<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
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.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Tennessee 62-1240866
- ------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3401 West End Ave., Suite 500, Nashville, Tennessee 37203
- --------------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (615) 383-0376
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
------ ------
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Common Stock, $ .01 Par Value, outstanding at November 9, 1998 - 7,340,608
shares.
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INDEX
CHILDREN'S COMPREHENSIVE SERVICES, INC.
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets -September 30, 1998
and June 30, 1998...............................................................................3
Consolidated Statements of Income --
Three month periods ended September 30, 1998 and 1997...........................................5
Consolidated Statements of Cash Flows --
Three months ended September 30, 1998 and 1997..................................................6
Notes to Consolidated Financial Statements --
September 30, 1998..............................................................................8
Item 2. Management's Discussion and
Analysis of Financial Condition and Results
of Operations..................................................................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk...............................................17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................................................18
SIGNATURES.......................................................................................................19
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
September 30, June 30,
(dollars in thousands) 1998 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,833 $ 20,067
Accounts receivable, net of allowance for doubtful accounts of
$2,176 at September 30 and $1,865 at June 30 18,690 17,809
Prepaid expenses 1,131 634
Other current assets 4,456 2,102
-------- --------
TOTAL CURRENT ASSETS 26,110 40,612
-------- --------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $8,384 at September 30 and $7,831
at June 30 46,162 37,162
DEFERRED TAX ASSETS, net 910 785
COST IN EXCESS OF NET ASSETS ACQUIRED, net 6,427 1,180
OTHER ASSETS AND DEFERRED CHARGES, net 490 462
-------- --------
TOTAL ASSETS $ 80,099 $ 80,201
======== ========
</TABLE>
3
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
September 30, June 30,
(dollars in thousands) 1998 1998
-------- --------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,378 $ 1,901
Notes payable - bank 1,020 -0-
Current portion - capital leases 45 44
Accrued employee compensation 3,850 5,192
Income taxes payable (631) 136
Accrued other expenses 3,630 3,300
Other liabilities and deferred revenue 1,334 172
-------- --------
TOTAL CURRENT LIABILITIES 13,626 10,745
LONG TERM DEBT AND CAPITAL LEASE
OBLIGATIONS 11,600 11,611
DEFERRED TAXES PAYABLE 2,635 -0-
OTHER LIABILITIES -0- 13
-------- --------
TOTAL LIABILITIES 27,861 22,369
-------- --------
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 7,340,608
shares at September 30 and 8,038,783 shares at June 30 73 80
Additional paid-in capital 51,567 57,820
Retained earnings (deficit) 598 (68)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 52,238 57,832
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 80,099 $ 80,201
======== ========
</TABLE>
See notes to consolidated financial statements.
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------------
(In thousands, except per share amounts) 1998 1997
-------- --------
<S> <C> <C>
Revenues:
Operating revenues $ 22,329 $ 19,706
Management fee income 871 935
-------- --------
TOTAL REVENUES 23,200 20,641
-------- --------
Operating expenses:
Employee compensation and benefits 14,502 12,624
Purchased services and other expenses 6,956 6,319
Depreciation and amortization 635 476
Related party rent 29 25
-------- --------
TOTAL OPERATING EXPENSES 22,122 19,444
-------- --------
Income from operations 1,078 1,197
Other (income) expense:
Interest expense 248 280
Interest income (214) (176)
Other income (57) -0-
-------- --------
TOTAL OTHER (INCOME) EXPENSE, NET (23) 104
-------- --------
Income before income taxes 1,101 1,093
Provision for income taxes 435 408
-------- --------
NET INCOME $ 666 $ 685
======== ========
Basic earnings per common share $ .09 $ .09
Diluted earnings per common share $ .09 $ .08
</TABLE>
See notes to consolidated financial statements.
