
(7) Incorporated herein by reference from Registrant's Form 10-K for the
fiscal year ended March 31, 1995, dated June 28, 1995 (File No.
0-16162).
(8) Incorporated herein by reference from Registrant's Form 10-K for the
fiscal year ended March 31, 1996, dated June 28, 1996 (File No.
0-16162).
(9) Incorporated herein by reference from Registrant's Form 10-Q for the
periods ended December 31, 1996, dated February 13, 1997 (File No.
0-16162).
(10) Incorporated herein by reference from Registrant's Form 10-Q for the
periods ended March 31, 1997, dated May 15, 1997 (File No. 0-16162).
(11) Incorporated herein by reference from Registrant's Form 8-K, dated June
2, 1997, reporting the acquisition of substantially all the assets of
Vendell Healthcare, Inc. (File No. 0-16162).
64
<PAGE> 1
Exhibit 10.7
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE
SECURITIES LAWS OF ANY STATE, AND MAY NOT BE SOLD, OR OTHERWISE
TRANSFERRED, IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM UNDER SUCH ACT AND UNDER ANY SUCH APPLICABLE STATE LAWS.
STOCK PURCHASE WARRANT
This Warrant is issued this 1st day of October, 1996, by Children's
Comprehensive Services, Inc., a Tennessee corporation (the "Company"), to
Joseph A. Fernandez ("Dr. Fernandez").
WITNESSETH:
1. ISSUANCE OF WARRANT; TERM. For and in consideration of the partial
surrender and cancellation of a Stock Purchase Warrant issued to School
Improvement Services, Inc. on October 1, 1994, and subsequently amended on
October 4, 1995, by the Company and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the Company hereby
grants to Dr. Fernandez, subject to the surrender of Amendment No. 1 to the
Original Warrant and the provisions hereinafter set forth, the right to purchase
3,858 shares of Common Stock, $.01 par value, of the Company (the "Common
Stock"). The shares of Common Stock issuable upon exercise of this Warrant are
hereinafter referred to as the "Shares." This Warrant shall be exercisable at
any time and from time to time from the date hereof through the period ending
September 30, 2004.
2. EXERCISE PRICE. The exercise price per share at which all or any of
the Shares may be purchased pursuant to the terms of this Warrant shall
be $5.20.
3. EXERCISE. This Warrant may be exercised by the holder hereof as to
all or any increment or increments of 1,000 Shares (or the balance of the Shares
if less than such number), upon delivery of written notice of intent to exercise
to the Company at 805 South Church Street, Murfreesboro, Tennessee 37130, or
such other address as the Company shall designate in a written notice to the
holder hereof, together with this Warrant and a certified or cashiers check
payable to the Company for the aggregate purchase price of the Shares so
purchased. Upon exercise of this Warrant as aforesaid, and upon compliance with
the covenants and conditions of Section 4 hereof, the Company shall, as promptly
as practicable, and in any event within 15 days thereafter, execute and deliver
to the holder of this Warrant a certificate or certificates for the total number
of whole Shares for which this Warrant is being exercised in such names and
denominations as are requested by such holder. If this Warrant shall be
exercised with respect to less than all of the Shares, the holder shall be
entitled to receive a new Warrant covering the
<PAGE> 2
number of Shares in respect of which this Warrant shall not have been exercised,
which new Warrant shall in all other respects be identical to this Warrant.
4. COVENANTS AND CONDITIONS. The issuance of shares pursuant hereto
are subject to the following:
(a) Neither this Warrant nor the Shares have been registered
under the Securities Act of 1933, as amended (the "Act"), or any state
securities laws ("Blue Sky Laws"). This Warrant has been acquired for
investment purposes only and not with a view to distribution or resale
and may not be made subject to a security interest, pledged,
hypothecated, sold, exercised in favor of third parties or otherwise
transferred without an effective registration statement for such
Warrant under the Act and applicable Blue Sky Laws or an opinion of
counsel reasonably satisfactory to the Company that registration is not
required under the Act or under any applicable Blue Sky Laws.
(b) Transfer of the Shares issued upon the exercise of this
Warrant shall be restricted in the same manner and to the same extent
as the Warrant and the certificates representing such Shares shall bear
the following legend:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS,
BUT HAVE BEEN ACQUIRED FOR THE PRIVATE INVESTMENT OF THE
HOLDER HEREOF AND MAY NOT BE OFFERED, SOLD OR TRANSFERRED
UNTIL (i) A REGISTRATION STATEMENT UNDER THE ACT AND SUCH
STATE SECURITIES LAWS AS ARE APPLICABLE SHALL HAVE BECOME
EFFECTIVE WITH REGARD THERETO, OR (ii) IN THE OPINION OF
COUNSEL ACCEPTABLE TO THE COMPANY REGISTRATION UNDER THE ACT
AND SUCH STATE SECURITIES LAWS AS ARE APPLICABLE IS NOT
REQUIRED IN CONNECTION WITH SUCH PROPOSED OFFER, SALE OR
TRANSFER.
(c) The holder hereof and the Company agree to execute such
other documents and instruments as counsel for the Company reasonably
deems necessary to effect the compliance of the issuance of this
Warrant and any shares of Common Stock issued upon exercise hereof with
applicable federal and state securities laws.
(d) The Company covenants and agrees that all Shares which may
be issued upon exercise of this Warrant will, upon issuance and payment
therefor, be legally and validly issued and outstanding, fully paid and
nonassessable, free from all taxes, liens and
2
<PAGE> 3
charges with respect thereto or to the issuance thereof. The Company
shall at all times reserve and keep available for issuance upon the
exercise of this Warrant or Warrants such number of the authorized but
unissued shares of the Common Stock as from time to time may be
required to exercise this Warrant (or any replacement thereof) in full.
5. TRANSFER OF WARRANTS. Subject to the provisions of Paragraph 4, this
Warrant may be transferred, in whole or in part, by presentation of the Warrant
to the Company with written instructions for such transfer. Upon presentation
for transfer, the Company shall promptly execute and deliver a new Warrant or
Warrants in the form hereof in the name of the assignee or assignees and in the
denominations specified in such instructions. All expenses, taxes and other
charges payable in connection with the preparation, issuance and delivery of
Warrants under this Paragraph shall be paid by the party requesting transfer of
the Warrant.
6. WARRANT HOLDER NOT SHAREHOLDER. This Warrant does not confer upon
the holder hereof, as such, any right whatsoever as a shareholder of the
Company.
7. ADJUSTMENT UPON CHANGES IN STOCK. The number of Shares subject to
this Warrant and the price per share of such Shares shall be adjusted by the
Company in an equitable manner to reflect changes in the capitalization of the
Company, occurring after the date hereof, including, but not limited to, such
changes as result from merger, consolidation, reorganization, recapitalization,
reclassification, stock dividend, dividend in property other than cash, stock
split, combination of shares, exchange of shares and change in corporate
structure. If any adjustment under this Paragraph 7 would create a fractional
share of Common Stock or a right to acquire a fractional share of Common Stock,
the aggregate number of shares represented by this Warrant shall be adjusted and
any resulting fractional share shall be rounded to the nearest whole share.
Whenever the number of Shares issuable upon exercise of this Warrant or the
price per share of such Shares shall be adjusted pursuant to this Paragraph 7,
the Company shall forthwith notify the holder or holders of this Warrant of such
adjustment, setting forth in reasonable detail the event requiring the
adjustment and the method by which such adjustment was calculated.
IN WITNESS WHEREOF, the parties hereto have set their hands as of the
date first above written.
CHILDREN'S COMPREHENSIVE SERVICES, INC.
By: /s/ Donald B. Whitfield
---------------------------------
Title: Vice President--Finance
------------------------------
JOSEPH A. FERNANDEZ
/s/ Joseph A. Fernandez
-------------------------------------
3
<PAGE> 1
Exhibit 10.9
RIVERSIDE COUNTY SUPERINTENDENT OF SCHOOLS
3939 Thirteenth Street/P.O. Box 868
Riverside, California 92505
MASTER CONTRACT
FOR NONPUBLIC, NON SECTARIAN SCHOOL AGENCY SERVICES
(Education Code Sections 56365 et seq.)
This Agreement, made and entered into this 8th day of August, 1997,
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.
<PAGE> 2
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.
4. SUPERINTENDENT shall provide CONTRACTOR with copy of each pupil's
Individualized Education Program. 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 by CONTRACTOR 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
cooperated with parent's 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.
<PAGE> 3
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 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. This applies only
to the basic education program. SUPERINTENDENT shall be responsible
for payment of nly the first day of related services (including
transportation) in the event of consecutive days of excused absence.
The one day payment only applies to the first day of a pupil's excused
absence. SUPERINTENDENT shall not be responsible for any payment of
a pupil's absence due to he/she being placed in juvenile hall or
temporarily placed out of the home by a state agency (other than
educational).
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.
<PAGE> 4
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.
18. RATE SCHEDULE: Educational service(s) offered by CONTRACTOR in
accordance with the Individualized Educational Program and the charges
for such service(s) during the term of this contract, shall be
as follows:
<TABLE>
<S> <C> <C> <C> <C>
a. Basic Education Program Rate Period
(Specify)
Education Program $119.75 per day
------- ---
b. Related Services per
---------------- -------------------- --------------------
(1) *Transportation per
-------------------- --------------------
(2) (a) Counseling - Group per
-------------------- --------------------
(b) Counseling - Individual per
-------------------- --------------------
(3) Adapted Physical Education per
-------------------- --------------------
(4) Language/Speech Therapy NTE $80.00 per hour
---------- ----
(5) Room and Board per
-------------------- --------------------
(6) Occupational Therapy $100.00 per hour
------------------------------------- ------- ----
(7) One-on-One Aide $88.56 per day
------------------------------------- ------ ---
(8) Speech Evaluation NTE$240.00 per 3 hour period
------------------------------------- ---------- -------------
</TABLE>
*TRANSPORTATION
1-20 Miles $13.62
21-35 Miles $24.10
36-50 Miles $30.97
51-75 Miles $48.20
76-95 Miles $64.53
96-120 Miles $70.67
121-171 Miles $80.16
172-220 Miles $108.20
<PAGE> 5
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 OF TRUANT ABSENCES. IN NO EVENT
SHALL SUPERINTENDENT BE RESPONSIBLE FOR PAYMENT FOR MORE THAN FIVE (5)
CONSECUTIVE DAYS OF UNEXCUSED OR TRUANT ABSENCES.
NOT TO EXCEED 215 DAYS
19. In no event shall the total dollar amount of this contract exceed the
sum of $6,724,000.00.
20. PAYMENT DEMAND: CONTRACTOR shall submit written demand monthly for
payment. Said demand shall be made in the manner prescribed by the
SUPERINTENDENT. CONTRACTOR shall submit said demands for payment for
services rendered no later than thirty (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) 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 cooperated 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 with 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.
<PAGE> 6
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 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 a 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 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.
<PAGE> 7
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 death, 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 form 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 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, 1997, to and
including June 30, 1998.
32. TERMINATION: This agreement may be terminated for cause. Cause shall
include, but not be limited to, 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.
<PAGE> 8
DALE S. HOLMES Advocate Schools
Riverside County 22365 Barton Road, Suite 300
Superintendent of Schools 119 South Mt. Vernon Avenue
Grand Terrance, CA 92324-5172
Signed Signed
------------------------- -------------------------
Deputy Contractor
Date Date
--------------------------- ---------------------------
Approved as to form: ----------------------------
WILLIAM C. KATZENSTEIN Name and Title (Please Print)
Riverside County Counsel
-----------------------------
By Tax Identification Number
--------------------------
Date
-------------------------
<PAGE> 1
Exhibit 10.14
CHILDREN'S COMPREHENSIVE SERVICES, INC.
1997 STOCK INCENTIVE PLAN
SECTION 1. PURPOSE; DEFINITIONS.
The purpose of the Children's Comprehensive Services, Inc. 1997 Stock
Incentive Plan (the "Plan") is to enable Children's Comprehensive Services, Inc.
(the "Company") to attract, retain and reward key employees of and consultants
to the Company and its Subsidiaries and Affiliates, and directors who are not
also employees of the Company, and to strengthen the mutuality of interests
between such key employees, consultants, and directors by awarding such key
employees, consultants, and directors performance-based stock incentives and/or
other equity interests or equity-based incentives in the Company, as well as
performance-based incentives payable in cash. The creation of the Plan shall not
diminish or prejudice other compensation programs approved from time to time by
the Board.
For purposes of the Plan, the following terms shall be defined as set forth
below:
A. "Affiliate" means any entity other than the Company and its Subsidiaries
that is designated by the Board as a participating employer under the Plan,
provided that the Company directly or indirectly owns at least 20% of the
combined voting power of all classes of stock of such entity or at least 20% of
the ownership interests in such entity.
B. "Board" means the Board of Directors of the Company.
C. "Cause" has the meaning provided in Section 5(j) of the Plan.
D. "Change in Control" has the meaning provided in Section 10(b) of the
Plan.
E. "Change in Control Price" has the meaning provided in Section 10(d) of
the Plan.
F. "Common Stock" means the Company's Common Stock, par value $.01 per
share.
G. "Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor thereto.
H. "Committee" means the Committee referred to in Section 2 of the Plan.
I. "Company" means Children's Comprehensive Services, Inc., a corporation
organized under the laws of the State of Tennessee or any successor corporation.
<PAGE> 2
J. "Disability" means disability as determined under the Company's Group
Long Term Disability Insurance Plan.
K. "Early Retirement" means retirement, for purposes of this Plan with the
express consent of the Company at or before the time of such retirement, from
active employment with the Company and any Subsidiary or Affiliate prior to age
65, in accordance with any applicable early retirement policy of the Company
then in effect or as may be approved by the Committee.
L. "Effective Date" has the meaning provided in Section 14 of the Plan.
M. "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and any successor thereto.
N. "Fair Market Value" means with respect to the Common Stock, as of any
given date or dates, unless otherwise determined by the Committee in good faith,
the reported closing price of a share of Common Stock on the NASDAQ-National
Market or such other market or exchange as is the principal trading market for
the Common Stock, or, if no such sale of a share of Common Stock is reported on
the NASDAQ-National Market or other exchange or principal trading market on such
date, the fair market value of a share of Common Stock as determined by the
Committee in good faith.
O. "Incentive Stock Option" means any Stock Option intended to be and
designated as an "Incentive Stock Option" within the meaning of Section 422 of
the Code.
P. "Immediate Family" means any child, stepchild, grandchild, parent,
stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother- in-law, or sister-in-law, and shall
include adoptive relationships.
Q. "Non-Employee Director" means a member of the Board who is a
Non-Employee Director within the meaning of Rule 16b-3(b)(3) promulgated under
the Exchange Act and an outside director within the meaning of Treasury
Regulation Sec. 162-27(e)(3) promulgated under the Code.
R. "Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
S. "Normal Retirement" means retirement from active employment with the
Company and any Subsidiary or Affiliate on or after age 65.
T. "Other Stock-Based Award" means an award under Section 8 below that is
valued in whole or in part by reference to, or is otherwise based on, the Common
Stock.
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<PAGE> 3
U. "Outside Director" means a member of the Board who is not an officer or
employee of the Company or any Subsidiary or Affiliate of the Company.
V. "Outside Director Option" means an award to an Outside Director under
Section 9 below.
W. "Plan" means this Children's Comprehensive Services, Inc. 1997 Stock
Incentive Plan, as amended from time to time.
X. "Restricted Stock" means an award of shares of Common Stock that is
subject to restrictions under Section 7 of the Plan.
Y. "Restriction Period" has the meaning provided in Section 7 of the Plan.
Z. "Retirement" means Normal or Early Retirement.
AA. "Section 162(m) Maximum" has the meaning provided in Section 3(a)
hereof.
BB. "Stock Appreciation Right" means the right pursuant to an award granted
under Section 6 below to surrender to the Company all (or a portion) of a Stock
Option in exchange for an amount equal to the difference between (i) the Fair
Market Value, as of the date such Stock Option (or such portion thereof) is
surrendered, of the shares of Common Stock covered by such Stock Option (or such
portion thereof), subject, where applicable, to the pricing provisions in
Section 6(b)(ii), and (ii) the aggregate exercise price of such Stock Option (or
such portion thereof).
CC. "Stock Option" or "Option" means any option to purchase shares of
Common Stock (including Restricted Stock, if the Committee so determines)
granted pursuant to Section 5 below.
DD. "Subsidiary" means any company (other than the Company) in an unbroken
chain of companies beginning with the Company if each of the companies (other
than the last company in the unbroken chain) owns stock possessing 50% or more
of the total combined voting power of all classes of stock in one of the other
companies in the chain.
SECTION 2. ADMINISTRATION.
