<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(MARK ONE) FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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.
----------------------------------------------------
(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
--------------
Registrant's former address:
805 South Church Street, Murfreesboro, Tennessee 37130
- -------------------------------------------------
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 February 10, 1998 - 7,969,222
shares.
- ---------------------------------------------------------------------------
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INDEX
CHILDREN'S COMPREHENSIVE SERVICES, INC.
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets -- December 31, 1997
and June 30, 1997...............................................................................3
Consolidated Statements of Income --
Three and six month periods ended December 31, 1997 and 1996....................................5
Consolidated Statements of Cash Flows --
Six months ended December 31, 1997 and 1996.....................................................6
Notes to Consolidated Financial Statements --
December 31, 1997...............................................................................8
Item 2. Management's Discussion and
Analysis of Financial Condition and Results
of Operations...................................................................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................17
PART II. OTHER INFORMATION
Item 4. Matters submitted to a vote of security holders................................................18
Item 6. Exhibits and Reports on Form 8-K...............................................................18
SIGNATURES.......................................................................................................19
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
December 31, June 30,
(dollars in thousands) 1997 1997
-------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $12,829 $13,641
Accounts receivable, net of allowance for doubtful
accounts of $1,807 at December 31 and $2,361 at
June 30 17,382 16,001
Prepaid expenses 1,021 604
Other current assets 1,664 1,483
------- -------
TOTAL CURRENT ASSETS 32,896 31,729
PROPERTY AND EQUIPMENT, net of
accumulated depreciation of $6,846 at December 31
and $5,908 at June 30 36,313 36,321
DEFERRED TAX ASSETS, net of valuation 614 614
COST IN EXCESS OF NET ASSETS ACQUIRED, net 359 372
OTHER ASSETS AND DEFERRED CHARGES, net 217 412
------- -------
TOTAL ASSETS $70,399 $69,448
======= =======
</TABLE>
3
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
December 31, June 30,
(dollars in thousands) 1997 1997
-------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,578 $ 1,620
Current portion - capital leases 42 40
Accrued employee compensation 3,970 3,062
Income taxes payable (802) 143
Accrued other expenses 1,943 2,744
Deferred revenue 181 168
------- -------
TOTAL CURRENT LIABILITIES 6,912 7,777
LONG TERM DEBT AND CAPITAL LEASE
OBLIGATIONS 11,634 11,655
OTHER LIABILITIES -0- 265
------- -------
TOTAL LIABILITIES 18,546 19,697
------- -------
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
7,821,675 shares at December 31 and 7,769,656 shares
at June 30 78 78
Additional paid-in capital 56,677 56,618
Accumulated (deficit) (4,902) (6,945)
------- -------
TOTAL SHAREHOLDERS' EQUITY 51,853 49,751
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $70,399 $69,448
======= =======
</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. Six Months Ended
December 31, December 31,
-------------------------------------------
(In thousands, except per share amounts) 1997 1996 1997 1996
-------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Operating revenues $ 22,245 $ 7,858 $ 41,951 $ 13,996
Management fee income 568 306 1,229 616
-------- ------- -------- --------
TOTAL REVENUES 22,813 8,164 43,180 14,612
-------- ------- -------- --------
Operating expenses:
Employee compensation and benefits 13,616 4,955 26,145 9,130
Purchased services and other expenses 6,508 1,658 12,716 3,019
Depreciation and amortization 507 229 983 438
Related party rent 26 26 51 51
-------- ------- -------- --------
TOTAL OPERATING EXPENSES 20,657 6,868 39,895 12,638
-------- ------- -------- --------
Income from operations 2,156 1,296 3,285 1,974
Other (income) expense:
Interest expense 227 12 486 211
Interest income (157) (272) (333) (453)
Other income (217) (3) (217) (7)
-------- ------- -------- --------
TOTAL OTHER (INCOME) EXPENSE, NET (147) (263) (64) (249)
-------- ------- -------- --------
Income before income taxes and extraordinary
item 2,303 1,559 3,349 2,223
Provision (benefit) for income taxes 898 (1,254) 1,306 (1,077)
-------- ------- -------- --------