5
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------
(dollars in thousands) 1998 1997
-------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 666 $ 685
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Depreciation 553 463
Amortization 82 13
Amortization of deferred loan costs 4 6
Provision for bad debts 102 12
Changes in operating assets and liabilities; net of effects from the purchase of
Ameris:
Accounts receivable 506 (484)
Prepaid expenses (435) (189)
Other current assets 150 (86)
Accounts payable 1,601 427
Accrued employee compensation (1,913) 46
Accrued other expenses 1,186 (54)
Income taxes payable (958) (1,431)
-------- -------
NET CASH PROVIDED (USED)BY OPERATING ACTIVITIES 1,544 (592)
INVESTING ACTIVITIES
Purchase of assets of Vendell Healthcare -0- (710)
Purchase of Ameris (11,652) -0-
Purchase of note receivable (2,500) -0-
Purchase of property and equipment (334) (525)
Proceeds from sale of property and equipment -0- -0-
(Increase) in other assets (42) (78)
-------- -------
NET CASH (USED) BY INVESTING ACTIVITIES $(14,528) $(1,313)
-------- -------
</TABLE>
6
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------
(dollars in thousands) 1998 1997
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<S> <C> <C>
FINANCING ACTIVITIES
Principal payments on revolving lines of credit, long-
term borrowings and capital lease obligations $ (1,763) $ (10)
Proceeds from revolving lines of credit and long-term borrowings 2,773 -0-
Common Stock repurchased (6,263) -0-
Proceeds from issuance of Common Stock, net 3 45
-------- --------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES (5,250) 35
-------- --------
(DECREASE) IN CASH AND CASH EQUIVALENTS (18,234) (1,870)
Cash and cash equivalents at beginning of period 20,067 13,649
-------- --------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 1,833 $ 11,779
======== ========
SUPPLEMENTAL INFORMATION
Income taxes paid $ 1,227 $ 1,856
Interest paid $ 237 $ 196
</TABLE>
See notes to consolidated financial statements.
7
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1998
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended September 30,
1998 are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 1999. For further information, refer to the
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 1998, the Company's prior
fiscal year end.
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.
NOTE B -- CONTINGENCIES
The Company is involved in various legal proceedings, none of which are expected
to have a material effect on the Company's financial position or results of
operations.
NOTE C -- EARNINGS PER COMMON SHARE
Effective December 31, 1997, the Company adopted Financial Accounting Standards
Board Statement ("SFAS") No. 128, Earnings per Share. Pursuant to this adoption,
the Company has restated earnings per share for the three months ended September
30, 1997. The computation of basic net income per common share is based on the
weighted average number of shares outstanding. Diluted net income per common
share includes the effect of common stock equivalents, consisting of dilutive
stock options and warrants.
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<PAGE> 9
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------------
1998 1997
---------- ----------
<S> <C> <C>
BASIC:
Average shares outstanding 7,698,959 7,930,606
========== ==========
Net income $ 666,000 $ 685,000
========== ==========
Per share amount $ .09 $ .09
========== ==========
DILUTED:
Average shares outstanding 7,698,959 7,930,606
Net effect of dilutive stock options and warrants 60,123 288,025
---------- ----------
TOTAL 7,759,082 8,218,631
========== ==========
Net income $ 666,000 $ 685,000
========== ==========
Per share amount $ .09 $ .08
========== ==========
</TABLE>
NOTE D -- MERGER AND ACQUISITION
The Company's financial statements have been restated to reflect the Company's
merger with Ventures Healthcare of Gainesville, Inc. ("Ventures") effective
January 1, 1998. The merger was accounted for as a pooling of interests. The
Company issued 146,580 shares of common stock pursuant to the transaction.
Revenue increased by $274,000 and net income by $47,000 for the three month
period ended September 30, 1997 due to the restatement for the Ventures
transaction.
In September 1998, the Company announced its acquisition of Ameris Health
Systems ("Ameris") for net consideration of approximately $11.7 million in cash.
Assets acquired at fair value totaled $16.1 million and liabilities assumed
totaled $4.4 million. Pursuant to this transaction, the Company also purchased a
note receivable for $2.5 million in cash. The payment of this note is guaranteed
by $2.5 million cash escrowed in conjunction with this transaction. Ameris,
through its wholly owned subsidiary, American Clinical Schools, Inc., operates
residential juvenile sex offender programs in Tennessee and Alabama with an
aggregate capacity of 168 licensed beds. In addition, Ameris has 60 beds under
development in Pennsylvania, a state in which CCS has not previously operated.