The Plan shall be administered by a Committee of not less than two
Non-Employee Directors, who shall be appointed by the Board and who shall serve
at the pleasure of the Board. The functions of the Committee specified in the
Plan may be exercised by an existing Committee of the Board composed exclusively
of Non-Employee Directors. The initial Committee shall be the Compensation
Committee of the Board. In the event there are not at least two Non-Employee
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<PAGE> 4
Directors on the Board, the Plan shall be administered by the Board and all
references herein to the Committee shall refer to the Board.
The Committee shall have authority to grant, pursuant to the terms of the
Plan, to officers, other key employees, Outside Directors and consultants
eligible under Section 4: (i) Stock Options, (ii) Stock Appreciation Rights,
(iii) Restricted Stock, and/or (iv) Other Stock-Based Awards; provided, however,
that the power to grant and establish the terms and conditions of awards to
Outside Directors under the Plan other than pursuant to Section 9 shall be
reserved to the Board.
In particular, the Committee, or the Board, as the case may be, shall have
the authority, consistent with the terms of the Plan:
(a) to select the officers, key employees and Outside Directors of and
consultants to the Company and its Subsidiaries and Affiliates to whom
Stock Options, Stock Appreciation Rights, Restricted Stock, and/or Other
Stock-Based Awards may from time to time be granted hereunder;
(b) to determine whether and to what extent Incentive Stock Options,
Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock,
and/or Other Stock-Based Awards, or any combination thereof, are to be
granted hereunder to one or more eligible persons;
(c) to determine the number of shares to be covered by each such
award granted hereunder;
(d) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any award granted hereunder (including, but not
limited to, the share price and any restriction or limitation, or any
vesting acceleration or waiver of forfeiture restrictions regarding any
Stock Option or other award and/or the shares of Common Stock relating
thereto, based in each case on such factors as the Committee shall
determine, in its sole discretion); and to amend or waive any such terms
and conditions to the extent permitted by Section 11 hereof;
(e) to determine whether and under what circumstances a Stock Option
may be settled in cash or Restricted Stock under Section 5(l) or (m), as
applicable, instead of Common Stock;
(f) to determine whether, to what extent, and under what circumstances
Option grants and/or other awards under the Plan are to be made, and
operate, on a tandem basis vis-a-vis other awards under the Plan and/or
cash awards made outside of the Plan;
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<PAGE> 5
(g) to determine whether, to what extent, and under what circumstances
shares of Common Stock and other amounts payable with respect to an award
under this Plan shall be deferred either automatically or at the election
of the participant (including providing for and determining the amount (if
any) of any deemed earnings on any deferred amount during any deferral
period);
(h) to determine whether to require payment of tax withholding
requirements in shares of Common Stock subject to the award; and
(i) to impose any holding period required to satisfy Section 16 under
the Exchange Act.
The Committee shall have the authority to adopt, alter, and repeal such
rules, guidelines, and practices governing the Plan as it shall, from time to
time, deem advisable; to interpret the terms and provisions of the Plan and any
award issued under the Plan (and any agreements relating thereto); and to
otherwise supervise the administration of the Plan.
All decisions made by the Committee pursuant to the provisions of the Plan
shall be made in the Committee's sole discretion and shall be final and binding
on all persons, including the Company and Plan participants.
SECTION 3. SHARES OF COMMON STOCK SUBJECT TO PLAN.
(a) As of the Effective Date, the aggregate number of shares of Common
Stock that may be issued under the Plan shall be 1,000,000 shares. Of the total
number of shares that may be issued under the Plan, an aggregate of 150,000
shares shall be reserved for issuance under Section 9 hereof, subject to
increases at the discretion of the Board. The shares of Common Stock issuable
under the Plan may consist, in whole or in part, of authorized and unissued
shares or treasury shares. No officer of the Company or other person whose
compensation may be subject to the limitations on deductibility under Section
162(m) of the Code shall be eligible to receive awards pursuant to this Plan
relating to in excess of 200,000 shares of Common Stock in any fiscal year (the
"Section 162(m) Maximum").
(b) If any shares of Common Stock that have been optioned cease to be
subject to a Stock Option, or if any shares of Common Stock that are subject to
any Restricted Stock or Other Stock-Based Award granted hereunder are forfeited
prior to the payment of any dividends, if applicable, with respect to such
shares of Common Stock, or any such award otherwise terminates without a payment
being made to the participant in the form of Common Stock, such shares shall
again be available for distribution in connection with future awards under the
Plan.
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<PAGE> 6
(c) In the event of any merger, reorganization, consolidation,
recapitalization, extraordinary cash dividend, stock dividend, stock split or
other change in corporate structure affecting the Common Stock, an appropriate
substitution or adjustment shall be made in the maximum number of shares that
may be awarded under the Plan, in the number and option price of shares subject
to outstanding Options granted under the Plan, in the number of shares
underlying Outside Director Options to be granted under Section 9 hereof, the
Section 162(m) Maximum and in the number of shares subject to other outstanding
awards granted under the Plan as may be determined to be appropriate by the
Committee, in its sole discretion, provided that the number of shares subject to
any award shall always be a whole number. An adjusted option price shall also be
used to determine the amount payable by the Company upon the exercise of any
Stock Appreciation Right associated with any Stock Option.
SECTION 4. ELIGIBILITY.
Officers, other key employees and Outside Directors of and consultants to
the Company and its Subsidiaries and Affiliates who are responsible for or
contribute to the management, growth and/or profitability of the business of the
Company and/or its Subsidiaries and Affiliates are eligible to be granted awards
under the Plan. Outside Directors are eligible to receive awards pursuant to
Section 9 and as otherwise determined by the Board.
SECTION 5. STOCK OPTIONS.
Stock Options may be granted alone, in addition to, or in tandem with other
awards granted under the Plan and/or cash awards made outside of the Plan. Any
Stock Option granted under the Plan shall be in such form as the Committee may
from time to time approve.
Stock Options granted under the Plan may be of two types: (i) Incentive
Stock Options and (ii) Non-Qualified Stock Options. Incentive Stock Options may
be granted only to individuals who are employees of the Company or any
Subsidiary of the Company.
The Committee shall have the authority to grant to any optionee Incentive
Stock Options, Non-Qualified Stock Options, or both types of Stock Options (in
each case with or without Stock Appreciation Rights).
Options granted to officers, key employees, Outside Directors and
consultants under the Plan shall be subject to the following terms and
conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem desirable.
(a) Option Price. The option price per share of Common Stock
purchasable under a Stock Option shall be determined by the Committee at
the time of grant but shall
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<PAGE> 7
be not less than 100% (or, in the case of any employee who owns stock
possessing more than 10% of the total combined voting power of all classes
of stock of the Company or of any of its Subsidiaries, not less than 110%)
of the Fair Market Value of the Common Stock at grant, in the case of
Incentive Stock Options, and not less than 50% of the Fair Market Value of
the Common Stock at grant, in the case of Non-Qualified Stock Options.
(b) Option Term. The term of each Stock Option shall be fixed by the
Committee, but no Incentive Stock Option shall be exercisable more than ten
years (or, in the case of an employee who owns stock possessing more than
10% of the total combined voting power of all classes of stock of the
Company or any of its Subsidiaries or parent Companies, more than five
years) after the date the Option is granted.
(c) Exercisability. Stock Options shall be exercisable at such time or
times and subject to such terms and conditions as shall be determined by
the Committee at or after grant; provided, however, that except as provided
in Section 5(g) and (h), Section 9 and Section 10, unless otherwise
determined by the Committee at or after grant, no Stock Option shall be
exercisable prior to the first anniversary date of the granting of the
Option. The Committee may provide that a Stock Option shall vest over a
period of future service at a rate specified at the time of grant, or that
the Stock Option is exercisable only in installments. If the Committee
provides, in its sole discretion, that any Stock Option is exercisable only
in installments, the Committee may waive such installment exercise
provisions at any time at or after grant, in whole or in part, based on
such factors as the Committee shall determine in its sole discretion.
(d) Method of Exercise. Subject to whatever installment exercise
restrictions apply under Section 5(c), Stock Options may be exercised in
whole or in part at any time during the option period, by giving written
notice of exercise to the Company specifying the number of shares to be
purchased. Such notice shall be accompanied by payment in full of the
purchase price, either by check, note, or such other instrument as the
Committee may accept. As determined by the Committee, in its sole
discretion, at or (except in the case of an Incentive Stock Option) after
grant, payment in full or in part may also be made in the form of shares of
Common Stock already owned by the optionee or, in the case of a
Non-Qualified Stock Option, shares of Restricted Stock or shares subject to
such Option or another award hereunder (in each case valued at the Fair
Market Value of the Common Stock on the date the Option is exercised). If
payment of the exercise price is made in part or in full with Common Stock,
the Committee may award to the employee a new Stock Option to replace the
Common Stock which was surrendered. If payment of the option exercise price
of a Non-Qualified Stock Option is made in whole or in part in the form of
Restricted Stock, such Restricted Stock (and any replacement shares
relating thereto) shall remain (or be) restricted in accordance with the
original terms of the Restricted Stock award in question, and any
additional Common Stock received upon the exercise shall be subject to the
same forfeiture restrictions, unless otherwise determined by the Committee,
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<PAGE> 8
in its sole discretion, at or after grant. No shares of Common Stock shall
be issued until full payment therefor has been made. An optionee shall
generally have the rights to dividends or other rights of a shareholder
with respect to shares subject to the Option when the optionee has given
written notice of exercise, has paid in full for such shares, and, if
requested, has given the representation described in Section 13(a).
(e) Transferability of Options. No Non-Qualified Stock Option shall be
transferable by the optionee without the prior written consent of the
Committee other than (i) transfers by the Optionee to a member of his or
her Immediate Family or a trust for the benefit of the optionee or a member
of his or her Immediate Family, or (ii) transfers by will or by the laws of
descent and distribution. No Incentive Stock Option shall be transferable
by the optionee otherwise than by will or by the laws of descent and
distribution and all Incentive Stock Options shall be exercisable, during
the optionee's lifetime, only by the optionee.
(f) Bonus for Taxes. In the case of a Non-Qualified Stock Option or an
optionee who elects to make a disqualifying disposition (as defined in
Section 422(a)(1) of the Code) of Common Stock acquired pursuant to the
exercise of an Incentive Stock Option, the Committee in its discretion may
award at the time of grant or thereafter the right to receive upon exercise
of such Stock Option a cash bonus calculated to pay part or all of the
federal and state, if any, income tax incurred by the optionee upon such
exercise.
(g) Termination by Death. Subject to Section 5(k), if an optionee's
employment by the Company and any Subsidiary or (except in the case of an
Incentive Stock Option) Affiliate terminates by reason of death, any Stock
Option held by such optionee may thereafter be exercised, to the extent
such option was exercisable at the time of death or (except in the case of
an Incentive Stock Option) on such accelerated basis as the Committee may
determine at or after grant (or except in the case of an Incentive Stock
Option, as may be determined in accordance with procedures established by
the Committee) by the legal representative of the estate or by the legatee
of the optionee under the will of the optionee, for a period of one year
(or such other period as the Committee may specify at or after grant) from
the date of such death or until the expiration of the stated term of such
Stock Option, whichever period is the shorter.
(h) Termination by Reason of Disability. Subject to Section 5(k), if
an optionee's employment by the Company and any Subsidiary or (except in
the case of an Incentive Stock Option) Affiliate terminates by reason of
Disability, any Stock Option held by such optionee may thereafter be
exercised by the optionee, to the extent it was exercisable at the time of
termination or (except in the case of an Incentive Stock Option) on such
accelerated basis as the Committee may determine at or after grant (or,
except in the case of an Incentive Stock Option, as may be determined in
accordance with procedures established by the Committee), for a period of
(i) three years (or such other period as the
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<PAGE> 9
Committee may specify at or after grant) from the date of such termination
of employment or until the expiration of the stated term of such Stock
Option, whichever period is the shorter, in the case of a Non-Qualified
Stock Option and (ii) one year from the date of termination of employment
or until the expiration of the stated term of such Stock Option, whichever
period is shorter, in the case of an Incentive Stock Option; provided
however, that, if the optionee dies within the period specified in (i)
above (or other such period as the committee shall specify at or after
grant), any unexercised Non-Qualified Stock Option held by such optionee
shall thereafter be exercisable to the extent to which it was exercisable
at the time of death for a period of twelve months from the date of such
death or until the expiration of the stated term of such Stock Option,
whichever period is shorter. In the event of termination of employment by
reason of Disability, if an Incentive Stock Option is exercised after the
expiration of the exercise period applicable to Incentive Stock Options,
but before the expiration of any period that would apply if such Stock
Option were a Non-Qualified Stock Option, such Stock Option will thereafter
be treated as a Non-Qualified Stock Option.
(i) Termination by Reason of Retirement. Subject to Section 5(k), if
an optionee's employment by the Company and any Subsidiary or (except in
the case of an Incentive Stock Option) Affiliate terminates by reason of
Normal or Early Retirement, any Stock Option held by such optionee may
thereafter be exercised by the optionee, to the extent it was exercisable
at the time of such Retirement or (except in the case of an Incentive Stock
Option) on such accelerated basis as the Committee may determine at or
after grant (or, except in the case of an Incentive Stock Option, as may be
determined in accordance with procedures established by the Committee), for
a period of (i) three years (or such other period as the Committee may
specify at or after grant) from the date of such termination of employment
or the expiration of the stated term of such Stock Option, whichever period
is the shorter, in the case of a Non-Qualified Stock Option and (ii) three
months from the date of such termination of employment or the expiration of
the stated term of such Stock Option, whichever period is the shorter, in
the event of an Incentive Stock Option; provided however, that, if the
optionee dies within the period specified in (i) above (or other such
period as the Committee shall specify at or after grant), any unexercised
Non-Qualified Stock Option held by such optionee shall thereafter be
exercisable to the extent to which it was exercisable at the time of death
for a period of twelve months from the date of such death or until the
expiration of the stated term of such Stock Option, whichever period is
shorter. In the event of termination of employment by reason of Retirement,
if an Incentive Stock Option is exercised after the expiration of the
exercise period applicable to Incentive Stock Options, but before the
expiration of the period that would apply if such Stock Option were a
Non-Qualified Stock Option, the option will thereafter be treated as a
Non-Qualified Stock Option.
(j) Other Termination. Subject to Section 5(k), unless otherwise
determined by the Committee (or pursuant to procedures established by the
Committee) at or (except
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in the case of an Incentive Stock Option) after grant, if an optionee's
employment by the Company and any Subsidiary or (except in the case of an
Incentive Stock Option) Affiliate is involuntarily terminated for any
reason other than death, Disability or Normal or Early Retirement, the
Stock Option shall thereupon terminate, except that such Stock Option may
be exercised, to the extent otherwise then exercisable, for the lesser of
three months or the balance of such Stock Option's term if the involuntary
termination is without Cause. For purposes of this Plan, "Cause" means (i)
a felony conviction of a participant or the failure of a participant to
contest prosecution for a felony, or (ii) a participant's willful
misconduct or dishonesty, which is directly and materially harmful to the
business or reputation of the Company or any Subsidiary or Affiliate. If an
optionee voluntarily terminates employment with the Company and any
Subsidiary or (except in the case of an Incentive Stock Option) Affiliate
(except for Disability, Normal or Early Retirement), the Stock Option shall
thereupon terminate; provided, however, that the Committee at grant or
(except in the case of an Incentive Stock Option) thereafter may extend the
exercise period in this situation for the lesser of three months or the
balance of such Stock Option's term.
(k) Incentive Stock Options. Anything in the Plan to the contrary
notwithstanding, no term of this Plan relating to Incentive Stock Options
shall be interpreted, amended, or altered, nor shall any discretion or
authority granted under the Plan be so exercised, so as to disqualify the
Plan under Section 422 of the Code, or, without the consent of the
optionee(s) affected, to disqualify any Incentive Stock Option under such
Section 422. No Incentive Stock Option shall be granted to any participant
under the Plan if such grant would cause the aggregate Fair Market Value
(as of the date the Incentive Stock Option is granted) of the Common Stock
with respect to which all Incentive Stock Options are exercisable for the
first time by such participant during any calendar year (under all such
plans of the Company and any Subsidiary) to exceed $100,000. To the extent
permitted under Section 422 of the Code or the applicable regulations
thereunder or any applicable Internal Revenue Service pronouncement:
(i) if (x) a participant's employment is terminated by reason of
death, Disability, or Retirement and (y) the portion of any Incentive
Stock Option that is otherwise exercisable during the post-termination
period specified under Section 5(g), (h) or (i), applied without
regard to the $100,000 limitation contained in Section 422(d) of the
Code, is greater than the portion of such Option that is immediately
exercisable as an "Incentive Stock Option" during such
post-termination period under Section 422, such excess shall be
treated as a Non-Qualified Stock Option; and
(ii) if the exercise of an Incentive Stock Option is accelerated
by reason of a Change in Control, any portion of such Option that is
not exercisable as an Incentive Stock Option by reason of the $100,000
limitation contained in Section 422(d) of the Code shall be treated as
a Non-Qualified Stock Option.