Income before extraordinary item 1,405 2,813 2,043 3,300
Extraordinary item:
Loss on early extinguishment of debt, net
of income tax benefit -- 337 -- 337
-------- ------- -------- --------
NET INCOME $ 1,405 $ 2,476 $ 2,043 $ 2,963
======== ======= ======== ========
Basic earnings per common share:
Income before extraordinary item $ .18 $ .40 $ .26 $ .49
Extraordinary item -- (.05) -- (.05)
-------- ------- -------- --------
NET INCOME $ .18 $ .35 $ .26 $ .44
======== ======= ======== ========
Diluted earnings per common share:
Income before extraordinary item $ .17 $ .39 $ .25 $ .48
Extraordinary item -- (.05) -- (.05)
-------- ------- -------- --------
NET INCOME $ .17 $ .34 $ .25 $ .43
======== ======= ======== ========
</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>
Six Months Ended
December 31,
---------------------------
(dollars in thousands) 1997 1996
---------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,043 $ 2,963
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Increase in deferred tax assets - 0 - (1,783)
Depreciation 940 404
Amortization 43 34
Amortization of deferred loan costs 17 19
Provision for bad debts 87 (35)
Loss on early extinguishment of debt - 0 - 119
Other - 0 - (7)
Changes in operating assets and liabilities:
Accounts receivable (1,467) (1,831)
Prepaid expenses (417) (11)
Other current assets 36 (250)
Accounts payable (42) 82
Accrued employee compensation 909 443
Accrued other expenses (344) (26)
Income taxes payable (945) (157)
----------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 860 (36)
INVESTING ACTIVITIES
Purchase of assets of Vendell Healthcare (710) - 0 -
Purchase of property and equipment (932) (509)
Proceeds from sale of property and equipment - 0 - 14
(Increase) in other assets (69) (138)
----------- ---------
NET CASH (USED) BY INVESTING ACTIVITIES $ (1,711) $ (633)
----------- ---------
</TABLE>
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
---------------------------
(dollars in thousands) 1997 1996
---------------------------
<S> <C> <C>
FINANCING ACTIVITIES
Principal payments on revolving lines of credit, long-
term borrowings and capital lease obligations $ (20) $ (6,206)
Proceeds from issuance of Common Stock, net 59 23,415
----------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 39 17,209
----------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (812) 16,540
Cash and cash equivalents at beginning of period 13,641 3,318
----------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,829 $ 19,858
=========== =========
SUPPLEMENTAL INFORMATION
Income taxes paid $ 2,175,000 $ 587,000
Interest paid $ 411,000 $ 249,000
</TABLE>
See notes to consolidated financial statements.
7
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
December 31, 1997
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Certain reclassifications have been made in the consolidated
financial statements for the three and six month periods ended December 31,
1996, to conform to the presentation of the financial statements for the three
and six month periods ended December 31, 1997. Operating results for the three
and six month periods ended December 31, 1997 are not necessarily indicative of
the results that may be expected for the fiscal year ending June 30, 1998. 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, 1997, 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 all prior periods. 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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The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
----------------------------------------------------------
1997 1996 1997 1996
----------------------------------------------------------
<S> <C> <C> <C> <C>
BASIC:
Average shares outstanding 7,820,635 7,126,444 7,802,330 6,674,737
========== ========== ========== ==========
Net income $1,405,000 $2,476,000 $2,043,000 $2,963,000
========== ========== ========== ==========
Per share amount $ .18 $ .35 $ .26 $ .44
========== ========== ========== ==========
DILUTED:
Average shares outstanding 7,820,635 7,126,444 7,802,330 6,674,737
Net effect of dilutive stock
options and warrants 311,671 199,647 284,045 234,594
---------- ---------- ---------- ----------
TOTAL 8,132,306 7,326,091 8,086,375 6,909,331
========== ========== ========== ==========
Net income $1,405,000 $2,476,000 $2,043,000 $2,963,000
========== ========== ========== ==========
Per share amount $ .17 $ .34 $ .25 $ .43
========== ========== ========== ==========
</TABLE>
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
During June 1997, the Company completed the acquisition of substantially all the
assets of Vendell Healthcare, Inc., and its subsidiaries ("Vendell
acquisition"). The results for the comparable fiscal 1997 period do not include
the results of this acquisition.