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NOTE E - COMPREHENSIVE INCOME
As of July 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income", which establishes the standards for the reporting and display of
comprehensive income and its components. This Statement requires that all items
that are components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements. During
the first quarter of fiscal 1999 and 1998, the Company had no items of other
comprehensive income.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company's merger with Ventures Healthcare of Gainesville, Inc. ("Ventures"),
effective January 1, 1998, was accounted for as a pooling of interests.
Accordingly, the Company's financial statements for the period ended September
30, 1997 have been restated to reflect this transaction.
The following discussion and this Quarterly Report on Form 10-Q contain
forward-looking statements and should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere herein.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. There are a
number of important factors that could cause the Company's actual results to
differ materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth under "Business - Risk
Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1998. 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.
General
As of September 30, 1998, the Company was providing education, treatment and
juvenile justice services to approximately 3,100 at risk and troubled youth and
100 adults either directly or through management contracts. It currently offers
these services through the operation and management of nonresidential
specialized education programs and day treatment programs and both open and
secured residential treatment centers in 11 states. Revenues are recognized as
services are rendered. The Company's non-residential programs, which
historically have generated higher operating margins than the Company's
residential facilities, generally receive revenues based on per diem rates. The
Company's residential facilities generally receive revenues under either fixed
fee contracts, at per diem rates or on a cost reimbursed basis.
In September 1998, the Company announced its acquisition of Ameris Health
Systems ("Ameris") for net consideration of approximately $11.7 million in cash.
Assets acquired at fair value totaled $16.1 million and liabilities assumed
totaled $4.4 million. Pursuant to this transaction, the Company also purchased a
note receivable for $2.5 million in cash. The payment of this note is guaranteed
by $2.5 million cash escrowed in conjunction with this transaction. Ameris,
through its wholly owned subsidiary, American Clinical Schools, Inc., operates
residential juvenile sex offender programs in Tennessee and Alabama with an
aggregate capacity of 168 licensed beds. In addition, Ameris has 60 beds under
development in Pennsylvania, a state in which CCS has not previously operated.
The Company receives management fee income from services provided to third
parties, including medical/surgical facilities, community mental health centers
and other behavioral health providers, for management of day treatment programs,
residential treatment centers, behavioral units in medical/surgical facilities
and free-standing behavioral facilities. The Company also receives management
fee income from Helicon, Incorporated ("Helicon"), a Section 501(c)(3)
not-for-profit corporation, for consulting, management and marketing services
rendered pursuant to a Consulting and Marketing Agreement, effective as of
August 1992, by and between Helicon and the Company (the "Helicon Agreement").
As of September 30, 1998, 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 its programs. Pursuant to the
Helicon Agreement, which expires September 1, 1999, the Company is entitled to
receive for these services management fee income in an amount equal to 6% of the
monthly gross revenues of Helicon's programs. The payment of these management
fees, however, is subordinated in right of payment to amounts payable by Helicon
to fund its programs. During the periods reported herein, the Company recognized
all
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of the management fee income to which it was entitled. However, for certain
periods prior to fiscal 1997, the Company did not recognize all of the
management fee income to which it was entitled due to the inability of Helicon
to pay. As of September 30, 1998, unpaid management fees, lease payments and
advances, plus interest, due the Company from Helicon totaled approximately
$7,576,000. The Company has fully reserved this amount. Future payments received
from Helicon on this amount, if any, will be recognized by the Company on the
cash basis. At September 30, 1998, 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."
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.
Purchased services and other expenses include all expenses not otherwise
presented separately in the Company's statements of income. Significant
components of these expenses at the operating level include items such as
professional fees and contracted services, 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.
At June 30, 1998, the Company had regular tax net operating loss carryforwards
of $2,449,000 which expire from 2002 through 2010. Utilization of a portion of
the net operating loss carryforwards is subject to an annual limitation pursuant
to Internal Revenue Code Section 382.