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(l) Buyout Provisions. The Committee may at any time offer to buy
out for a payment in cash, Common Stock, or Restricted Stock an Option
previously granted, based on such terms and conditions as the
Committee shall establish and communicate to the optionee at the time
that such offer is made.
(m) Settlement Provisions. If the option agreement so provides at
grant or (except in the case of an Incentive Stock Option) is amended
after grant and prior to exercise to so provide (with the optionee's
consent), the Committee may require that all or part of the shares to
be issued with respect to the spread value of an exercised Option take
the form of Restricted Stock, which shall be valued on the date of
exercise on the basis of the Fair Market Value (as determined by the
Committee) of such Restricted Stock determined without regards to the
forfeiture restrictions involved.
(n) Performance and Other Conditions. The Committee may condition
the exercise of any Option upon the attainment of specified
performance goals or other factors as the Committee may determine, in
its sole discretion. Unless specifically provided in the option
agreement, any such conditional Option shall vest immediately prior to
its expiration if the conditions to exercise have not theretofore been
satisfied.
SECTION 6. STOCK APPRECIATION RIGHTS.
(a) Grant and Exercise. Stock Appreciation Rights may be granted
in conjunction with all or part of any Stock Option granted under the
Plan. In the case of a Non-Qualified Stock Option, such rights may be
granted either at or after the time of the grant of such Stock Option.
In the case of an Incentive Stock Option, such rights may be granted
only at the time of the grant of such Stock Option. A Stock
Appreciation Right or applicable portion thereof granted with respect
to a given Stock Option shall terminate and no longer be exercisable
upon the termination or exercise of the related Stock Option, subject
to such provisions as the Committee may specify at grant where a Stock
Appreciation Right is granted with respect to less than the full
number of shares covered by a related Stock Option. A Stock
Appreciation Right may be exercised by an optionee, subject to Section
6(b), in accordance with the procedures established by the Committee
for such purpose. Upon such exercise, the optionee shall be entitled
to receive an amount determined in the manner prescribed in Section
6(b). Stock Options relating to exercised Stock Appreciation Rights
shall no longer be exercisable to the extent that the related Stock
Appreciation Rights have been exercised.
(b) Terms and Conditions. Stock Appreciation Rights shall be
subject to such terms and conditions, not inconsistent with the
provisions of the Plan, as shall be determined from time to time by
the Committee, including the following:
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(i) Stock Appreciation Rights shall be exercisable only at such
time or times and to the extent that the Stock Options to which they
relate shall be exercisable in accordance with the provisions of
Section 5 and this Section 6 of the Plan.
(ii) Upon the exercise of a Stock Appreciation Right, an optionee
shall be entitled to receive an amount in cash and/or shares of Common
Stock equal in value to the excess of the Fair Market Value of one
share of Common Stock over the option price per share specified in the
related Stock Option multiplied by the number of shares in respect of
which the Stock Appreciation Right shall have been exercised, with the
Committee having the right to determine the form of payment. When
payment is to be made in shares, the number of shares to be paid shall
be calculated on the basis of the Fair Market Value of the shares on
the date of exercise. When payment is to be made in cash, such amount
shall be calculated on the basis of the Fair Market Value of the
Common Stock on the date of exercise.
(iii) Stock Appreciation Rights shall be transferable only when
and to the extent that the underlying Stock Option would be
transferable under Section 5(e) of the Plan.
(iv) Upon the exercise of a Stock Appreciation Right, the Stock
Option or part thereof to which such Stock Appreciation Right is
related shall be deemed to have been exercised for the purpose of the
limitation set forth in Section 3 of the Plan on the number of shares
of Common Stock to be issued under the Plan.
(v) The Committee, in its sole discretion, may also provide that,
in the event of a Change in Control and/or a Potential Change in
Control, the amount to be paid upon the exercise of a Stock
Appreciation Right shall be based on the Change in Control Price,
subject to such terms and conditions as the Committee may specify at
grant.
(vi) The Committee may condition the exercise of any Stock
Appreciation Right upon the attainment of specified performance goals
or other factors as the Committee may determine, in its sole
discretion.
SECTION 7. RESTRICTED STOCK.
(a) Administration. Shares of Restricted Stock may be issued either
alone, in addition to, or in tandem with other awards granted under the
Plan and/or cash awards made outside the Plan. The Committee shall
determine the eligible persons to whom, and the time or times at which,
grants of Restricted Stock will be made, the number of shares
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of Restricted Stock to be awarded to any person, the price (if any) to be
paid by the recipient of Restricted Stock (subject to Section 7(b)), the
time or times within which such awards may be subject to forfeiture, and
the other terms, restrictions and conditions of the awards in addition to
those set forth in Section 7(c). The Committee may condition the grant of
Restricted Stock upon the attainment of specified performance goals or such
other factors as the Committee may determine, in its sole discretion. The
provisions of Restricted Stock awards need not be the same with respect to
each recipient.
(b) Awards and Certificates. The prospective recipient of a Restricted
Stock award shall not have any rights with respect to such award, unless
and until such recipient has executed an agreement evidencing the award and
has delivered a fully executed copy thereof to the Company, and has
otherwise complied with the applicable terms and conditions of such award.
(i) The purchase price for shares of Restricted Stock shall be
established by the Committee and may be zero.
(ii) Awards of Restricted Stock must be accepted within a period
of 60 days (or such shorter period as the Committee may specify at
grant) after the award date, by executing a Restricted Stock Award
Agreement and paying whatever price (if any) is required under Section
7(b)(i).
(iii) Each participant receiving a Restricted Stock award shall
be issued a stock certificate in respect of such shares of Restricted
Stock. Such certificate shall be registered in the name of such
participant, and shall bear an appropriate legend referring to the
terms, conditions, and restrictions applicable to such award.
(iv) The Committee shall require that the stock certificates
evidencing such shares be held in custody by the Company until the
restrictions thereon shall have lapsed, and that, as a condition of
any Restricted Stock award, the participant shall have delivered a
stock power, endorsed in blank, relating to the shares of Common Stock
covered by such award.
(c) Restrictions and Conditions. The shares of Restricted Stock
awarded pursuant to this Section 7 shall be subject to the following
restrictions and conditions:
(i) In accordance with the provisions of this Plan and the award
agreement, during a period set by the Committee commencing with the
date of such award (the "Restriction Period"), the participant shall
not be permitted to sell, transfer, pledge, assign, or otherwise
encumber shares of Restricted Stock awarded under the Plan. Within
these limits, the Committee, in its sole discretion, may provide for
the lapse of such restrictions in installments and may accelerate or
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waive such restrictions, in whole or in part, based on service,
performance, such other factors or criteria as the Committee may
determine in its sole discretion.
(ii) Except as provided in this paragraph (ii) and Section
7(c)(i), the participant shall have, with respect to the shares of
Restricted Stock, all of the rights of a shareholder of the Company,
including the right to vote the shares, and the right to receive any
cash dividends. The Committee, in its sole discretion, as determined
at the time of award, may permit or require the payment of cash
dividends to be deferred and, if the Committee so determines,
reinvested, subject to Section 13(e), in additional Restricted Stock
to the extent shares are available under Section 3, or otherwise
reinvested. Pursuant to Section 3 above, stock dividends issued with
respect to Restricted Stock shall be treated as additional shares of
Restricted Stock that are subject to the same restrictions and other
terms and conditions that apply to the shares with respect to which
such dividends are issued. If the Committee so determines, the award
agreement may also impose restrictions on the right to vote and the
right to receive dividends.
(iii) Subject to the applicable provisions of the award agreement
and this Section 7, upon termination of a participant's employment
with the Company and any Subsidiary or Affiliate for any reason during
the Restriction Period, all shares still subject to restriction will
vest, or be forfeited, in accordance with the terms and conditions
established by the Committee at or after grant.
(iv) If and when the Restriction Period expires without a prior
forfeiture of the Restricted Stock subject to such Restriction Period,
certificates for an appropriate number of unrestricted shares shall be
delivered to the participant promptly.
(d) Minimum Value Provisions. In order to better ensure that award
payments actually reflect the performance of the Company and service of the
participant, the Committee may provide, in its sole discretion, for a
tandem performance-based or other award designed to guarantee a minimum
value, payable in cash or Common Stock to the recipient of a restricted
stock award, subject to such performance, future service, deferral, and
other terms and conditions as may be specified by the Committee.
SECTION 8. OTHER STOCK-BASED AWARDS.
(a) Administration. Other Stock-Based Awards, including, without
limitation, performance shares, convertible preferred stock, convertible
debentures, exchangeable securities and Common Stock awards or options
valued by reference to earnings per share or Subsidiary performance, may be
granted either alone, in addition to, or in tandem with
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Stock Options, Stock Appreciation Rights, or Restricted Stock granted under
the Plan and cash awards made outside of the Plan; provided that no such
Other Stock-Based Awards may be granted in tandem with Incentive Stock
Options if that would cause such Stock Options not to qualify as Incentive
Stock Options pursuant to Section 422 of the Code. Subject to the
provisions of the Plan, the Committee shall have authority to determine the
persons to whom and the time or times at which such awards shall be made,
the number of shares of Common Stock to be awarded pursuant to such awards,
and all other conditions of the awards. The Committee may also provide for
the grant of Common Stock upon the completion of a specified performance
period. The provisions of Other Stock-Based Awards need not be the same
with respect to each recipient.
(b) Terms and Conditions. Other Stock-Based Awards made pursuant to
this Section 8 shall be subject to the following terms and conditions:
(i) Shares subject to awards under this Section 8 and the award
agreement referred to in Section 8(b)(v) below, may not be sold,
assigned, transferred, pledged, or otherwise encumbered prior to the
date on which the shares are issued, or, if later, the date on which
any applicable restriction, performance, or deferral period lapses.
(ii) Subject to the provisions of this Plan and the award
agreement and unless otherwise determined by the Committee at grant,
the recipient of an award under this Section 8 shall be entitled to
receive, currently or on a deferred basis, interest or dividends or
interest or dividend equivalents with respect to the number of shares
covered by the award, as determined at the time of the award by the
Committee, in its sole discretion, and the Committee may provide that
such amounts (if any) shall be deemed to have been reinvested in
additional shares of Common Stock or otherwise reinvested.
(iii) Any award under Section 8 and any shares of Common Stock
covered by any such award shall vest or be forfeited to the extent so
provided in the award agreement, as determined by the Committee in its
sole discretion.
(iv) In the event of the participant's Retirement, Disability, or
death, or in cases of special circumstances, the Committee may, in its
sole discretion, waive in whole or in part any or all of the remaining
limitations imposed hereunder (if any) with respect to any or all of
an award under this Section 8.
(v) Each award under this Section 8 shall be confirmed by, and
subject to the terms of, an agreement or other instrument by the
Company and the participant.
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(vi) Common Stock (including securities convertible into Common
Stock) issued on a bonus basis under this Section 8 may be issued for
no cash consideration. Common Stock (including securities convertible
into Common Stock) purchased pursuant to a purchase right awarded
under this Section 8 shall be priced at least 85% of the Fair Market
Value of the Common Stock on the date of grant.
SECTION 9. AWARDS TO OUTSIDE DIRECTORS.
(a) The provisions of this Section 9 shall apply only to awards to
Outside Directors in accordance with this Section 9. The Committee shall
have no authority to determine the timing of or the terms or conditions of
any award under this Section 9.
(b) On the date of each Annual Meeting of Shareholders of the Company,
each Outside Director will receive an automatic grant of a non-qualified
stock option to purchase 5,000 shares of Common Stock. The exercise price
of each option granted pursuant to this Section 9(b) shall equal the Fair
Market Value of such Common Stock on the date of grant.
(c) Each Outside Director Option shall vest and become exercisable six
(6) months after the date of grant, but shall not be exercisable prior to
such vesting. Each Outside Director Option shall expire, if unexercised, on
the tenth anniversary of the date of grant. The exercise price may be paid
in cash or in shares of Common Stock, including shares of Common Stock
subject to the Outside Director Option.
(d) Outside Director Options shall not be transferable without the
prior written consent of the Board other than (i) transfers by the optionee
to a member of his or her Immediate Family or a trust for the benefit of
optionee or a member of his or her Immediate Family, or (ii) transfers by
will or by the laws of descent and distribution.
(e) Grantees of Outside Director Options shall enter into a stock
option agreement with the Company setting forth the exercise price and
other terms as provided herein.
(f) The termination of Outside Director Options shall be governed by
the provisions of Sections 5(g), 5(i) and 5(j) hereof as if Outside
Directors were employees of the Company, except that any determination to
accelerate the vesting of an Outside Director Option will be made by the
Board and not by the Committee.
(g) Outside Director Options shall be subject to Section 10. The
number of shares and the exercise price per share of each Outside Director
Option shall be adjusted
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<PAGE> 17
automatically in the same manner as the number of shares and the exercise
price for Stock Options under Section 3 hereof at any time that Stock
Options are adjusted as provided in Section 3.
(h) Any applicable withholding taxes shall be paid in shares of Common
Stock subject to the Outside Director Option valued as the Fair Market
Value of such shares unless the Company agrees to accept a payment in cash
in the amount of such withholding taxes.
SECTION 10. CHANGE IN CONTROL PROVISIONS.
(a) Impact of Event. In the event of:
(1) a "Change in Control" as defined in Section 10(b); or
(2) a "Potential Change in Control" as defined in Section 10(c),
but only if and to the extent so determined by the Committee or the
Board at or after grant (subject to any right of approval expressly
reserved by the Committee or the Board at the time of such
determination),
(i) Subject to the limitations set forth below in this Section
10(a), the following acceleration provisions shall apply:
(a) Any Stock Appreciation Rights, any Stock Option or
Outside Director Option awarded under the Plan not previously
exercisable and vested shall become fully exercisable and vested.
(b) The restrictions applicable to any Restricted Stock and
Other Stock-Based Awards, in each case to the extent not already
vested under the Plan, shall lapse and such shares and awards
shall be deemed fully vested.
(ii) Subject to the limitations set forth below in this Section
10(a), the value of all outstanding Stock Options, Stock Appreciation
Rights, Restricted Stock, Outside Director Options and Other
Stock-Based Awards, in each case to the extent vested, shall, unless
otherwise determined by the Board or by the Committee in its sole
discretion prior to any Change in Control, be cashed out on the basis
of the "Change in Control Price" as defined in Section 10(d) as of the
date such Change in Control or such Potential Change in Control is
determined to have occurred or such other date as the Board or
Committee may determine prior to the Change in Control.
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(iii) The Board or the Committee may impose additional conditions
on the acceleration or valuation of any award in the award agreement.
(b) Definition of Change in Control. For purposes of Section 10(a), a
"Change in Control" means the happening of any of the following:
(i) any person or entity, including a "group" as defined in
Section 13(d)(3) of the Exchange Act, other than the Company or a
wholly-owned subsidiary thereof or any employee benefit plan of the
Company or any of its Subsidiaries, becomes the beneficial owner of
the Company's securities having 35% or more of the combined voting
power of the then outstanding securities of the Company that may be
cast for the election of directors of the Company (other than as a
result of an issuance of securities initiated by the Company in the
ordinary course of business); or
(ii) as the result of, or in connection with, any cash tender or
exchange offer, merger or other business combination, sales of assets
or contested election, or any combination of the foregoing
transactions, less than a majority of the combined voting power of the
then outstanding securities of the Company or any successor Company or
entity entitled to vote generally in the election of the directors of
the Company or such other company or entity after such transaction are
held in the aggregate by the holders of the Company's securities
entitled to vote generally in the election of directors of the Company
immediately prior to such transaction; or
(iii) during any period of two consecutive years, individuals who
at the beginning of any such period constitute the Board cease for any
reason to constitute at least a majority thereof, unless the election,
or the nomination for election by the Company's shareholders, of each
director of the Company first elected during such period was approved
by a vote of at least two-thirds of the directors of the Company then
still in office who were directors of the Company at the beginning of
any such period.
(c) Definition of Potential Change in Control. For purposes of Section
10(a), a "Potential Change in Control" means the happening of any one of
the following:
(i) The approval by shareholders of an agreement by the Company,
the consummation of which would result in a Change in Control of the
Company as defined in Section 10(b); or
(ii) The acquisition of beneficial ownership, directly or
indirectly, by any entity, person or group (other than the Company or
a Subsidiary or any
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Company employee benefit plan (including any trustee of such plan
acting as such trustee)) of securities of the Company representing 5%
or more of the combined voting power of the Company's outstanding
securities and the adoption by the Committee of a resolution to the
effect that a Potential Change in Control of the Company has occurred
for purposes of this Plan.
(d) Change in Control Price. For purposes of this Section 10, "Change
in Control Price" means the highest price per share paid in any transaction
reported on the NASDAQ-National Market or such other exchange or market as
is the principal trading market for the Common Stock, or paid or offered in
any bona fide transaction related to a Potential or actual Change in
Control of the Company at any time during the 60 day period immediately
preceding the occurrence of the Change in Control (or, where applicable,
the occurrence of the Potential Change in Control event), in each case as
determined by the Committee except that, in the case of Incentive Stock
Options and Stock Appreciation Rights relating to Incentive Stock Options,
such price shall be based only on transactions reported for the date on
which the optionee exercises such Stock Appreciation Rights or, where
applicable, the date on which a cash out occurs under Section 10(a)(ii).