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, 1997. 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 December 31, 1997, the Company was providing education, treatment and
juvenile justice services to approximately 2,900 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. These services were provided
directly or through the Company's management contract with Helicon, Incorporated
("Helicon"), a Section 501(c)(3) not-for-profit corporation. Revenues under
these contracts are recognized as services are rendered. The Company's
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.
The Company receives management fee income from Helicon for consulting,
management and marketing services rendered pursuant to a Consulting and
Marketing Agreement, effective as of August 1992, by and between Helicon and the
Company (the "Helicon agreement"). As of December 31, 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 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 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
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<PAGE> 11
management fee income to which it was entitled due to the inability of Helicon
to pay these amounts. There can be no assurance that the Company will recognize
all of the management fee income due under the agreement in the future. As of
December 31, 1997, unpaid management fees, lease payments and advances, plus
interest, due the Company from Helicon totaled approximately $7,194,000. Based
on the current level of operations being maintained by Helicon, the Company does
not anticipate collecting any of this amount. The Company has fully reserved
this amount, and future payments received from Helicon on this amount, if any,
will be recognized by the Company on the cash basis. During the quarter ended
December 31, 1997, the Company received a one time payment of $217,000 from
Helicon in payment of previously reserved amounts due for management fees. This
receipt is reflected in other income for the quarter. The Company has also
guaranteed Helicon's obligations under a bank line of credit in the amount of
$1,000,000. As of December 31, 1997, $33,000 was outstanding under this line of
credit. See "-Liquidity and Capital Resources." The Company also receives
management fee income from services provided to other health care providers for
management of behavioral units or facilities pursuant to contracts.
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.
The Company's effective tax rate for the three and six month periods ended
December 31, 1996 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. At June
30, 1997, the Company's prior fiscal and tax year end, the Company had 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 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 December 31, 1997, the Company opened the
following programs:
- A 96 bed secure residential facility for juvenile offenders in Bexar
County, Texas;
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- An alternative education program for approximately 100 children in
Tarrant County, Texas; and
- A 75 chair special education program in Ontario, California.
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 Six Months Ended
December 31, December 31,
------------------------------------------------------
1997 1996 1997 1996
------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues 97.5% 96.3% 97.2% 95.8%
Management fee income 2.5 3.7 2.8 4.2
------ ------ ------ ------
TOTAL REVENUES 100.0 100.0 100.0 100.0
------ ------ ------ ------
Employee compensation and benefits 59.7 60.7 60.5 62.5
Purchased services and other expenses 28.5 20.3 29.5 20.7
Depreciation and amortization 2.2 2.8 2.3 3.0
Related party rent 0.1 0.3 0.1 0.3
------ ------ ------ ------
TOTAL OPERATING EXPENSES 90.5 84.1 92.4 86.5
------ ------ ------ ------
Income from operations 9.5 15.9 7.6 13.5
Other (income) expense:
Interest expense 1.0 0.1 1.1 1.4
Interest income (0.7) (3.3) (0.8) (3.1)
Other income (0.9) (0.0) (0.4) (0.0)
Provision for income taxes 3.9 (15.4) 3.0 (7.4)
Extraordinary item, net of income tax -- 4.2 -- 2.3
------ ------ ------ ------
NET INCOME 6.2% 30.3% 4.7% 20.3%
====== ====== ====== ======
</TABLE>
Three Months Ended December 31, 1997 versus December 31, 1996
Operating revenues for the three months ended December 31, 1997 increased
$14,387,000 or 183.1%, to $22,245,000 as compared to $7,858,000 for the three
months ended December 31, 1996. Approximately $12,300,000 of the increase in
operating revenues is attributable to the Vendell acquisition. The increase is
also due to increased utilization in certain programs, other acquisitions and
the opening of new programs during the current and preceding three quarters.
Management fee income increased $262,000 for the three months ended December 31,
1997 to $568,000 from $306,000 for the three month period ended December 31,
1996. Management fee
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income recognized under the Helicon Agreement for the three months ended
December 31, 1997 increased $15,000 to $321,000 from $306,000 for the three
months ended December 31, 1996. Other management fee income, attributable to the
Vendell acquisition, accounted for the remainder of the increase.