The Company's quarterly results may fluctuate significantly as a result of a
variety of factors, including the timing of the opening of new programs. When
the Company opens a new program, the program may be unprofitable until the
program population, and net revenues contributed by the program, approach
intended levels, primarily because the Company staffs its programs in advance 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.
During the three month period ended September 30, 1998, the Company:
- Completed the acquisition of a company with 168 beds in Tennessee and
Alabama and 60 beds under development in Pennsylvania;
- Signed a management contract for a 40 bed residential treatment center
in El Paso, Texas, 14 beds of which are currently operational;
- Signed a management contract for a 24 bed residential program in
Hawaii; and
- Signed contracts with three school districts in Kentucky to provide a
30-chair alternative school.
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Results of Operations
The following table sets forth, for the periods indicated, the percentage
relationship to the Company's total revenues of certain items in the Company's
statements of income:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------
1998 1997
------ ------
<S> <C> <C>
Operating revenues 96.2% 95.5%
Management fee income 3.8 4.5
------ ------
TOTAL REVENUES 100.0 100.0
------ ------
Employee compensation and benefits 62.5 61.2
Purchased services and other expenses 30.0 30.6
Depreciation and amortization 2.8 2.3
Related party rent 0.1 0.1
------ ------
TOTAL OPERATING EXPENSES 95.4 94.2
------ ------
Income from operations 4.6 5.8
Other (income) expense:
Interest expense 1.0 1.4
Interest income (0.9) (0.9)
Other income (0.3) (0.0)
Provision for income taxes 1.9 2.0
------ ------
NET INCOME 2.9% 3.3%
====== ======
</TABLE>
Three Months Ended September 30, 1998 versus September 30, 1997
Operating revenues for the three months ended September 30, 1998 increased
$2,623,000 or 13.3%, to $22,329,000 as compared to $19,706,000 for the three
months ended September 30, 1997. The increase in operating revenues is primarily
attributable to new programs and to the acquisitions of Chad Youth Enhancement
Center and Ameris consummated in February and September of 1998, respectively.
The increase is also due to increased utilization in certain programs.
Management fee income decreased $64,000 for the three months ended September 30,
1998 to $871,000 from $935,000 for the three month period ended September 30,
1997. Management fee income recognized under the Helicon Agreement for the three
months ended September 30, 1998 increased $12,000 to $335,000 from $323,000 for
the three months ended September 30, 1997. Other management fee income declined
primarily as the result of one contract acquired from Vendell which was not
renewed.
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Total revenues for the three months ended September 30, 1998 increased
$2,559,000, or 12.4%, to $23,200,000 as compared to $20,641,000 for the three
months ended September 30, 1997 as a result of the factors described above.
Employee compensation and benefits for the three months ended September 30, 1998
increased $1,878,000, or 14.9%, to $14,502,000, as compared to $12,624,000 for
the three months ended September 30, 1997. As a percentage of total revenues,
employee compensation and benefits increased from 61.2% for the three months
ended September 30, 1997 to 62.5% for the three months ended September 30, 1998.
The increase in employee compensation and benefits over the same period in the
prior year results primarily from the Company's growth, including acquisitions.
The increase in employee compensation and benefits as a percent of revenue over
the same period in the prior year results primarily from the effect of a
reduction in revenue days in California and intentional overstaffing at the
Montana facility.
Purchased services and other expenses for the three months ended September 30,
1998 increased $637,000, or 10.1%, to $6,956,000, as compared to $6,319,000 for
the three months ended September 30, 1997. As a percentage of total revenues,
purchased services and other expenses decreased to 30.0% for the three months
ended September 30, 1998 from 30.6% for the three months ended September 30,
1997. The increase in purchased services and other expenses over the same period
in the prior year is attributed primarily to the Company's growth, including
acquisitions. The decrease in purchased services and other expenses as a percent
of revenue over the same period in the prior year results primarily from the
effect of increased utilization at certain facilities.