SECTION 11. AMENDMENTS AND TERMINATION.
The Board may at any time amend, alter or discontinue the Plan; provided,
however, that, without the approval of the Company's shareholders, no amendment
or alteration may be made which would (a) except as a result of the provisions
of Section 3(c) of the Plan, increase the maximum number of shares that may be
issued under the Plan or increase the Section 162(m) Maximum, (b) change the
provisions governing Incentive Stock Options except as required or permitted
under the provisions governing incentive stock options under the Code, or (c)
make any change for which applicable law or regulatory authority (including the
regulatory authority of the NYSE or any other market or exchange on which the
Common Stock is traded) would require shareholder approval or for which
shareholder approval would be required to secure full deductibility of
compensation received under the Plan under Section 162(m) of the Code. No
amendment, alteration, or discontinuation shall be made which would impair the
rights of an optionee or participant under a Stock Option, Stock Appreciation
Right, Restricted Stock, Other Stock-Based Award or Outside Director Option
theretofore granted, without the participant's consent.
The Committee may amend the terms of any Stock Option or other award
theretofore granted, prospectively or retroactively, but, subject to Section 3
above, no such amendment shall impair the rights of any holder without the
holder's consent. The Committee may also substitute new Stock Options for
previously granted Stock Options (on a one for one or other basis), including
previously granted Stock Options having higher option exercise prices. Solely
for purposes of computing the Section 162(m) Maximum, if any Stock Options or
other awards
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previously granted to a participant are canceled and new Stock Options or other
awards having a lower exercise price or other more favorable terms for the
participant are substituted in their place, both the initial Stock Options or
other awards and the replacement Stock Options or other awards will be deemed to
be outstanding (although the canceled Stock Options or other awards will not be
exercisable or deemed outstanding for any other purposes).
SECTION 12. UNFUNDED STATUS OF PLAN.
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
participant or optionee by the Company, nothing contained herein shall give any
such participant or optionee any rights that are greater than those of a general
creditor of the Company. In its sole discretion, the Committee may authorize the
creation of trusts or other arrangements to meet the obligations created under
the Plan to deliver Common Stock or payments in lieu of or with respect to
awards hereunder; provided, however, that, unless the Committee otherwise
determines with the consent of the affected participant, the existence of such
trusts or other arrangements is consistent with the "unfunded" status of the
Plan.
SECTION 13. GENERAL PROVISIONS.
(a) The Committee may require each person purchasing shares pursuant
to a Stock Option or other award under the Plan to represent to and agree
with the Company in writing that the optionee or participant is acquiring
the shares without a view to distribution thereof. The certificates for
such shares may include any legend which the Committee deems appropriate to
reflect any restrictions on transfer. All certificates for shares of Common
Stock or other securities delivered under the Plan shall be subject to such
stock-transfer orders and other restrictions as the Committee may deem
advisable under the rules, regulations, and other requirements of the
Commission, any stock exchange upon which the Common Stock is then listed,
and any applicable Federal or state securities law, and the Committee may
cause a legend or legends to be put on any such certificates to make
appropriate reference to such restrictions.
(b) Nothing contained in this Plan shall prevent the Board from
adopting other or additional compensation arrangements, subject to
shareholder approval if such approval is required; and such arrangements
may be either generally applicable or applicable only in specific cases.
(c) The adoption of the Plan shall not confer upon any employee of the
Company or any Subsidiary or Affiliate any right to continued employment
with the Company or a Subsidiary or Affiliate, as the case may be, nor
shall it interfere in any way
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<PAGE> 21
with the right of the Company or a Subsidiary or Affiliate to terminate the
employment of any of its employees at any time.
(d) No later than the date as of which an amount first becomes
includible in the gross income of the participant for Federal income tax
purposes with respect to any award under the Plan, the participant shall
pay to the Company, or make arrangements satisfactory to the Committee
regarding the payment of, any Federal, state, or local taxes of any kind
required by law to be withheld with respect to such amount. The Committee
may require withholding obligations to be settled with Common Stock,
including Common Stock that is part of the award that gives rise to the
withholding requirement. The obligations of the Company under the Plan
shall be conditional on such payment or arrangements and the Company and
its Subsidiaries or Affiliates shall, to the extent permitted by law, have
the right to deduct any such taxes from any payment of any kind otherwise
due to the participant.
(e) The actual or deemed reinvestment of dividends or dividend
equivalents in additional Restricted Stock (or other types of Plan awards)
at the time of any dividend payment shall only be permissible if sufficient
shares of Common Stock are available under Section 3 for such reinvestment
(taking into account then outstanding Stock Options and other Plan awards).
(f) The Plan and all awards made and actions taken thereunder shall be
governed by and construed in accordance with the laws of the State of
Tennessee.
(g) The members of the Committee and the Board shall not be liable to
any employee or other person with respect to any determination made
hereunder in a manner that is not inconsistent with their legal obligations
as members of the Board. In addition to such other rights of
indemnification as they may have as directors or as members of the
Committee, the members of the Committee shall be indemnified by the Company
against the reasonable expenses, including attorneys' fees actually and
necessarily incurred in connection with the defense of any action, suit or
proceeding, or in connection with any appeal therein, to which they or any
of them may be a party by reason of any action taken or failure to act
under or in connection with the Plan or any option granted thereunder, and
against all amounts paid by them in settlement thereof (provided such
settlement is approved by independent legal counsel selected by the
Company) or paid by them in satisfaction of a judgment in any such action,
suit or proceeding, except in relation to matters as to which it shall be
adjudged in such action, suit or proceeding that such Committee member is
liable for negligence or misconduct in the performance of his duties;
provided that within 60 days after institution of any such action, suit or
proceeding, the Committee member shall in writing offer the Company the
opportunity, at its own expense, to handle and defend the same.
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(h) In addition to any other restrictions on transfer that may be
applicable under the terms of this Plan or the applicable award agreement,
no Stock Option, Stock Appreciation Right, Restricted Stock award, or Other
Stock-Based Award or other right issued under this Plan is transferable by
the participant without the prior written consent of the Committee, or, in
the case of an Outside Director, the Board, other than (i) transfers by an
optionee to a member of his or her Immediate Family or a trust for the
benefit of the optionee or a member of his or her Immediate Family or (ii)
transfers by will or by the laws of descent and distribution. The
designation of a beneficiary will not constitute a transfer.
(i) The Committee may, at or after grant, condition the receipt of any
payment in respect of any award or the transfer of any shares subject to an
award on the satisfaction of a six-month holding period, if such holding
period is required for compliance with Section 16 under the Exchange Act.
SECTION 14. EFFECTIVE DATE OF PLAN.
The Plan shall be effective as of June 3, 1997 provided that it must be
approved by a majority of the votes cast by the holders of the Company's Common
Stock.
SECTION 15. TERM OF PLAN.
No Stock Option, Stock Appreciation Right, Restricted Stock award, Other
Stock-Based Award or Outside Director Option award shall be granted pursuant to
the Plan on or after the tenth anniversary of the Effective Date of the Plan,
but awards granted prior to such tenth anniversary may be extended beyond that
date.
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Exhibit 10.18
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE
SECURITIES LAWS OF ANY STATE, AND MAY NOT BE SOLD, OR OTHERWISE
TRANSFERRED, IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM UNDER SUCH ACT AND UNDER ANY SUCH APPLICABLE STATE LAWS.
STOCK PURCHASE WARRANT
This Warrant is issued this 1st day of October, 1996, by Children's
Comprehensive Services, Inc., a Tennessee corporation (the "Company"), to
Kenneth W. Miller ("Mr. Miller").
WITNESSETH:
1. ISSUANCE OF WARRANT; TERM. For and in consideration of the partial
surrender and cancellation of a Stock Purchase Warrant issued to School
Improvement Services, Inc. on October 1, 1994, and subsequently amended on
October 4, 1995, by the Company and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the Company hereby
grants to Mr. Miller, subject to the surrender of Amendment No. 1 to the
Original Warrant and the provisions hereinafter set forth, the right to purchase
5,758 shares of Common Stock, $.01 par value, of the Company (the "Common
Stock"). The shares of Common Stock issuable upon exercise of this Warrant are
hereinafter referred to as the "Shares." This Warrant shall be exercisable at
any time and from time to time from the date hereof through the period ending
September 30, 2004.
2. EXERCISE PRICE. The exercise price per share at which all or any of
the Shares may be purchased pursuant to the terms of this Warrant shall
be $5.20.
3. EXERCISE. This Warrant may be exercised by the holder hereof as to
all or any increment or increments of 1,000 Shares (or the balance of the Shares
if less than such number), upon delivery of written notice of intent to exercise
to the Company at 805 South Church Street, Murfreesboro, Tennessee 37130, or
such other address as the Company shall designate in a written notice to the
holder hereof, together with this Warrant and a certified or cashiers check
payable to the Company for the aggregate purchase price of the Shares so
purchased. Upon exercise of this Warrant as aforesaid, and upon compliance with
the covenants and conditions of Section 4 hereof, the Company shall, as promptly
as practicable, and in any event within 15 days thereafter, execute and deliver
to the holder of this Warrant a certificate or certificates for the total number
of whole Shares for which this Warrant is being exercised in such names and
denominations as are requested by such holder. If this Warrant shall be
exercised with respect to less than all of the Shares, the holder shall be
entitled to receive a new Warrant covering the
<PAGE> 2
number of Shares in respect of which this Warrant shall not have been exercised,
which new Warrant shall in all other respects be identical to this Warrant.
4. COVENANTS AND CONDITIONS. The issuance of shares pursuant hereto
are subject to the following:
(a) Neither this Warrant nor the Shares have been registered
under the Securities Act of 1933, as amended (the "Act"), or any state
securities laws ("Blue Sky Laws"). This Warrant has been acquired for
investment purposes only and not with a view to distribution or resale
and may not be made subject to a security interest, pledged,
hypothecated, sold, exercised in favor of third parties or otherwise
transferred without an effective registration statement for such
Warrant under the Act and applicable Blue Sky Laws or an opinion of
counsel reasonably satisfactory to the Company that registration is
not required under the Act or under any applicable Blue Sky Laws.
(b) Transfer of the Shares issued upon the exercise of this
Warrant shall be restricted in the same manner and to the same extent
as the Warrant and the certificates representing such Shares shall
bear the following legend:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "ACT"), OR ANY APPLICABLE STATE SECURITIES LAWS, BUT HAVE
BEEN ACQUIRED FOR THE PRIVATE INVESTMENT OF THE HOLDER HEREOF AND
MAY NOT BE OFFERED, SOLD OR TRANSFERRED UNTIL (i) A REGISTRATION
STATEMENT UNDER THE ACT AND SUCH STATE SECURITIES LAWS AS ARE
APPLICABLE SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR
(ii) IN THE OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY
REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS AS ARE
APPLICABLE IS NOT REQUIRED IN CONNECTION WITH SUCH PROPOSED
OFFER, SALE OR TRANSFER.
(c) The holder hereof and the Company agree to execute such other
documents and instruments as counsel for the Company reasonably deems
necessary to effect the compliance of the issuance of this Warrant and
any shares of Common Stock issued upon exercise hereof with applicable
federal and state securities laws.
(d) The Company covenants and agrees that all Shares which may be
issued upon exercise of this Warrant will, upon issuance and payment
therefor, be legally and validly issued and outstanding, fully paid
and nonassessable, free from all taxes, liens and
2
<PAGE> 3
charges with respect thereto or to the issuance thereof. The Company
shall at all times reserve and keep available for issuance upon the
exercise of this Warrant or Warrants such number of the authorized but
unissued shares of the Common Stock as from time to time may be
required to exercise this Warrant (or any replacement thereof) in
full.
5. TRANSFER OF WARRANTS. Subject to the provisions of Paragraph 4, this
Warrant may be transferred, in whole or in part, by presentation of the Warrant
to the Company with written instructions for such transfer. Upon presentation
for transfer, the Company shall promptly execute and deliver a new Warrant or
Warrants in the form hereof in the name of the assignee or assignees and in the
denominations specified in such instructions. All expenses, taxes and other
charges payable in connection with the preparation, issuance and delivery of
Warrants under this Paragraph shall be paid by the party requesting transfer of
the Warrant.
6. WARRANT HOLDER NOT SHAREHOLDER. This Warrant does not confer upon
the holder hereof, as such, any right whatsoever as a shareholder of the
Company.
7. ADJUSTMENT UPON CHANGES IN STOCK. The number of Shares subject to
this Warrant and the price per share of such Shares shall be adjusted by the
Company in an equitable manner to reflect changes in the capitalization of the
Company, occurring after the date hereof, including, but not limited to, such
changes as result from merger, consolidation, reorganization, recapitalization,
reclassification, stock dividend, dividend in property other than cash, stock
split, combination of shares, exchange of shares and change in corporate
structure. If any adjustment under this Paragraph 7 would create a fractional
share of Common Stock or a right to acquire a fractional share of Common Stock,
the aggregate number of shares represented by this Warrant shall be adjusted and
any resulting fractional share shall be rounded to the nearest whole share.
Whenever the number of Shares issuable upon exercise of this Warrant or the
price per share of such Shares shall be adjusted pursuant to this Paragraph 7,
the Company shall forthwith notify the holder or holders of this Warrant of such
adjustment, setting forth in reasonable detail the event requiring the
adjustment and the method by which such adjustment was calculated.
IN WITNESS WHEREOF, the parties hereto have set their hands as of the
date first above written.
CHILDREN'S COMPREHENSIVE SERVICES, INC.
By:
-----------------------------------
Title:
--------------------------------
KENNETH W. MILLER
--------------------------------------
3
<PAGE> 1
Exhibit 10.19
THE STATE OF TENNESSEE
COUNTY OF DAVIDSON
THIS INDENTURE, dated 9-26-89
WITNESSETH:
I.
LESSOR. Subject to and upon the terms, provisions and conditions
hereinafter set forth, THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED
STATES, having its principal place of business at 1285 Avenue of the Americas,
New York, New York 10019 (the Landlord), hereby leases unto
LESSEE. RIVENDELL OF AMERICA, INC., a Delaware corporation, having its
principal place of business at 3401 West End Building, Nashville, Tennessee
37203 (the Tenant), and the Tenant accepts from Landlord, the premises described
as approximately 11,591 rentable square feet located on the fifth (5th) floor(s)
outlined on the floor plan(s) cross-hatched in red and attached hereto as
Exhibit A (the Premises) in the building located at 3401 West End Avenue,
Nashville, Tennessee (the Building) (said Building, together with the land on
which it is located and all other improvements thereon being called the
Property), for the term, the rent, and subject to the conditions and covenants
hereinafter provided.
TERM. The term of this lease shall commence on November 1, 1989 and
shall end on October 31, 1994 unless sooner terminated as provided herein, to be
occupied and used by the Tenant for general offices and for no other purpose
whatsoever. No easement for light or air is included in the Premises.
In Consideration thereof, the parties covenant and agree as follows:
II.
BASE RENTAL. (a) The Tenant shall pay to the Landlord as Base Rent, in
legal tender, at the Landlord's office at c/o John W. Galbreath & Co., 3401 West
End Building, Nashville, Tennessee 37203 or as directed from time to time by
Landlord's notice, the annual sum of SEE RIDER TO LEASE ATTACHED HERETO AND MADE
A PART HEREOF DOLLARS ($__________) payable in equal monthly payments of SEE
RIDER TO LEASE ATTACHED HERETO AND MADE A PART HEREOF DOLLARS ($__________)
each, in advance promptly on the first day of every calendar month of the term,
except for the first six (6) month's base rent which is waived, and pro-rata, in
advance, for any partial month, without demand, the same being hereby waived and
without any set-off or deduction whatsoever. Interest at the per annum rate
<PAGE> 2
of 12% will be charged retroactive to the first day of the month for rents not
paid by the tenth (10th) of the calendar month.
(b) It is understood that the Base Rent specified in Paragraph
(a) does not anticipate any increase in the amount of taxes on the Property or
in the cost of operation and maintenance thereof. Therefore, in order that the
rental payable throughout the term of the lease shall reflect any such increase,
the parties agree as hereinafter in this Section set forth. The annual Base Rent
payable pursuant to Paragraph (a) as increased pursuant to Paragraph (b) and (c)
of this Section is hereinafter called the "Rent." Certain terms are defined as
follows:
EXPENSE COMPONENT. The portion of the Base Rent attributable to Taxes
and Operating Expenses. The Expense Component shall be that amount experienced
by Landlord during calendar year 1989, on a per rentable square foot basis, as
determined by
NET RENTABLE AREA. The Net Rentable Area of the Building shall, for all
purposes, be deemed to be 250,000 square feet, and the Net Rentable Area of the
Premises shall be deemed to be 11,591 square feet.