Total revenues for the three months ended December 31, 1997 increased
$14,649,000, or 179.4%, to $22,813,000 as compared to $8,164,000 for the three
months ended December 31, 1996 as a result of the factors described above.
Employee compensation and benefits for the three months ended December 31, 1997
increased $8,661,000, or 174.8%, to $13,616,000, as compared to $4,955,000 for
the three months ended December 31, 1996. As a percentage of total revenues,
employee compensation and benefits decreased from 60.7% for the three months
ended December 31, 1996 to 59.7% for the three months ended December 31, 1997.
The increase in employee compensation and benefits over the same period in the
prior year results primarily from the Company's growth, including the Vendell
acquisition. The decrease in employee compensation and benefits as a percent of
revenue over the same period in the prior year results primarily from the effect
of the Vendell acquisition.
Purchased services and other expenses for the three months ended December 31,
1997 increased $4,850,000, or 292.5%, to $6,508,000, as compared to $1,658,000
for the three months ended December 31, 1996. As a percentage of total revenues,
purchased services and other expenses increased to 28.5% for the three months
ended December 31, 1997 from 20.3% for the three months ended December 31, 1996.
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 the
Vendell acquisition. The increase 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 the Vendell acquisition.
Depreciation and amortization for the three months ended December 31, 1997
increased $278,000, or 121.4%, to $507,000 as compared to $229,000 for the three
months ended December 31, 1996. The increase in depreciation and amortization
compared to the same period in the prior year is attributable to the Company's
growth, including the Vendell acquisition.
Income from operations for the three months ended December 31, 1997 increased
$860,000, or 66.4%, to $2,156,000 as compared to $1,296,000 for the three months
ended December 31, 1996, and decreased as a percentage of total revenues to 9.5%
for the three months ended December 31, 1997 from 15.9% for the three months
ended December 31, 1996 as a result of the factors described above.
Interest expense for the three months ended December 31, 1997 increased $215,000
to $227,000 as compared to $12,000 for the three months ended December 31, 1996.
The increase in interest expense over the same period in the prior year is
attributed principally to debt incurred as part of the Vendell acquisition.
Interest income decreased $115,000 to $157,000 for the three months ended
December 31, 1997 as
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compared to $272,000 for the three months ended December 31, 1996. The decrease
in interest income over the same period in the prior year is attributable
primarily to the decrease in cash available for investment as a result of the
June 1997 Vendell acquisition.
Other income for the three months ended December 31, 1997 increased to $217,000
from $3,000 for the three months ended December 31, 1996. Other income for the
fiscal 1998 period is the result of a one time payment by Helicon of management
fees for which a reserve had previously been established. Helicon was able to
make this payment due to the receipt of one time settlement.
Provision for income tax expense for the three months ended December 31, 1997
increased $2,152,000 to $898,000 from $(1,254,000) for the three months ended
December 31, 1996. The increase in provision for income tax expense compared to
the same period in the prior year results both from the increase in the
Company's taxable income and an increase in the Company's effective tax rate due
to the reversal, during the period ended December 31, 1996, of a portion of the
valuation allowance against the Company's deferred tax assets.
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 all prior periods.
Six Months Ended December 31, 1997 versus December 31, 1996
Operating revenues for the six months ended December 31, 1997 increased
$27,955,000 or 199.7%, to $41,951,000 as compared to $13,996,000 for the six
months ended December 31, 1996. Approximately $23,600,000 of the increase in
operating revenues is attributable to the Vendell acquisition. The increase is
also due to increased utilization in certain programs along with the opening of
new programs during the current and preceding three quarters.
Management fee income increased $613,000 for the six months ended December 31,
1997 to $1,229,000 from $616,000 for the six month period ended December 31,
1996. Management fee income recognized under the Helicon Agreement for the six
months ended December 31, 1997 increased $27,000 to $643,000 from $616,000 for
the six months ended December 31, 1996. Other management fee income,
attributable to the Vendell acquisition, accounted for the remainder of the
increase.
Total revenues for the six months ended December 31, 1997 increased $28,568,000,
or 195.5%, to $43,180,000 as compared to $14,612,000 for the six months ended
December 31, 1996 as a result of the factors described above.