Depreciation and amortization for the three months ended September 30, 1998
increased $159,000, or 33.4%, to $635,000 as compared to $476,000 for the three
months ended September 30, 1997. The increase in depreciation and amortization
compared to the same period in the prior year is primarily attributable to the
Company's acquisitions.
Income from operations for the three months ended September 30, 1998 decreased
$119,000, or 9.9%, to $1,078,000 as compared to $1,197,000 for the three months
ended September 30, 1997, and decreased as a percentage of total revenues to
4.6% for the three months ended September 30, 1998 from 5.8% for the three
months ended September 30, 1997 as a result of the factors described above.
Interest expense for the three months ended September 30, 1998 decreased $32,000
to $248,000 as compared to $280,000 for the three months ended September 30,
1997. The decrease in interest expense over the same period in the prior year is
attributed principally to a reduction in the Company's effective interest rate.
Interest income increased $38,000 to $214,000 for the three months ended
September 30, 1998 as compared to $176,000 for the three months ended September
30, 1997. The increase in interest income over the same period in the prior year
is attributable primarily to the increase in cash available for investment
during the period.
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Other income for the three months ended September 30, 1998 was $57,000,
consisting of the recognition of previously deferred gain on the sale of
property concurrent with the collection of the note receivable related to the
sale.
Provision for income tax expense for the three months ended September 30, 1998
increased $27,000 to $435,000 from $408,000 for the three months ended September
30, 1997. The increase in provision for income tax expense compared to the same
period in the prior year results primarily from an increase in the Company's
effective tax rate.
Effective December 31, 1997, the Company adopted SFAS No. 128, Earnings per
Share. Pursuant to this adoption, the Company has restated earnings per share
for the three months ended September 30, 1997.
Liquidity and Capital Resources
Cash provided by operating activities for the three months ended September 30,
1998 was $1,547,000 on net income of $666,000 as compared to cash used of
$592,000 on net income of $685,000 for the three months ended September 30,
1997. Working capital at September 30, 1998 was $12,484,000, as compared to
$29,867,000 at June 30, 1998.
Cash used by investing activities was $14,531,000 for the three months ended
September 30, 1998 as compared to $1,313,000 for the three months ended
September 30, 1997, due primarily to the Ameris acquisition.
Cash of $5,250,000 was used by financing activities for the three months ended
September 30, 1998, due primarily to the repurchase of 700,000 shares of the
Company's Common Stock, offset by a net increase in the amount outstanding under
the Company's line of credit. Cash of $35,000 was provided by financing
activities for the three months ended September 30, 1997.
The Company has a loan and security agreement with First American National Bank
("FANB"), the term of which extends through November 1, 1999. 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. In September 1998, availability under the Company's line of credit
was expanded to $23,000,000. The $10,000,000 expansion matures in January 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. At September 30, 1998, the
outstanding balance under the line of credit was $12,470,000.
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
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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.
Helicon has also entered into a $1 million line of credit with FANB which
expired on October 31, 1998. This line of credit has been expanded to $1.5
million and renewed until October 31, 1999. As a condition to this line of
credit, the Company agreed to guarantee Helicon's performance under such line of
credit. At September 30, 1998, the outstanding amount under Helicon's line of
credit was $458,000.
Capital expenditures during the next twelve months are expected to include the
replacement of existing capital assets as necessary, as well as the costs
associated with the opening of new programs and facilities, including the
possible purchase of certain real estate and improvements. The Company also may
consider other possible strategic acquisitions, including acquisitions of
existing programs and other companies engaged in youth services or related
businesses.
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, cash on hand, amounts available
under its line of credit and outside financing sources 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.
The Year 2000 ("Y2K") issue involves the inability of some computers or
microprocessors to correctly handle the century change that will occur at
midnight, December 31, 1999. The Y2K issue, which also includes a number of
related problems, affects nearly every business in the world. The Company's
assessment of potential Y2K problems has focused on three areas: (i) the
Company's information technology ("IT") systems, (ii) its non-IT systems, and
(iii) its relationships with third parties. The Company has substantially
completed an initial assessment of its IT systems' exposure to the Y2K-related
problems, and currently believes that its main IT systems, which include
billing, accounting, and payroll systems, are Y2K compliant. Although the
Company has not tested the Y2K compliance of such systems, such systems have
been represented as Y2K compliant by the vendors thereof. Certain less-critical
IT systems as well as certain individual computers and associated software are
not currently Y2K compliant, however, the Company expects to replace these
systems or make them Y2K compliant as needed.