TAXES. (i) All real estate taxes, including State equalization factor
if any, payable (adjusted after protest or litigation, if any) for any part of
the term of this lease, exclusive of penalties or discounts, on the Property,
(ii) any taxes which shall be levied in lieu of any such taxes on the gross
rentals of the Property*, (iii) any special assessments against the Property
which shall be required to be paid during the calendar year in respect to which
taxes are being determined, and (iv) the expense of contesting the amount or
validity of any such taxes, charges or assessments, such expense to be
applicable to the period of the item contested.
OPERATING EXPENSE. Those expenses incurred or paid on behalf of the
Landlord in respect of the operation and maintenance of the Property which, in
accordance with accepted principles of sound accounting practice is used by the
Landlord, as applied to the operation and maintenance of first class office
buildings, are properly chargeable to the operation and maintenance of the
Property, and the cost, as reasonably amortized by the Landlord, with interest
at the rate of 10% per annum on the unamortized amount, of any capital
improvement made after completion of the Building which reduces other Operating
Expenses, but in an amount not to exceed such reduction for the relevant year.
Operating Expenses shall not include franchise, excise or income taxes imposed
on the Landlord, and the cost to Landlord of any work or service performed in
any instance for any tenant (including the Tenant) at the cost of such tenant.
If Landlord shall make any capital improvement after the operating base year
during the term of this lease in compliance with the requirements of any
federal, state or local law or governmental regulation, then the reasonable
annual amortization of the cost of such improvement with interest at the prime
rate in existence at the time of completion of such improvement shall be deemed
an operating expense in each of the calendar years during which such
amortization occurs, but only if such improvements reduce building operating
expenses or are required as a life, health or safety measure not required as of
1989.
* excluding Landlord's franchise, excise or income taxes.
<PAGE> 3
In determining the amount of Operating Expenses, for the purpose of
this Section, for any Calendar year (i) if less than 95% of the Building shall
have been occupied by tenants and fully used by them, at any time during the
year, Operating Expenses shall be increased to an amount equal to the like
operating expense which would normally be expected to be incurred, had such
occupancy been 95% and had such full utilization been made during the entire
period, or (ii) if the Landlord is not furnishing any particular work or service
(the cost of which if performed by the Landlord would constitute an Operating
Expense*) to a tenant who has undertaken to perform such work or service in lieu
of the performance thereof by the Landlord, Operating Expense shall be deemed
for the purposes of this Section to be increased by an amount equal to the
additional operating expense which would reasonably have been incurred during
such period by the Landlord if it had at its own expense furnished such work or
service to such tenant.
(c) In order to provide for current payments on account of an increase
in the Taxes and Operating Expenses over the Expense Component, the Tenant
agrees that the Base Rent to be paid by Tenant shall be adjusted upward in the
event and to the extent that the actual Taxes and Operating Expense per square
foot of Net Rentable Area of the Building shall exceed the Expense Component of
the Base Rent as hereinabove set forth for any calendar year. In the event that
this Lease shall commence or terminate in the midst of a calendar year, the
Taxes and Operating Expenses for that calendar year and the Expense Component
shall be prorated for such portion of the calendar year as the Lease shall be in
effect, and the Base Rent shall be adjusted upward in the event and to the
extent that the prorated actual Taxes and Operating Expenses per square foot of
Net Rentable Area of the Building shall exceed the prorated Expense Component of
the Base Rent.
Prior to the commencement of each calendar year of Tenant's occupancy,
if it is expected that the Taxes and Operating Expenses for such year will
exceed the Expense Component attributable to the Building as a whole, Landlord
shall provide Tenant an estimate of Taxes and Operating Expenses for said
calendar year. Tenant shall pay a Base Rent for said calendar year adjusted
upward by Tenant's pro rata portion of the amount of difference between (i) the
Expense Component or the prior calendar year's estimated Taxes and Operating
Expenses, whichever is greater, and (ii) the coming year's estimated Taxes and
Operating Expenses. Within 150 days, or as soon thereafter as possible, of the
conclusion of each calendar year of the lease term, Landlord shall furnish to
Tenant an audited statement of Landlord's Taxes and Operating Expenses for said
calendar year. A lump-sum payment will be made from Landlord to Tenant or from
Tenant to Landlord as appropriate within thirty (30) days of the delivery of
such audited statement, equal to the product of (i) the Net Rentable Area of the
Premises and (ii) the difference in actual Taxes and Operating Expenses per
square foot of Net Rentable Area of the Building, and estimated Taxes and
Operating Expenses per square foot of Net Rentable Area of the Building. The
effect of this reconciliation payment is that Tenant will pay, during the lease
term, its share of increases in Taxes and Operating Expenses over the Expense
Component, and no more. The obligation of the Tenant with respect to the payment
of Rent shall survive the termination of this lease. Any payment, refund, or
credit made pursuant to this Paragraph (c) shall be made without prejudice to
any right of the Tenant to dispute, or of the Landlord to correct, any item(s)
as billed pursuant to the provisions hereof.
*other than by reason of its negligence or in breach of its lease obligations.
<PAGE> 4
(d) Upon receipt of the Landlord's statement, Tenant does hereby
covenant and agree promptly to pay the increases in Rent pursuant to Paragraphs
(b) and (c) of this Section as and when the same shall become due and payable,
without further demand therefor, and without any set-off or deduction
whatsoever. Failure to give such statement shall not constitute a waiver by
Landlord of its right to require an increase in Rent.
(e) Within 180 days after receipt of such statement, Tenant or its
authorized employee shall have the right to inspect the books of Landlord during
the business hours of Landlord at Landlord's office in the Building or, at
Landlord's option, at such other location that Landlord may specify, for the
purpose of verifying information in such statement. Unless Tenant asserts
specific error(s) within 180 days after delivery of such statement, the
statement shall be deemed to be correct.
(f) Nothing contained herein, and no decrease in Taxes and/or Operating
Expenses shall reduce Tenant's Rent below the annual Base Rent set forth in
Paragraph (a) of this Section.
(g) Tenant at all times during the term of this Lease agrees to lease
parking rights for at least 25 cars in the Parking Garage located adjacent to
the Building. No specific spaces in the Parking Garage are to be assigned to
Tenant, but Landlord shall issue to Tenant the aforesaid number of stickers or
tags, each of which will authorize parking in the Parking Garage of a car on
which the sticker or tag is displayed, or Landlord will provide a reasonable
alternative means of identifying and controlling cars authorized to be parked in
the Parking Garage. Landlord may designate the area within which each such car
may be parked and Landlord may change such designations from time to time.
Landlord may make, modify and enforce rules and regulations relating to the
parking of automobiles in the Parking Garage, and Tenant will abide by such
rules and regulations. Four (4) of Tenant's parking spaces shall be reserved.
Tenant covenants and agrees to pay Landlord during the term of this
Lease as additional rental hereunder, the sum of $0.00 per car per month (the
"Basic Parking Charge"), such sum to be payable quarterly in advance on the
first day of each and every calendar quarter during the term hereof, and a pro
rata portion of such sum shall be payable for the first partial calendar month
of any calendar quarter in the event that the lease term commences on a date
other than the first day of a calendar month.
(h) All costs and expenses and the Basic Parking Charge which Tenant
assumes or agrees to pay to Landlord pursuant to this lease, shall be deemed
additional rent and, in the event of non-payment thereof, Landlord shall have
all the rights and remedies herein provided for in case of non-payment of Rent.
III.
Lessor Covenants and Agrees With Lessee:
SERVICES. The Landlord shall provide, at Landlord's expense, except as
Services otherwise provided, the following services:
<PAGE> 5
(a) Public utilities to furnish the electricity, gas and water
utilized in operating any and all facilities serving the
Premises.
(b) Hot and cold water at those points of supply provided for general
use of other tenants in the Building; central heat and air
conditioning in season, at such temperatures and in such amounts
as are generally furnished to first-class office buildings;
routine maintenance and electric lighting service for all public
areas and special service areas of the Building in the manner and
to the extent generally furnished to first-class office building
during normal working hours.
(c) Janitor service on a five (5) day week basis excluding holidays;
provided, however, Tenant's floor covering or other improvements
meet the prior approval of the Landlord. In the event such
finishes are not considered "standard" by the Landlord, Tenant
shall pay the additional cleaning cost attributable thereto as
additional rent. Tenant shall pay said additional rent upon
presentation of a statement therefor by Landlord, and Tenant's
failure to pay shall constitute default hereunder.
(d) Electrical facilities to furnish sufficient power for
typewriters, desk top computers, voice writers, calculating
machines and other machines of similar low electrical
consumption; but not including electricity required by
duplicating and electronic data processing equipment, special
lighting in excess of building standard, and any other item of
electrical equipment which (singly) consumes more than 0.5
kilowatts at rated capacity or requires a voltage other than 120
volts single phase.
(e) All building standard fluorescent bulb replacement in all areas
and all incandescent bulb replacement in public areas, toilet and
rest room areas and stairwells.
(f) Elevator service.
Should Tenant require any additional work or service, including but not
limited to the additional work or service described above, including service
furnished outside the normal working hours, Landlord may, on terms to be agreed,
upon reasonable advance notice by Tenant, furnish such additional service and
Tenant agrees to pay the Landlord such charges as may be agreed on, but in no
event at a charge less than Landlord's actual cost plus overhead for the
additional services provided, it being agreed that the cost to the Landlord of
such additional services shall be excluded from Operating Expense.
It is understood that Landlord does not warrant that any of the
services referred to above, or any other services which Landlord may supply,
will be free from interruption, Tenant acknowledging that any one or more such
services may be suspended by reason of accidents or of repairs, alterations, or
improvements necessary to be made, or by strikes or lockouts, or by reason of
operation of the law, or causes beyond the reasonable control of Landlord. Any
such interruption or discontinuance of service shall never be deemed an eviction
or disturbance to Tenant's use and possession of the Premises, or any part
thereof, or render Landlord liable to
<PAGE> 6
Tenant for damages by abatement of rent or otherwise, or relieve Tenant from
performance of Tenant's obligations under this lease, unless such interruption
or disturbance renders the Premises untenantable for five (5) consecutive
business days, then in such case, Tenant's rent shall be abated until the
Premises are restored to a tenantable condition.
QUIET ENJOYMENT. So long as the Tenant shall observe and perform the
covenants and agreements binding on it hereunder, the Tenant shall at all times
during the term herein granted, peacefully and quietly have and enjoy possession
of the Premises without any encumbrance or hindrance by, from or through the
Landlord.
CERTAIN RIGHTS RESERVED TO THE LANDLORD. The Landlord reserves the
following rights:
(a) To name the Building and to change the name or street address of
the Landlord.
(b) To install and maintain a sign or signs on the exterior of the
Building.
(c) To designate all sources furnishing sign painting and lettering,
ice, drinking water, towels, toilet supplies, shoe shining, vending machines,
mobile vending service, catering, and like services used on the Premises or in
the Building.
(d) To constantly have pass keys to the Premises.
(e) On reasonable prior notice to the Tenant, to exhibit the Premises
to prospective tenants during the last twelve (12) months of the term, and to
any prospective purchaser, mortgagee, or assignee of any mortgage on the
Property and to others having a legitimate interest at any time during the term.
(f) At any time in the event of an emergency, and otherwise at
reasonable times, to take any and all measures, including inspections, repairs,
alterations, additions and improvements to the Premises or to the Building, as
may be necessary or desirable for the safety, protection or preservation of the
Premises or the Building or the Landlord's interests, or as may be necessary or
desirable in the operation or improvement of the Building or in order to comply
with all laws, orders and requirements of governmental or other authority.
(g) To install vending machines of all kinds in the Premises, and to
provide mobile vending service therefor, and to receive all of the revenue
derived therefrom; provided, however, that no vending machines shall be
installed by Landlord in the Premises nor shall any mobile vending service be
provided therefor, unless Tenant so requests.
(h) To provide and install at Tenant's cost, all letters or numerals on
doors in the Premises. All such letters and numerals shall be in the Building
standard graphics, and no other shall be used or permitted on the Premises.
ESTOPPEL CERTIFICATE BY TENANT. The Tenant agrees that from time to
time upon not less than ten (10) days prior request by the Landlord, the Tenant
will deliver to the Landlord a
<PAGE> 7
statement in writing certifying (a) that the lease is unmodified and in full
force and effect (or if there have been modifications that the same is in full
force and effect as modified and identifying the modifications), (b) the dates
to which the Rent and other charges have been paid, and (c) that, so far as the
person making the certificate knows, the Landlord is not in default under any
provision of this lease, and, if the Landlord is in default, specifying each
such default of which the person making the certificate may have knowledge, it
being understood that any such statement so delivered may be relied upon by any
landlord under any ground or underlying lease, or any prospective purchaser,
mortgagee, or any assignee of any mortgage on the Property.
WAIVER OF CERTAIN CLAIMS. The Tenant, to the extent permitted by law,
waives all claims it may have against the Landlord, and against the Landlord's
agents and employees for damage to person or property sustained by the Tenant,
its employees or invitees, resulting from any part of the Property or any
equipment or appurtenances becoming out of repair, or resulting from any
accident in or about the Property or resulting directly or indirectly from any
act or neglect of any tenant or occupant of any part of the Property or of any
other person, unless such damage is a result of the negligence or contributing
negligence of Landlord, or Landlord's agents or employees. If any damage results
from any act or neglect of the Tenant, the Landlord may, at the Landlord's
option, repair such damage and the Tenant shall thereupon pay to the Landlord
the total cost of such repair. All personal property belonging to the Tenant or
any occupant of the Premises that is in or on any part of the Property shall be
there at the risk of the Tenant or of such other person only, and the Landlord,
its agents and employees shall not be liable for any damage thereto or for the
theft or misappropriation thereof unless such damage, theft or misappropriation
is a result of the negligence or contributory negligence of Landlord or
Landlord's agents or employees. The Tenant agrees to hold the Landlord harmless
and indemnified against claims and liability for injuries to all persons and for
damages to or loss of property occurring in or about the Property, due to any
act of negligence or default under this lease by the Tenant, its contractors,
agents or employees.
To the extent that the Tenant carries hazard insurance on any of its
property in the Premises and to the extent that the Landlord carries hazard
insurance on the Property, each policy of insurance shall contain, if obtainable
from the insurer selected by the Tenant or the Landlord, as the case may be,
without additional expense, a provision waiving subrogation against the other
party to this lease. If such provision can be obtained only at additional
expense, the obligation to obtain such provision shall continue if the other
party, on notice shall pay the amount of such additional expense. Each of the
parties hereto releases the other with respect to any liability which the other
may have for any damages by fire or other casualty with respect to any liability
which the other may have for any damages by fire or other casualty with respect
to which the party against whom such release is claimed shall be insured under a
policy or policies of insurance containing such provision waiving subrogation.
<PAGE> 8
IV.
LESSEE COVENANTS AND AGREES WITH LESSOR.
LIABILITY INSURANCE. Landlord and Tenant shall, at their expense,
maintain during the term, liability insurance, contractual liability insurance
and property damage insurance under policies issued by insurers of recognized
responsibility, with limits of not less than $1,000,000.00 for personal injury,
bodily injury, death, or for damage or injury to or destruction of property
(including the loss of use thereof) for any one occurrence. Tenant's policies
shall name Landlord, its agents, servants and employees as additional insureds.
Certificates of insurance shall be furnished to Landlord. **comprehensive public
HOLDING OVER. If the tenant retains possession of the Premises or any
part thereof after the termination of the term, the Tenant shall pay the
Landlord Rent at 150% of the monthly rate specified in Section 1 for the time
the Tenant thus remains in possession and, in addition thereto, shall pay the
Landlord for all damages, consequential as well as direct, sustained by reason
of the Tenant's retention of possession. If the Tenant remains in possession of
the Premises, or any part thereof, after the termination of the term, such
holding over shall, constitute a renewal of this lease on a month to month
basis, cancelled by either party on thirty (30) days prior written notice. The
provisions of this Section do not exclude the Landlord's rights or re-entry or
other right hereunder.
ASSIGNMENT AND SUBLETTING. (a) The Tenant shall not, without the
Landlord's prior written consent*, (a) assign, convey, mortgage, pledge,
encumber or otherwise transfer (whether voluntarily or otherwise) this lease or
any interest under it; (b) allow any transfer thereof or any lien upon the
Tenant's interest by operation of law; (c) sublet the Premises or any part
thereof, or (d) permit the use or occupancy of the Premises or any part thereof
by any one other than Tenant.
(b) Notwithstanding anything herein to the contrary, if at any time or
from time to time during the Term, Tenant desires to sublet or assign the lease
with respect to all or part of the Premises, Tenant shall notify Landlord in
writing (hereinafter referred to in this Section as the "Notice") of the terms
of the proposes subletting or assignment and the area proposed to be sublet or
covered by the assignment.