Employee compensation and benefits for the six months ended December 31, 1997
increased $17,015,000, or 186.4%, to $26,145,000, as compared to $9,130,000 for
the six months ended December 31, 1996. As a percentage of total revenues,
employee compensation and benefits decreased from 62.5% for the six months ended
December 31, 1996 to 60.5% for the six months ended December 31, 1997. The
increase in employee compensation and benefits over the same period in the prior
year results primarily from the Company's growth, including the Vendell
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<PAGE> 15
acquisition. The decrease in employee compensation and benefits as a percent of
revenue over the same period in the prior year results primarily from the effect
of the Vendell acquisition.
Purchased services and other expenses for the six months ended December 31, 1997
increased $9,697,000, or 321.2%, to $12,716,000, as compared to $3,019,000 for
the six months ended December 31, 1996. As a percentage of total revenues,
purchased services and other expenses increased to 29.5% for the six months
ended December 31, 1997 from 20.7% for the six months ended December 31, 1996.
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 the
Vendell acquisition. The increase 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 the Vendell acquisition.
Depreciation and amortization for the six months ended December 31, 1997
increased $545,000, or 124.4%, to $983,000 as compared to $438,000 for the six
months ended December 31, 1996. The increase in depreciation and amortization
compared to the same period in the prior year is attributable to the Company's
growth, including the Vendell acquisition.
Income from operations for the six months ended December 31, 1997 increased
$1,311,000, or 66.4%, to $3,285,000 as compared to $1,974,000 for the six months
ended December 31, 1996, and decreased as a percentage of total revenues to 7.6%
for the six months ended December 31, 1997 from 13.5% for the six months ended
December 31, 1996, as a result of the factors described above.
Interest expense for the six months ended December 31, 1997 increased $275,000,
or 130.3%, to $486,000 as compared to $211,000 for the six months ended December
31, 1996. The increase in interest expense over the same period in the prior
year is attributed principally to debt incurred as part of the Vendell
acquisition, offset by the Company's previous long-term debt, the prepayment of
which was made on October 1, 1996, and the related elimination of deferred loan
cost amortization.
Interest income decreased $120,000 to $333,000 for the six months ended December
31, 1997 as compared to $453,000 for the six months ended December 31, 1996. The
decrease in interest income over the same period in the prior year is
attributable primarily to the decrease in cash available for investment as a
result of the June 1997 Vendell acquisition.
Provision for income tax expense for the six months ended December 31, 1997
increased $2,383,000 to $1,306,000 from a benefit of $1,077,000 for the six
months ended December 31, 1996. The increase in provision for income tax expense
compared to the same period in the prior year results both from the increase in
the Company's taxable income and an increase in the Company's effective tax rate
due to the reversal, during the period ended December 31, 1996, of a portion of
the valuation allowance against the Company's deferred tax assets.
15
<PAGE> 16
Liquidity and Capital Resources
Cash provided by operating activities for the six months ended December 31, 1997
was $860,000 on net income of $2,043,000 as compared to cash used of $36,000 on
net income of $2,963,000 for the six months ended December 31, 1996. Working
capital at December 31, 1997 was $25,984,000, as compared to $23,952,000 at June
30, 1997, and the current ratio at December 31, 1997 was 4.8:1, as compared to
4.1:1 at June 30, 1997.
Cash used by investing activities was $1,711,000 for the six months ended
December 31, 1997 as compared to $633,000 for the six months ended December 31,
1996, due primarily to an increase in cash outlays for the purchase of property
and equipment and for the additional cash payment related to the Vendell
acquisition. Cash of $17,209,000 was provided by financing activities for the
six months ended December 31, 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 the
public offering completed in August 1996, and the subsequent repayment of
outstanding debt with a portion of the proceeds. Cash of $39,000 was provided by
financing activities for the six months ended December 31, 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. 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 December 31,
1997, the outstanding balance under the line of credit was $11,450,000.
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 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. As a
condition to this line of credit, the Company agreed to guarantee Helicon's
performance under such line of credit. At December 31, 1997, there was $33,000
outstanding under Helicon's line of credit.
Capital expenditures during fiscal 1998 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.