The Company has also assessed the exposure of its non-IT systems (such as time
clocks) to Y2K problems, and does not believe that Y2K issues related to non-IT
systems will have a material adverse effect on the Company's results of
operations, financial position or cash flows.
The Company has recently begun an initial assessment of the Y2K readiness of its
payors and other third parties with whom it does business, and expects to more
fully focus on this aspect of its Y2K compliance during fiscal 1999. The Company
expects to contact all material payors and other third
16
<PAGE> 17
parties during calendar 1998 in an attempt to minimize the effect of any Y2K
issues that may arise. Despite efforts that the Company may make in this regard,
there can be no assurance that the systems of other companies with whom it does
business will be compliant.
To date, the Company has incurred no material expenses related to the Y2K
compliance of its IT and non-IT systems. The Company believes that the costs
associated with finalizing the Y2K compliance of such systems will not
materially increase the Company's future capital expenditures.
The Company believes that its most likely worst case Y2K scenario is that some
of its material third party payors will not be Y2K compliant and will have
difficulty processing and paying the Company's bills, which could affect the
Company's cash flows. The Company intends to develop a contingency plan to
address this scenario, and expects that such a plan would involve assuring the
Company's access to additional capital through, for example, a line of credit.
The Company expects to develop this contingency plan during fiscal 1999.
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 June 1997 the FASB 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. This Statement is
effective for financial statements for the Company's fiscal year which began
July 1, 1998; however the Statement is not required to be applied to interim
financial statements in the initial year of its application. The adoption of the
statement will affect only disclosures provided and will have no impact on the
Company's consolidated balance sheets or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
At September 30, 1998, the Company had only cash equivalents, invested in high
grade, very short term securities, which are not typically subject to material
market risk.
17
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)The following exhibits are included herein:
(27) Financial Data Schedule. (SEC use only)
(b) Reports on Form 8-K:
Form 8-K Reporting Date -- August 12, 1998
Items reported - Item 5. Other Events.
The Company reported approval of a plan to repurchase up to 500,000 shares of
the Company's common stock.
Form 8-K Reporting Date -- September 24, 1998
Items reported - Item 2. Acquisition or disposition of assets.
The Company reported the acquisition of Ameris Health Systems, Inc. for
cash and assumption of liabilities.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHILDREN'S COMPREHENSIVE SERVICES, INC.
(Registrant)
Date: November 16, 1998 /s/ WILLIAM J BALLARD
--------------------------------------------
William J Ballard
Chairman and Chief Executive Officer
Date: November 16, 1998 /s/ DONALD B. WHITFIELD
--------------------------------------------
Donald B. Whitfield
Vice President of Finance, Chief Financial
Officer (Principal Financial and Accounting
Officer)
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CHILDRENS COMPREHENSIVE SERVICES INC FOR THE THREE
MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,833
<SECURITIES> 0
<RECEIVABLES> 20,866
<ALLOWANCES> 2,176
<INVENTORY> 0
<CURRENT-ASSETS> 26,110
<PP&E> 54,546
<DEPRECIATION> 8,384
<TOTAL-ASSETS> 80,099
<CURRENT-LIABILITIES> 13,626
<BONDS> 11,600
0
0
<COMMON> 73
<OTHER-SE> 52,165
<TOTAL-LIABILITY-AND-EQUITY> 80,099
<SALES> 0
<TOTAL-REVENUES> 23,200
<CGS> 0
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<OTHER-EXPENSES> 22,122
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<INTEREST-EXPENSE> 248
<INCOME-PRETAX> 1,101
<INCOME-TAX> 435
<INCOME-CONTINUING> 666
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<NET-INCOME> 666
<EPS-PRIMARY> .09
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