*which shall not be unreasonably withheld.
<PAGE> 9
If the Landlord approves in writing the terms of the proposed
assignment or sublease and the proposed assignee or sublessee but a fully
executed counterpart of such assignment or sublease is not delivered to Landlord
within sixty (60) days after the date of Landlord's approval, then Landlord's
approval of the proposed assignment or sublease shall be deemed null and void
and Tenant shall again comply with all the conditions of this Section as if the
Notice and options hereinabove referred to had not been given and received.
(d) Tenant agrees to pay to Landlord, on demand, reasonable costs
incurred by Landlord in connection with any request by Tenant for Landlord to
consent to any assignment or subletting by Tenant.
(e) If, with the consent of the Landlord, this lease be assigned or if
the Premises or any part thereof be sublet or occupied by anyone other than
Tenant, Landlord may, after default by Tenant, collect rent from the assignee,
subtenant or occupant, and apply the net amount collected to the Rent and
Additional Rent herein reserved, but no such assignment subletting, occupancy or
collection shall be deemed a waiver of any of Tenant's covenants contained in
this lease or the acceptance of the assignee, subtenant or occupant as Tenant,
or a release of Tenant from further performance by Tenant of covenants on the
part of Tenant herein contained.
(f) Tenant shall remain liable in the event of any assignment or
sub-letting.
CONDITION OF PREMISES. Tenant's taking possession of the Premises shall
be conclusive evidence as against the Tenant that the Premises were in good
order and satisfactory condition with the Tenant took possession, except as to
latent defects. No promise of the Landlord to alter, remodel, repair or Improve
the Premises or the Building have been made by Landlord to Tenant, other than as
may be contained herein or in a separate Work Letter Agreement signed by
Landlord and Tenant. At the termination of this lease, the Tenant shall return
the Premises broom-clean and in as good condition as when the Tenant took
possession, ordinary wear and loss by fire or other casualty excepted, falling
which the Landlord may restore the Premises to such condition and the Tenant
shall pay the cost thereof on demand. The provisions of this Section IV shall
survive the termination of this lease.
USE OF PREMISES. The Tenant agrees to comply with the following rules
and regulations and with such reasonable modifications thereof and additions
thereto as the Landlord
<PAGE> 10
may hereinafter from time to time make for the Building. The
Landlord shall not be responsible for the non-observance by
any other tenant of any of said rules and regulations.
(a) The Tenant shall not exhibit, sell or offer for
sale on the Premises or in the Building any article or thing
except those articles and things essentially connected with
the stated use of the Premises by the Tenant without the
advance consent of the Landlord.
(b) The Tenant will not make or permit to be made any
use of the Premises or any part thereof which would violate
any of the covenants, agreements, terms, provisions and
conditions of this lease or which directly or indirectly is
forbidden by public law, ordinance or governmental regulation
or which may be dangerous to life, limb, or property, or which
may invalidate or increase the premium cost of any policy of
insurance carried on the Building or covering its operation,
or which will suffer or permit the Premises or any part
thereto to be used in any manner or anything to be brought
into or kept therein which, in the judgment of Landlord, shall
in any way impair or tend to impair the character, reputation
or appearance of the Property as a high-quality office
building,, or which will impair or interfere with or tend to
impair or interfere with any of the services performed by
Landlord for the Property.
(c) The Tenant shall not display, inscribe, print,
paint, maintain or affix on any place in or about the Building
any sign, notice, legend, direction, figure or advertisement,
except on the doors of the Premises and on the Directory
Board, and then only such names) and matter, and in such
color, size, style, place and materials, as shall first have
been approved by the Landlord. The listing of any name other
than that of Tenant, whether on the doors of the Premises, on
the Building directory, or otherwise, shall not operate to
vest any right of interest in this lease or in the Premises
tor to be deemed to be the written consent of landlord mention
in Section III, it be expressly understood that any such
listing is a privilege extended by Landlord revocable at will
bey written notice to Tenant.
(d) The Tenant shall not advertise the business,
profession or activities of the Tenant conducted in the
Building in any manner which violates the Letter or spirit of
any code of ethics adopted by any recognized association or
organization pertaining to such business, profession or
activities, and shall not use the name of the Building for any
purpose other than that of the business address of the Tenant,
and shall never use any picture or likeness of the Building in
circulars, notices, advertisements or correspondence without
the Landlord's consent.
(e) No additional locks or similar devices shall be
attached to any door or window without Landlord's prior
written consent. No keys for any door other than others
provided by the Landlord shall be made. If more than two keys
for one lock are desired, the Landlord will provide the same
upon payment by the Tenant.
<PAGE> 11
All keys must be returned to the Landlord at the expiration or
termination of this lease.
(f) The Tenant shall not make any alterations,
Improvements or additions to the Premises including, but not
limited to, wall coverings, floor coverings and special
lighting installations, without the Landlord's advance written
consent in each and every instance. In the event Tenant
desires to make any alterations, Improvements or additions,
Tenant shall first submit to Landlord plans and specifications
therefore and obtain Landlord's written approval thereof prior
to commencing any such work. All alterations, Improvements or
additions, whether temporary or permanent in character, made
by Landlord or Tenant in or upon the Premise shall become
Landlord's property and shall remain upon the Premises at the
termination of this lease without compensation to Tenant
(excepting only Tenant's movable office furniture, trade
fixtures, office and professional equipment) provided,
however, that landlord shall have the right to require Tenant
to remove such alternations, Improvements or additions, at
Tenant's cost, upon the termination of this lease and to
repair any damage to the Premises resulting therefrom, and
Tenant may remove millwork or other*
(g) All persons entering or leaving the Building
after hours on Monday through Friday, or at any time on
Saturdays, Sundays or holidays, may be required to do so under
such regulations as the Landlord may Impose. The Landlord may
exclude or expel any peddler.
(h) The Tenant shall not overload any floor. The
Landlord may direct the time and manner of delivery, routing
and removal, and the location, of safes and other heavy
articles.
(i) Unless the Landlord gives advance written
consent, the Tenant shall not install or operate any steam or
internal combustion engine, boiler, machinery, refrigerating
or heating device or air-conditioning apparatus in or about
the Premises, or carry on any mechanical business therein, or
use the Premises for housing accommodations or lodging or
sleeping purposes, or do any cooking therein, or use any
illumination other than electric light, or use or permit to be
brought into the Building any inflammable fluids such as
gasoline, kerosene, naphtha, and benzine, or any explosives,
radioactive materials or other articles deemed extra hazardous
to life, limb or property except in a manner which would not
violate any ordinance or regulation of the City. The Tenant
shall not use the Premises for any illegal or immoral purpose.
(j) The Tenant shall cooperate fully with the
Landlord to assure the effective operating of the Building's
air-conditioning system, including the closing of venetian
blinds and drapes, and if windows are operable to keep them
closed when the air-conditioning system is in use.
* built-in fixtures installed by Tenant, at its expense, provided Premises are
restored to its original condition, ordinary wear and tear excepted.
<PAGE> 12
(k) The Tenant shall not contract for any work or
service which might involve the employment of labor
incompatible with the Building employees or employees of
contractors doing work or performing services by or on behalf
of the Landlord.
(l) The sidewalks, halls, passages, exits, entrances,
elevators and stairways shall not be obstructed by the Tenant
or used for any purpose other than for Ingress to and egress
from its Premises. The halls, passages, exists, entrances,
elevators, stairways and roof are not for the use of the
general public and the Landlord shall in all cases retain the
right to control and prevent access thereto by all persons
whose presence, in the judgment of the Landlord, shall be
prejudicial to the safety, character, reputation and interests
of the Building and its tenants, provided that nothing herein
contained shall be constructed to prevent such access to
persons with whom the Tenant normally deals in the ordinary
course of Tenant's business unless such persons are engaged in
illegal activities. No Tenant and no employees or invitees of
any Tenant shall go upon the roof or mechanical floors of the
Building.
(m) Tenant shall not use, keep or permit to be used
or kept any foul or noxious gas or substance in the Premises,
or permit or suffer the Premises to be occupied or used in a
manner, offensive or objectionable to the Landlord or other
occupants of the Building by reason of noise, odors and/or
vibrations, or interfere in any way with other tenants or
those having business therein, nor shall any animals or birds
be brought in or kept in or about the Premises or the
Building.
(n) Tenant shall see that the doors, and windows, if
operable, of the Premises are closed and securely locked
before leaving the Building and must observe strict care and
caution that all water apparatus are entirely shut off before
Tenant or Tenant's employees leave the Building, and that all
electricity shall likewise be carefully shut off so as to
prevent waste or damage, and for any default or carelessness
Tenant shall make good all injuries or losses sustained by
other tenants or occupants of the Building or Landlord.
In addition to all other liabilities for breach of
any covenant of this Section, the Tenant shall pay to the
Landlord an amount equal to any increase in insurance premiums
payable by the Landlord or any other tenant in the Building,
caused by such breach.
REPAIRS. Tenant shall give to Landlord prompt written notice of any
damage to, or defective condition in any part or appurtenance of the Building's
plumbing, electrical, heating, air-conditioning or other systems serving,
located in, or passing through the Premises. Subject to the provisions of
Section V, the Tenant shall, at the Tenant's own expense, keep the Premises in
good order, condition and repair during the term, except that the Landlord, at
the Landlord's expense (unless caused by the fault or negligence of the Tenant,
its contractors, agents, or employees) shall keep in repair the elevators,
electrical lines, plumbing fixtures located in the Building (except those
installed by or for Tenant with Landlord's approval) heating and
air-conditioning equipment,
<PAGE> 13
outside walls, including windows, and roof. The Tenant at the Tenant's expense,
shall comply with all laws and ordinances, and all rules and regulations of all
governmental authorities and of all insurance bodies at any time in force,
applicable to the Premises or to the Tenant's use thereof, except that the
Tenant shall not hereby be under any obligation to comply with any law,
ordinance, rule or regulation requiring any structural alteration of or in
connection with the Premises, unless such alteration is required by reason of a
condition which has been created by, or at the instance of, the Tenant, or is
required by reason of a breach of any of the Tenant's covenants and agreements
hereunder. Landlord shall not be required to repair any injury or damage by fire
or other cause or to make any repairs or replacements of any panels, decoration,
office fixtures, railing, ceiling, floor covering, partitions, or any other
property installed in the Premises by the Tenant.
V.
Lessor and Lessee mutually covenant and agree as follows:
UNTENANTABILITY. If the Premises are made untenantable in whole or in
part by fire or other casualty the Rent, until repairs shall be made or the
lease terminated as hereinafter provided, shall be apportioned on a per diem
basis according to the part of the Premises which is usable by the Tenant, if,
but only if, such fire or other casualty be not caused by the fault or
negligence of the Tenant, its contractors, agents, or employees. If such damage
shall be so extensive that the Premises cannot be restored to Building Standard
by the Landlord within a period of four (4) months, either party shall have the
right to cancel this lease by notice to the other given at any time within
thirty (30) days after the date of such damage; except that if such fire or
casualty resulted from the Tenant's fault or negligence, the Tenant shall have
no right to cancel. If a portion of the Building other than the Premises shall
be so damaged that in the opinion of the Landlord the Building should be
restored in such a way as to alter the Premises materially, the Landlord may
cancel this lease by notice to the Tenant given at any time within thirty (30)
days after the date of such damage. In the event of giving effective notice
pursuant to this Section, this lease and the term and estate hereby granted
shall expire on the date fifteen (15) days after the giving of such notice as
fully and completely as if such date were the date hereinbefore set for the
expiration of the term of this lease. If this lease is not so terminated, the
Landlord will promptly repair the damage at the Landlord's expense.
EMINENT DOMAIN. (a) In the event that title to the whole or any part of
the Premises shall be lawfully condemned or taken in any manner for any public
or quasi-public use, this lease and the term and estate hereby granted shall
forthwith cease and terminate as of the date of vesting of title and the
Landlord shall be entitled to receive the entire award related to the real
property, the Tenant hereby assigning to the Landlord the Tenant's interest
therein, if any. Tenant shall be entitled to the amount of the award, if any,
for Tenant's personal property in the Premises and moving expenses it incurs.
(b) In the event that title to a substantial part of the Building other
than the Premises shall be so condemned or taken and if in the opinion of the
Landlord, the Building should be restored in such a way as to alter the Premises
materially, the Landlord may terminate this lease and the term and estate hereby
granted by notifying the Tenant of such termination within sixty
<PAGE> 14
(60) days following the date of vesting of title, and this lease and the term
and estate hereby granted shall expire on the date specified in the notice of
termination, not less than sixty (60) days after the giving of such notice, as
fully and completely as if such date were the date hereinbefore set for the
expiration of the term of this lease, and the Rent hereunder shall be
apportioned as of such date.
LANDLORD'S REMEDIES. All rights and remedies of the Landlord herein
enumerated shall be cumulative and none shall exclude any other right or remedy
allowed by law. In addition to the other remedies in this lease provided, the
Landlord shall be entitled to the restraint by injunction of the violation or
attempted violation of any of the covenants, agreements or conditions of this
lease.
(a) If the Tenant shall (i) apply for or consent to
the appointment of a receiver, trustee or liquidator of the
Tenant or of all or a substantial part of its assets, (ii)
admit in writing its inability to pay its debts as they come
due, (iii) make a general assignment for the benefit of
creditors, (iv) file a petition or an answer seeking
reorganization or arrangement with creditors or to take
advantage of any insolvency law other than the federal
Bankruptcy Code, or (v) file an answer admitting the material
allegations of a petition filed against the Tenant in any
bankruptcy, reorganization or insolvency proceeding other than
the Federal Bankruptcy Code or if an order, judgment or decree
shall be entered by any court of competent jurisdiction,
except for a bankruptcy court or a federal court sitting as a
bankruptcy court, adjudicating the Tenant insolvent or
approving a petition seeking reorganization of the Tenant or
appointing a receiver, trustee or liquidator of the Tenant or
of all or a substantial part of its assets, then, in any of
such events, the Landlord may give to the Tenant a notice of
intention to end the term of this lease specifying a day not
earlier than ten (10) days thereafter, and upon the giving of
such notice the term of this lease and all right, title and
interest of the Tenant hereunder shall expire as fully and
completely on the day so specified as if that day were the
date herein specifically fixed for the expiration of the term.
(b) If Tenant defaults in the payment of Rent and
such default continues for ten (10) days after notice, or
defaults in the prompt and full performance of any other
provision of this Lease and such default continues for twenty
(20) days after notice* or if the leasehold interest of the
Tenant be levied upon under execution or be attached by
process of law, or if the Tenant abandons the Premises, then
and in any such event the Landlord may, at its election,
either terminate this lease and the Tenant's right to
possession of the Premises or, without terminating this lease,
endeavor to relet the Premises. Nothing herein shall be
construed so as to relieve the Tenant of any obligation,
including the payment of Rent, as provided in this lease.
(c) Upon any termination of this lease, the Tenant
shall surrender possession and vacate the Premises
immediately, and deliver possession thereof to the Landlord,
and hereby grants to the Landlord full and free license to
enter into and upon the Premises in such event with or without
process of law and to
<PAGE> 15
repossess the Landlord of the Premises as of the Landlord's
former estate and to expel or remove the Tenant and any others
who may be occupying or within the Premises and to remove any
and all property therefrom, using such force as may be
reasonably necessary, without being deemed in any manner
guilty of trespass, eviction or forcible entry or detainer,
and without relinquishing the Landlord's right to Rent or any
other right given to the Landlord hereunder or by operation of
law.
(d) If the Tenant abandons the Premises or the
Landlord otherwise becomes entitled so to elect, and the
Landlord elects, without terminating this lease, to endeavor
to relet the Premises, the Landlord may, at the Landlord's
option enter into the Premises, remove the Tenant's signs and
other evidence of tenancy, and take and hold possession
thereof as in Paragraph (c) of this Section provided, without
such entry and possession terminating this lease, or releasing
the Tenant, in whole or in part, from the Tenant's obligation
to pay the Rent hereunder for the full term as hereinafter
provided. Upon and after entry into possession without
termination of this lease, the Landlord may relet the Premises
or any part thereof for the account of the Tenant to any
person, film or corporation other than the Tenant for such
rent, for such time and upon such terms as the Landlord shall
determine to be reasonable (in accordance with the then
prevailing market conditions and terms). In any such case, the
Landlord may make repairs, alterations and addition in or to
the Premises, and redecorate the same to the extent deemed by
the Landlord reasonably necessary or reasonably desirable, and
the Tenant shall, upon demand, pay the cost thereof, together
with the Landlord's reasonable expenses of the reletting. If
the consideration collected by the Landlord upon any such
reletting for the Tenant's account is not sufficient to pay
monthly the full amount of the Rent reserved in this lease,
together with the cost of repairs, alterations, additions,
redecorating and the Landlord's expenses, the Tenant shall pay
the Landlord the amount of each monthly deficiency upon
demand.