16
<PAGE> 17
Current obligations, typically due within thirty days or less, are expected to
be funded with cash flows from operations and borrowings under the Company's
line of credit. Management believes that funds from operations, remaining
proceeds from the August 1996 public offering, and amounts available under its
line of credit will provide sufficient cash flow for the foreseeable future.
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 Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, Reporting of 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 income be reported in a financial statement that is displayed with the
same prominence as other financial statements. The Company does not expect the
effect of adoption of SFAS No. 130 to materially change the disclosures
currently being provided.
In June 1997 the FSAB 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 13, 1997. 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.
This information called for by Item 3 is not required for the fiscal quarter
ended December 31, 1997 as the Company's market capitalization was less than
$2.5 billion as of January 28, 1997.
17
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the Company was held on November 12, 1997. At the meeting,
the following directors, comprising all of the directors, were elected: William
J Ballard, Amy S. Harrison, Martha A. Petrey Ph.D., Thomas B. Clark, Joseph A.
Fernandez, Ed.D and David L. Warnock. As to each director, votes were cast as
follows: For- 6,160,430; Against-none; Abstain-129,492. The shareholders
approved the Company's 1997 Stock Incentive Plan by the following vote: For-
3,766,669; Against-1,510,282; Abstain-5,280. There were 1,007,691 broker
non-votes on this matter. The shareholders ratified the selection of Ernst &
Young as the Company's independent auditors for the 1998 fiscal year by the
following vote: For-6,284,755; Against-3,162; Abstain-2,005. There were no other
matters which were submitted for a vote of security holders during the quarter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
(11) Statement re: computation of earnings per share.
(27) Financial Data Schedule. (SEC use only)
(b) Reports on Form 8-K:
None.
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: February 16, 1998 /s/ WILLIAM J BALLARD
------------------------------------------
William J Ballard
Chairman and Chief Executive Officer
Date: February 16, 1998 /s/ DONALD B. WHITFIELD
------------------------------------------
Donald B. Whitfield
Vice President of Finance, Chief
Financial Officer (Principal
Financial and Accounting Officer)
19
<PAGE> 20
Exhibit Index
Exhibit No.
11 Computation of Per Share Earnings
27 Financial Data Schedule (SEC use only)
- ---------------
20
<PAGE> 1
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
-------------------------------------------------
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------------------------------
1997 1996 1997 1996
-------------------------------------------------
<S> <C> <C> <C> <C>
BASIC:
Average shares outstanding 7,820,635 7,126,444 7,802,330 6,674,737
========== ========== ========== ==========
Net income $1,405,000 $2,476,000 $2,043,000 $2,963,000
========== ========== ========== ==========
Per share amount $ .18 $ .35 $ .26 $ .44
========== ========== ========== ==========
DILUTED:
Average shares outstanding 7,820,635 7,126,444 7,802,330 6,674,737
Net effect of dilutive stock
options and warrants 311,671 199,647 284,045 234,594
---------- ---------- ---------- ----------
TOTAL 8,132,306 7,326,091 8,086,375 6,909,331
========== ========== ========== ==========
Net income $1,405,000 $2,476,000 $2,043,000 $2,963,000
========== ========== ========== ==========
Per share amount $ .17 $ .34 $ .25 $ .43
========== ========== ========== ==========
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CHILDREN'S COMPREHENSIVE SERVICES INC FOR THE THREE
MONTHS ENDED DECEMBER 31, 1997 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-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 12,829
<SECURITIES> 0
<RECEIVABLES> 19,189
<ALLOWANCES> 1,807
<INVENTORY> 0
<CURRENT-ASSETS> 32,896
<PP&E> 43,159
<DEPRECIATION> 6,846
<TOTAL-ASSETS> 70,399
<CURRENT-LIABILITIES> 6,912
<BONDS> 11,634
0
0
<COMMON> 78
<OTHER-SE> 51,775
<TOTAL-LIABILITY-AND-EQUITY> 70,399
<SALES> 0
<TOTAL-REVENUES> 22,813
<CGS> 0
<TOTAL-COSTS> 20,657
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 227
<INCOME-PRETAX> 2,303
<INCOME-TAX> 898
<INCOME-CONTINUING> 1,405
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,405
<EPS-PRIMARY> .18
<EPS-DILUTED> .17
</TABLE>