(e) If the Landlord elects to terminate this lease in
any of the contingencies specified in this Section, it being
understood that the Landlord may elect to terminate the lease
after and notwithstanding its election to terminate the
Tenant's right to possession as in Paragraph (b) of this
Section provided, the Landlord shall be entitled to recover as
damages, and not as a penalty, an amount equal to the Rent and
Additional Rent provided in this lease for the residue of the
stated term hereof, less the fair rental value of the Premises
for the residue of the stated term as the same accrues.
(f) Any and all property which may be removed from
the Premises by the Landlord pursuant to the authority of this
lease or of law, to which the Tenant is or may be entitled,
may be handled, removed or stored by the Landlord at the risk,
cost and expense of the Tenant, and the Landlord shall in no
event be responsible for the value, preservation or
safekeeping thereof. The Tenant shall pay to the Landlord upon
demand, any and all expenses incurred in such removal and all
storage charges against such property so long as the same
shall be in the
<PAGE> 16
Landlord's possession or under the Landlord's control. Any
such property of the Tenant not removed from the Premises or
retaken from storage by the Tenant within thirty (30) days
after the end of the term or of the Tenant's right to
possession of the Premises, however terminated, shall be
conclusively deemed to have been forever abandoned by the
Tenant and either may be retained by Landlord as its property
or may be disposed of in such manner as Landlord may see fit.
(g) The Tenant agrees that if it shall at any time
fail to make any payment or perform any other act on its part
to be made or performed under this lease, the Landlord may,
but shall not be obligated to, and after reasonable notice or
demand and without waiving, or releasing the Tenant from, any
obligation under this lease, make such payment or perform such
other act to the extent the Landlord may deem desirable, and
in connection therewith to pay expenses and employ counsel.
The Tenant agrees to pay a reasonable attorney's fee if legal
action is required to enforce performance by Tenant of any
condition, obligation or requirement hereunder. All sums to be
paid by the Landlord and all expenses in connection therewith,
together with interest at the prime rate in existence at the
time from the date of payment, shall be deemed additional rent
hereunder and payable at the time of any installment of Rent
thereafter becoming due and the Landlord shall have the same
rights and remedies for the non-payment thereof, or of any
other additional rent, as in the case of default in the
payment of Rent.
SUBORDINATION OF LEASE. The rights of the Tenant under this lease shall
be and are subject and subordinate at all times to all ground leases, and/or
underlying leases, if any, now or hereafter in force against the Property, and
to the lien of any mortgage now or hereafter in force against such leases and/or
the Property, and to all advances made or hereafter to be made upon the security
thereof, and to all renewals, modifications, consolidations, replacements and
extensions thereof. This Section is self-operative and no further instrument of
subordination shall be required. In confirmation of such subordination, Tenant
shall promptly execute such further instruments as may be requested by the
Landlord, provided Tenant receives reasonably satisfactory assurances that its
tenancy will not be disturbed so long as Tenant is not in default of its
obligations under the Lease. The Tenant hereby irrevocably appoints the Landlord
as attorney-in-fact for the Tenant with full power and authority to execute and
deliver in the name of the Tenant any such instrument or instruments. Tenant, at
the option of any mortgagee, agrees to attorn to such mortgagee in the event of
foreclosure sale or deed in lieu thereof.
COMMENCEMENT OF POSSESSION. If the Landlord shall be unable to give
possession of the Premises on the date of the commencement of the term hereof
because the Premises shall not be ready for occupancy, the Landlord shall not be
subject to any liability for the failure to give possession on said date. Under
such circumstances, unless the delay is the fault of the Tenant, the Rent shall
not commence until the Premises are available for occupancy by the Tenant, and
no such failure to give possession on the date of commencement of the term shall
in any wise affect the validity of this lease or the obligations of the Tenant
hereunder, nor shall same be construed in any wise to extend the term of this
lease. If, at the Tenant's request, the Landlord shall make the Premises
available to the Tenant prior to the date of commencement of the term for the
purpose of decorating, furnishing and equipping the Premises, the use of the
Premises for such work shall
<PAGE> 17
not create a landlord-tenant relationship between the parties nor constitute
occupancy of the Premises within the meaning of the next sentence, but the
provisions of Section III of this lease shall apply. If, with the consent of the
Landlord, the Tenant shall enter into occupancy of the Premises to do business
therein prior to the date of commencement of the term, provisions of this lease
shall apply and the Rent shall accrue and be payable at the first rate specified
in Paragraph (a) of Section II. from the date of occupancy.
NOTICES AND CONSENTS. All notices, demands, requests, consents or
approvals which may or are required to be given by either party to the other
shall be in writing and shall be deemed given when sent by United States
Certified or Registered Mail, postage prepaid, (a) if for the Tenant, addressed
to the Tenant at the Building, or at such other place as the Tenant may from
time to time designate by notice to the Landlord, or (b) if for the Landlord,
addressed to the office of the Landlord in the Building with a copy to Landlord
addressed to c/o John W. Galbreath & Co., 3401 West End Building, Nashville,
Tennessee 37203 or at such otherp lace as the Landlord may from time to time
designate by notice to the Tenant. All consents and approvals provided for
herein must be in writing to be valid. If the term Tenant as used in this lease
refers to more than one person, any notice, consent, approval, request, bill,
demand or statement, given as aforesaid to any one of such persons shall be
deemed to have been duly given to Tenant.
SPRINKLERS. If there now is or shall be installed in the Building a
"sprinkler system," and such system or any of its appliances shall be damaged or
injured or not in proper working order by reason of any act or omission of the
Tenant, Tenant's agents, servants, employees, licensees or visitors, the Tenant
shall forthwith restore the same to good working conditions at its own expense,
and if the Board of Fire Underwriters of Fire Insurance Exchange or any bureau,
department or official of the state or city government, require or recommend
that any changes, modifications, alterations or additional sprinkler heads or
other equipment be made or supplied by reason of the Tenant's business, or the
location of partitions, trade fixtures, or other contents, of the Premises, or
for any other reason, or if any such changes, modifications, alterations,
additional sprinkler heads or other equipment, become necessary to prevent the
imposition of a penalty or charge against the full allowance for a sprinkler
system in the fire insurance rate as fixed by said Exchange, or by any fire
insurance company, Tenant shall, at the Tenant's expense, promptly make and
supply such changes, modifications, alterations, additional sprinkler head or
other equipment.
NO ESTATE IN LAND. This contract and lease shall create the
relationship of landlord and tenant between Landlord and Tenant; no estate shall
pass out of Landlord, and Tenant has only a usufruct which is not subject to
levy and sale.
IN VALIDITY OF PARTICULAR PROVISIONS. If any clause or provision of
this lease is or becomes illegal, invalid or unenforceable because of present or
future laws or any rule or regulation of any governmental body or entity,
effective during its term, the intention of the parties hereto is that the
remaining parts of this lease shall not be affected thereby unless such
invalidity is, in the sold determination of Landlord, essential to the rights of
both parties in which event Landlord has the right to terminate this lease on
written notice to Tenant.
<PAGE> 18
WAIVER OF BENEFITS. Tenant waives the benefits of all existing and
future Rent Control Legislation and Statues and similar governmental rules and
regulations, whether in time of war or not, to the extent permitted by law.
MISCELLANEOUS TAXES. Tenant shall pay prior to delinquency all taxes
assessed against or levied upon its occupancy of the Premises, or upon the
fixture, furnishings, equipment and all other personal property of Tenant
located in the Premises, if nonpayment thereof shall give rise to a lien on the
real estate, and when possible Tenant shall cause said fixtures, furnishings,
equipment and other personal property to be assessed and billed separately from
the property of Landlord. In the event any or all of Tenant's fixtures,
furnishings, equipment and other personal property, or upon Tenant's occupancy
of the Premises, shall be assessed and taxed with the property of Landlord,
Tenant shall pay to Landlord its share of such taxes within ten (10) days after
delivery to Tenant by Landlord of a statement in writing setting forth the
amount of such taxes applicable to Tenant's fixtures, furnishings, equipment or
personal property.
SUBSTITUTE PREMISES. If the Premises contain an area of 2,000 square
feet or less, Landlord shall have the right at any time during the term hereof,
upon giving Tenant not less than sixty (60) days prior written notice, to
provide and furnish Tenant with space elsewhere in the Building of approximately
the same size as the Premises and remove and place Tenant in such space, with
Landlord to pay all reasonable costs and expenses incurred as a result of such
removal of Tenant. Should Tenant refuse to permit Landlord to move Tenant to
such new space at the end of said sixty (60) day period, Landlord shall have the
right to cancel and terminate this lease effective ninety (90) days from the
date of original notification by Landlord. If Landlord moves Tenant to such new
space, this lease and each and all of its terms, covenants and conditions shall
remain in full force and effect and be deemed applicable to such new space, and
such new space shall thereafter be deemed to be the Premises as though Landlord
and Tenant had entered into an express written amendment of this lease with
respect thereto.
BROKERAGE. Tenant represents and warrants that it has dealt with no
broker, agent or other person in connection with this transaction other than
John W. Galbreath & Co., and FVAA, Inc., and that no broker, agent or other
person brought about this transaction, and Tenant agrees to indemnity and hold
Landlord harmless from and against any claims by other broker, agent or other
person claiming a commission or other form of compensation by virtue of having
dealt with Tenant with regard to this leasing transaction. The provisions of
this Section shall survive the termination of this lease.
SPECIAL STIPULATION. (a) No receipt of money by the Landlord from the
Tenant after the termination of this lease or after the service of any notice or
after the commencement of any suit, or after final judgment for possession of
the Premises shall reinstate, continue or extend the term of this lease or
affect any such notice, demand or suit or imply consent for any action for which
Landlord's consent is required.
(b) No waiver of any default of the Tenant hereunder shall be
implied from any omission by the Landlord to take any action on account
of such default if such
<PAGE> 19
default persists or be repeated, and no express waiver shall affect any
default other than the default specified in the express waiver and that
only for the time and to the extent therein stated.
(c) The term "Landlord" as used in this lease, so far as
covenants or agreement on the part of the Landlord are concerned, shall
be limited to mean and include only the owner or owners of the
Landlord's interest in this lease at the time in question, and in the
event of any transfer or transfers of such interest the Landlord herein
named (and in case of any subsequent transfer, the then transferor)
shall be automatically freed and relieved from and after the date of
such transfer of all personal liability as respects the performance of
any covenants or agreements on the part of the Landlord contained in
this lease thereafter to be performed.
(d) It is understood that the Landlord may occupy portions of
the Building in the conduct of the Landlord's business. In such event,
all references herein to the other tenants of the Building shall be
deemed to include the Landlord as an occupant.
(e) The term "City" as used in this lease shall be understood
to mean the City in which the Property is located.
(f) All of the covenants of the Tenant hereunder shall be
deemed and constructed to be "conditions" as well as "covenants" as
though the words specifically expressing or importing covenants and
conditions were used in each separate instance.
(g) Tenant agrees that, upon receiving a written request from
Landlord, Tenant will with ten (10) days deliver a copy of this lease,
or if Landlord so requests, a memorandum of this lease, in recordable
form to Landlord. Tenant shall not record this lease or a memorandum
thereof without the prior written consent of Landlord.
(h) Neither party has made any representations or promises,
except as contained herein, or in some further writing signed by the
party making such representation or promise.
(i) In the absence of fraud, no person, firm or corporation,
or the heirs, legal representatives, successors and assigns,
respectively, thereof, executing this lease as agent, trustee or in any
other representative capacity shall ever be deemed or held individually
liable hereunder for any reason or cause whatsoever.
(j) In event of variation or discrepancy, the Landlord's
original copy of this lease shall control.
(k) Each provision hereof shall extend to and shall, as the
case may require, bind and inure to the benefit of the Landlord and
the Tenant and their
<PAGE> 20
respective heirs, legal representatives and successors, and assigns in
the event this lease has been assigned with the express, written
consent of the Landlord.
(l) If, because of any act or omission of Tenant, its
employees, agents, contractors, or subcontractors, any mechanic's lien
or other lien charge or order for the payment of money shall be filed
against Landlord, or against all or any portion of the Premises, or the
Building of which the Premises are a part, Tenant shall, at its own
cost and expense, cause the same to be discharged of record, or bonded,
within thirty (30) days after the filing thereof, and Tenant shall
indemnify the save harmless Landlord against and from all costs,
liabilities, suits, penalties, claims and demands, including reasonable
attorney's fee resulting therefrom.
(m) It is understood and agreed that this lease shall not be
binding until and unless all parties have signed it.
Exhibit A and Rider to Lease consisting of three pages are attached
hereto and become part of this lease.
IN WITNESS WHEREOF, Landlord and Tenant have respectively signed and
sealed this lease as of the day and year first above written.
THE EQUITABLE LIFE ASSURANCE
SOCIETY OF THE UNITED STATES
(Landlord)
By:
---------------------------------
RIVENDELL OF AMERICA, INC.
(Tenant)
ATTEST:
By:
- --------------------------- ---------------------------------
Secretary
<PAGE> 21
Exhibit A
FLOOR MAP OF PREMISES.
<PAGE> 22
Rider to Lease
RIDER TO LEASE, DATED __________________, 1989, between THE EQUITABLE
LIFE ASSURANCE SOCIETY OF THE UNITED STATES, as Landlord, and RIVENDELL OF
AMERICA, INC, as Tenant.
Base Rent. Tenant agrees to pay Landlord for the use of the Premises
in lawful money of the United States, a base monthly rent in accordance with
the following schedule:
<TABLE>
<CAPTION>
Year Annual Monthly
---- ------ -------
<S> <C> <C>
Year 1 $105,478.10 $ 8,789.84
Year 2 $175,024.10 $14,585.34
Year 3 $198,206.10 $16,517.18
Year 4 $209,797.10 $17,483.09
Year 5 $209,797.10 $17,483.09
</TABLE>
The base rent specified above shall be paid in accordance with the provisions of
Article II of this Lease.
Landlord shall abate the monthly installments of Base Rental for the
first six (6) months of the initial Term of this Lease.
Renewal Option. Tenant shall have the option to renew this Lease for
one (1) successive five (5) year term under the same terms and conditions of the
Lease, except that Base Rent for the renewal term shall be calculated at the
then current market rate for the Premises, provided however, that: (1) the
Tenant shall have notified the Landlord in writing of its election to renew the
term at least six (6) months prior to the commencement of such term, and (2) at
the time of such election and at the time of commencement of such terms, the
Tenant shall not be in default under any of the terms, covenants or conditions
of the Lease with respect to a matter as to which notice of default has been
given hereunder and which has not been remedied within the time limited in this
Lease and this Lease has not been terminated.
Right of First Refusal. Tenant shall have the continuing right of first
refusal for adjacent space on the Fifth Floor. When such space becomes
available, Landlord shall notify Tenant in writing that it is under firm
negotiations with a prospective tenant and should Tenant decide to lease said
space, Tenant may do so under the same terms and conditions as provided in this
Lease, including Base Rent, provided that Tenant notify Landlord in writing of
its desire to lease said additional space within five (5) business days after
receiving said written notification from Landlord.
<PAGE> 23
Improvements. Landlord shall, at its expense, furnish and install the
improvements shown on Tenant's plans and specifications, dated 9-28-89, and such
shall be completed on or before 11-1-89.
Moving Allowance. Landlord shall, upon the Commencement Date of this
Lease, provide Tenant with a moving expense allowance equal to $1.00 per
rentable square foot of the Premises.
Landlord's execution of this Lease is subject to the "buy out" and
cancellation of Hospital Corporation of America's existing lease.
Additional Space. Commencing February 1, 1990, Tenant shall lease an
additional 1,883 rentable square feet of adjacent space (See Exhibit A, attached
hereto) under the same terms and conditions of the Lease, including base rental
rate and abatement of monthly rent due on the additional space from February 1,
1990 through July 31, 1990. Tenant shall also receive an improvement allowance
not exceed $7.00 per rentable square foot of the additional space. This
expansion is subject to Landlord's receipt and execution of a cancellation
agreement with the tenant currently occupying said space.
THE EQUITABLE LIFE ASSURANCE
SOCIETY OF THE UNITED STATES
(Landlord)
By:__________________________________
RIVENDELL OF AMERICA, INC.
(Tenant)
By:__________________________________
<PAGE> 24
JOHN W. GALBREATH & CO.
Realtor
3401 West End Building
Nashville, Tennessee 37203
Leasing/Management Agent __________________, 1990
Rivendell of America Inc.
3401 West End Building
Nashville, Tennessee 37203
Gentlemen:
The following will confirm our agreement with respect to certain
storage space on the Fifth (5th) Floor of the 3401 West End Building in
Nashville, Tennessee, to be used by your firm for storage purposes, which is
leased to you under the following terms and conditions:
1. This Lease and rental provided for hereunder shall be on a
month-to-month basis commencing January 17, 1990.
2. The Base Rent for this space shall be $56.00 per month, payable in
advance, on the first day of each calendar month at the office of the Landlord
in Nashville, Tennessee. The Base Rent shall include Tenant's cost of
electricity so long as Tenant uses the premises solely for storage purpose.
Should Tenant use the space for any other purposes, Tenant shall be invoiced for
electricity consumption accordingly.
3. Tenant agrees to accept the premises demised herein in "as-is" broom
clean condition, and any improvements thereto shall be constructed with
Landlord's consent, at Tenant's sole expense, and Tenant shall pay for the same
within fifteen (15) days of being invoiced therefor by Landlord, and said amount
shall be deemed additional rent until paid.
4. Tenant shall have the option to cancel this Lease upon thirty days
prior written notice to landlord of its intention to cancel.
5. This space represent 112 sq. ft. rentable area.
<PAGE> 25
Please indicate your acceptance to the above agreement by signing and
returning the enclosed copy of this letter.
THE EQUITABLE LIFE ASSURANCE
SOCIETY OF THE UNITED STATES
Witness: (Landlord)
By:_________________________ By:____________________________
Witness:
RIVENDELL OF AMERICA, INC.
By:_________________________ (Tenant)
By:____________________________
SOUTHERN REGIONAL OFFICE: FIRST AMERICAN CENTER, NASHVILLE, TN. 615/255-4818
MAIN OFFICE: 180 EAST BROAD STREET; COLUMBUS, OHIO 43215 614/460-4444
<PAGE> 1
Exhibit 10.20
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE made this 21st day of February, 1990,
between the EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES (hereinafter
referred to as "Landlord") and RIVENDELL OF AMERICA, INC. (hereinafter referred
to as "Tenant").
W I T N E S S E T H :
WHEREAS, Landlord and Tenant have heretofore entered into a Lease
Agreement, September 26, 1989, for space on the 5th Floor of the 3401 West End
Building in Nashville, Tennessee; and
WHEREAS, Tenant now desires to lease an additional 1,883 rentable
square feet on the Fifth (5th) Floor, as stipulated in the Rider to Lease.
NOW THEREFORE, effective and commencing February 1, 1990, Landlord and
Tenant hereby agree to amend the Lease as follows:
A. Article I., Lessee, Line 5. Delete "approximately 11,591
rentable square feet" and insert in lieu thereof "approximately 13,474
rentable square feet".
B. Rider to Lease, Base Rent. At the end of this Section, add
the following language:
"For the 1,883 rentable square feet demised under the First
Amendment to Lease, Tenant shall pay to Landlord Base Rent in
accordance with the following schedule:
<TABLE>
<CAPTION>
Years Annual Monthly
----- ------ -------
<S> <C> <C>
February 1, 1990 through $17,135.30 $1,427.94
October 31, 1990
November 1, 1990 through $28,433.30 $2,369.44
October 31, 1991
</TABLE>
<PAGE> 2
<TABLE>
<S> <C> <C>
November 1, 1991 through $32,199.30 $2,683.28
October 31, 1992
November 1, 1992 through $34,082.30 $2,840.19
October 31, 1993
November 1, 1993 through $34,082.30 $2,840.19
October 31, 1994
</TABLE>
The base rent specified above shall be paid in accordance with the
provisions of Article II of this Lease.
Landlord shall abate the monthly installments of Base Rent for the
premises demised under the First Amendment to Lease from February 1,
1990 through July 31, 1990."
Within the premises demised under this First Amendment to Lease,
Landlord shall furnish and install the improvements shown on Tenant's plans and
specifications, provided however, that Landlord's total cost for such
improvements shall not exceed $13,181.00.
This Amendment is subject to Landlord's receipt and execution of a
cancellation agreement with the tenant currently occupying said space.
Except as above amended, all the terms and conditions of the Lease
shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment to Lease as of the day and year first above written.
Witnesses: THE EQUITABLE LIFE ASSURANCE SOCIETY
OF THE UNITED STATES
(Landlord)
By _______________________________ By _____________________________________
Witnesses: RIVENDELL OF AMERICA, INC.
(Tenant)
By _______________________________ By _____________________________________
<PAGE> 1
Exhibit 10.21
SECOND AMENDMENT TO LEASE
This Second Amendment to Lease Agreement (hereinafter the "Second Amendment") is
made and entered into this 1st day of March, 1993, by and between the Equitable
Life Assurance Society of the United States, as "Landlord", and Rivendell of
America, Inc., as "Tenant".
Whereas, Landlord and Tenant entered into a certain Lease dated September 26,
1989, and as subsequently amended on February 21, 1990, by that "First Amendment
to Lease" (all hereinafter referred to as the "Lease"), providing for the demise
by Landlord to Tenant of office space in a certain office building now commonly
known and designated as 3401 West End Avenue, Nashville, Tennessee (the
"Building"), all as more specifically set forth in the Lease; and
Whereas, Landlord and Tenant desire to expand the premises by 2,327 rentable
square feet (the "Expansion Space") located on the fifth floor of the East Wing
of the Building.
Now, therefore, in consideration of mutual covenants and undertakings
hereinafter set forth by and between the parties hereto, the Lease is hereby
Amended as follows:
1. Amendment of Article I. "Lessee" Section. Line 5 of the Section captioned
"Lessee" in Article I of the Lease shall be amended to provide the
following:
"approximately 15,801 rentable quare feet"
2. Amendment of Article II. "Net Rentable Area" Section. The Section captioned
"Net Rentable Area" of Article II of the Lease shall be amended to provide
the following:
"The Net Rentable Area of the Building shall, for all purposes, be
deemed to be 250,000 square feet, and the Net Rentable Area of the
Premises shall be deemed to be 15,801 square feet."
3. Amendment of Rider to Lease. "Base Rent" Section. The Section captioned
"Base Rent" in the Rider to Lease shall be amended to provide the
following:
"Tenant agrees to pay Landlord for the use of the Premises in lawful
money of the United States, Base Rent in accordance with the following
schedule:
<TABLE>
<CAPTION>
Term Annual Monthly
---- ------ -------
<S> <C> <C>
03/01/93-10/31/94 $281,111.40 $23,425.95
</TABLE>
The Base Rent specified above shall be paid in accordance with the
provisions of Article II of this Lese."
4. Tenant Improvements. Landlord shall provide the Expansion Space to Tenant
on an "As- Is, Where Is" basis. Tenant shall be responsible for all costs
associated with the refit and refurbishment of the Expansion Space
including but not limited to the construction, the
<PAGE> 2
construction documentation, permitting, etc. All work shall be done with
Landlord's consent and supervision.
Notwithstanding the foregoing, should Tenant refit the Expansion Space at
its cost, Landlord will reimburse Tenant for such reasonable costs to refit
the Expansion Space if Tenant extends its Lease on 15,801 rentable square
feet beyond the current expiration date of October 31, 1994.
5. Definitions. Definitions and terms used in this Second Amendment shall have
the same definitions set forth in the Lease.
6. Incorporation. This Second Amendment shall be incorporated into and made a
part of the Lease and all provisions of this Lease not expressly modified
or amended shall remain in full force and effect.
In witness whereof, the parties hereto have executed this Second Amendment to
Lease Agreement by proper person thereunto authorize to do so on the day and
year first written above.
LANDLORD:
EQUITABLE LIFE ASSURANCE
SOCIETY OF THE UNITED STATES
by: _______________________________
its: ______________________________
TENANT:
RIVENDELL OF AMERICA, INC.
by: _______________________________
its: ______________________________
<PAGE> 1
Exhibit 10.22
Third Amendment to Lease
This Third Amendment to Lease Agreement (hereinafter the "Third Amendment") is
made and entered into this 26th day of October, 1993, by and between 3401
ASSOCIATES, L.P., a Tennessee limited partnership, (successor-in-interest to the
Equitable Life Assurance Society of the United States) as "Landlord", and
VENDELL HEALTHCARE, INC. (Successor-in-interest to Rivendell of America, Inc.),
as "Tenant".
WHEREAS, Landlord and Tenant entered into a certain Lease dated September 26,
1989, and as subsequently amended on February 21, 1990, by the "First Amendment
to Lease" and on March 1, 1993, by that "Second Amendment to Lease" (all
thereinafter referred to as the "Lease"), providing for the demise by Landlord
to Tenant of office space in a certain office building now commonly known and
designated as 3401 West End Avenue, Nashville, Tennessee (the "Building"), all
as more specifically set forth in the Lease; and
WHEREAS, Landlord and Tenant desire to expand the premises by 3,329 rentable
square feet (the "Expansion Space") located on the fifth floor of the East Wing
of the Building.
NOW, THEREFORE, in consideration of mutual covenants and undertakings
hereinafter set forth by and between the parties hereto, the Lease is hereby
Amended as follows:
1. Amendment of Article I. "Lessee" Section. Line 5 of the Section captioned
"Lessee" in Article I of the Lease shall be amended to provide the
following:
"approximately 19,130 rentable square feet"
2. Amendment of Article I. "Term" Section. The Section captioned "Term" of
Article I of the Lease shall be deleted and the following substituted:
"The term of this lease shall commence on January 1, 1994, and shall
end on December 31, 1999 unless sooner terminated as provided herein,
to be occupied and used by the Tenant for general offices and for no
other purposes whatsoever. No easement for light or air is included in
the Premises."
3. Amendment of Article II. "Base Rental" Section. The Section captioned "Base
Rental (a)" of Article II of the Lease shall be deleted and the following
substituted:
"The Tenant shall pay to the Landlord as Base Rent, in legal tender,
at the Landlords office c/o Eakin & Smith, Inc., 2100 West End Avenue,
Suite 950, Nashville, Tennessee 37203, or as directed from time to
time by Landlord's notice, the annual sum of $306,080.00 payable in
equal monthly payments of $25,506.67 each, in advance promptly on the
first day of every calendar month of the term, except prorata, in
advance, for any partial month, without demand, the same being hereby
waived and without any set-off or deduction whatsoever. Interest at
the per
<PAGE> 2
annum rate of 6% will be charged retroactive to the first day of the
month for rents not paid by the tenth (10th) of the calendar month."
4. Amendment of Article II. "Net Rentable Area" Section. The Section captioned
"Net Rentable Area" of Article II of the Lease shall be deleted and the
following substituted:
"The Net Rentable Area of the Building shall, for all purposes, be
deemed to be 250,000 square feet, and the Net Rentable Area of the
Premises shall be deemed to be 19,130 square feet."
5. Amendment of the "Rider to Lease". The "Rider to Lease" and all terms
contained therein attached to the Lease are deleted in their entirety and
are of no further force and effect.
6. Option to Renew. Tenant shall have the option to renew this Lease for one
(1) successive five (5) year term under the same terms and conditions of
the Lease, except that Base rent for the renewal term shall be calculated
at the then current market rate for the Premises, provided however, that:
1) the Tenant shall have notified the Landlord in writing of its election
to renew the term at least six (6) months prior to the commencement of such
term, and 2) at the time of such election and at the time of commencement
of such term, the Tenant shall not be in default under any of the terms,
covenants or conditions of the Lease with respect to a matter as to which
notice of default has been given hereunder and which has not been remedied
within the time limited in this Lease and this Lease has not been
terminated.
7. Amendment of Article II. "Operating Expense" Section Paragraph (g). Line 2
of paragraph (g) of the section captioned "Operating Expense" in Article II
of the Lease shall be amended to provide the following:
"for at least forty-six (46) cars in the Parking Garage located adjacent to
the Building."
8. Amendment of Article V. "Brokerage" Section. The Section captioned
"Brokerage" of Article V of the Lease shall be amended by deleting the
reference in the second line to "other than John W. Galbreath Co. and FVAA,
Inc.", and substituting therefor, "other than Eakin & Smith, Inc. and
Fulton Armstrong Associates."
9. Tenant Improvements. Landlord shall prepare the Premises for Tenant and
shall be responsible for all costs associated with the refit and
refurbishment of the Premises pursuant to construction drawings to be
agreed upon by Landlord and Tenant and attached hereto as Exhibit "A".
Landlord shall further pay Tenant the sum of $8,700.00 at commencement of
the Term of this Third Amendment to compensate Tenant for its out-of-pocket
costs in preparing the expansion space taken in the Second Amendment.
8. Definitions. Definitions and terms used in this Third Amendment shall have
the same definitions set forth in the Lease.
<PAGE> 3
9. Incorporation. This Third Amendment shall be incorporated into and made a
part of the Lease and all provisions of this Lease not expressly modified
or amended shall remain in full force and effect.
In witness whereof, the parties hereto have executed this Third Amendment to
Lease Agreement by proper person thereunto authorize to do so on the day and
year first written above.
LANDLORD: TENANT:
3401 ASSOCIATES, L.P., acting by VENDELL HEALTHCARE, INC.
and through its Property Manager,
EAKIN & SMITH, INC.
By: _______________________________ By: ______________________________
Its: ______________________________ Its: _____________________________
<PAGE> 1
EXHIBIT 11--STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ended Three Months Ended Year Ended Year Ended
June 30, June 30, March 31, March 31,
1997 1996 1996 1995
--------- ------------------ ---------- ----------
<S> <C> <C> <C> <C>
PRIMARY
Average shares outstanding 6,949,856 5,418,525 5,368,309 4,861,166
Net effect of dilutive
stock options and
warrants-based on the
treasury stock method
using average market
price 225,417 344,844 227,758 183,991
---------- ---------- ---------- -----------
TOTAL 7,175,273 5,763,369 5,596,067 5,045,157
========== ========== ========== ==========
Net income $5,646,000 $ 853,000 $2,524,000 $1,904,000
========== ========== ========== ==========
Per share amount $ .79 $ .15 $ .45 $ .38
========== ========== ========== ==========
FULLY DILUTED
Average shares
Outstanding 6,949,856 5,418,525 5,368,309 4,861,166
Net effect of dilutive
stock options and
warrants-based on the
treasury stock method
using the higher of
ending or average
market price 225,417 361,796 319,320 254,230
---------- ---------- ---------- ----------
TOTAL 7,175,273 5,780,321 5,687,629 5,115,396
========== ========== ========== ==========
Net income $5,646,000 $ 853,000 $2,524,000 $1,904,000
========== ========== ========== ==========
Per share amount $ .79 $ .15 $ .44 $ .37
========== ========== ========== ==========
</TABLE>
The number of shares and per share amounts for the years ended March 31, 1996
and 1995 have been retroactively adjusted to reflect the Company's 1 for 2
reverse stock split, effected March 21, 1996.
65
<PAGE> 1
EXHIBIT 21--SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Percent State of
Owned Incorporation
------- --------------
<S> <C> <C>
Children's Comprehensive Services
of California, Inc. 100% California
d/b/a Advocate Schools
CCS/Altacare of Arkansas, Inc. 100% Arkansas
CCS/Bay County, Inc. 100% Florida
d/b/a Bay County Behavioral Health Center
CCS/Gulf Pines, Inc. 100% Texas
d/b/a Gulf Pines Behavioral Health Services
CCS/Lansing, Inc. 100% Michigan
d/b/a Rivendell Center for Behavioral Health
CCS of Montana, Inc. 100% Montana
CCS/Rivendell of Arkansas, Inc. 100% Arkansas
CCS/Rivendell of Kentucky, Inc. 100% Kentucky
CCS/Salt Lake City, Inc. 100% Utah
d/b/a Copper Hills Youth Center
</TABLE>
66
<PAGE> 1
EXHIBIT 23--CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (Nos. 33-33499 and 33-60773) pertaining to the Employee Stock Purchase
Plan, 1987 Employee Stock Option Plan, 1989 Stock Option Plan for Non-Employee
Directors, and 1986 Incentive Stock Plan of Children's Comprehensive Services,
Inc., and in the related Prospectuses of our report dated August 13, 1997, with
respect to the consolidated financial statements and schedule of Children's
Comprehensive Services, Inc. and subsidiaries included in the Annual Report
(Form 10-K) for the year ended June 30, 1997.
Ernst & Young LLP
Nashville, Tennessee
September 26, 1997
67
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 13,641
<SECURITIES> 0
<RECEIVABLES> 18,362
<ALLOWANCES> 2,361
<INVENTORY> 0
<CURRENT-ASSETS> 31,729
<PP&E> 42,229
<DEPRECIATION> 5,908
<TOTAL-ASSETS> 69,448
<CURRENT-LIABILITIES> 7,777
<BONDS> 11,655
0
0
<COMMON> 78
<OTHER-SE> 49,673
<TOTAL-LIABILITY-AND-EQUITY> 69,448
<SALES> 0
<TOTAL-REVENUES> 36,188
<CGS> 0
<TOTAL-COSTS> 30,842
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 321
<INCOME-PRETAX> 6,015
<INCOME-TAX> (8)
<INCOME-CONTINUING> 6,023
<DISCONTINUED> 0
<EXTRAORDINARY> 377
<CHANGES> 0
<NET-INCOME> 5,646
<EPS-PRIMARY> .79
<EPS-DILUTED> .79
</TABLE>
