<PAGE> 1
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 MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 May 10, 1999 - 7,411,141 shares.
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1
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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 -- March 31, 1999
and June 30, 1998...............................................................................3
Consolidated Statements of Income -- Three and nine month
periods ended March 31, 1999 and 1998...........................................................5
Consolidated Statements of Cash Flows --
Nine months ended March 31, 1999 and 1998.......................................................6
Notes to Consolidated Financial Statements --
March 31, 1999..................................................................................8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..........................................................................10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................................................19
SIGNATURES.......................................................................................................20
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30,
(dollars in thousands) 1999 1998
------- -------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,593 $20,067
Accounts receivable, net of allowance for doubtful
accounts of $1,520 at March 31 and $1,865 at
June 30 23,583 17,809
Prepaid expenses 977 634
Deferred income taxes 525 525
Other current assets 5,448 1,577
------- -------
TOTAL CURRENT ASSETS 32,126 40,612
PROPERTY AND EQUIPMENT, net of
accumulated depreciation of $9,756 at March 31
and $7,831 at June 30 50,440 37,162
DEFERRED TAX ASSETS, net of valuation allowance -- 785
COST IN EXCESS OF NET ASSETS ACQUIRED, net 14,262 1,180
OTHER ASSETS AND DEFERRED CHARGES, net 1,244 462
------- -------
TOTAL ASSETS $98,072 $80,201
======= =======
</TABLE>
3
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
March 31, June 30,
(dollars in thousands) 1999 1998
------- -------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,674 $ 1,901
Current portion - long-term debt 803 44
Accrued employee compensation 5,143 5,192
Income taxes payable 1,064 136
Accrued other expenses 2,596 3,300
Other liabilities and deferred revenue 2,319 172
------- -------
TOTAL CURRENT LIABILITIES 14,599 10,745
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS 25,962 11,611
DEFERRED TAXES PAYABLE 1,755 --
OTHER LIABILITIES -- 13
------- -------
TOTAL LIABILITIES 42,316 22,369
------- -------
SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00 per share--
10,000,000 shares authorized -- --
Common stock, par value $.01 per share--
50,000,000 shares authorized; issued and
outstanding 7,399,483 shares at March 31
and 8,038,783 shares at June 30 74 80
Additional paid-in capital 51,884 57,820
Retained earnings (deficit) 3,798 (68)
------- -------
TOTAL SHAREHOLDERS' EQUITY 55,756 57,832
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $98,072 $80,201
======= =======
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- --------------------
(In thousands, except per share amounts) 1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Operating revenues $ 30,594 $ 24,044 $ 80,015 $ 65,995
Management fee income 955 936 2,699 2,755
-------- -------- -------- --------
TOTAL REVENUES 31,549 24,980 82,714 68,750
-------- -------- -------- --------
Operating expenses:
Employee compensation and benefits 19,004 14,349 50,343 40,680
Purchased services and other expenses 7,956 6,635 22,680 19,590
Depreciation and amortization 1,047 564 2,488 1,547
Related party rent 28 25 86 76
-------- -------- -------- --------
TOTAL OPERATING EXPENSES 28,035 21,573 75,597 61,893
-------- -------- -------- --------
Income from operations 3,514 3,407 7,117 6,857
Other (income) expense:
Interest expense 556 223 1,174 737
Interest income (88) (190) (393) (523)
Other income 3 (1,523) (54) (1,740)
-------- -------- -------- --------
TOTAL OTHER (INCOME) EXPENSE, NET 471 (1,490) 727 (1,526)
-------- -------- -------- --------
Income before income taxes 3,043 4,897 6,390 8,383
Provision for income taxes 1,202 1,910 2,524 3,216
======== ======== ======== ========
NET INCOME $ 1,841 $ 2,987 $ 3,866 $ 5,167
======== ======== ======== ========
Basic earnings per common share $ 0.25 $ 0.37 $ 0.52 $ 0.66
Diluted earnings per common share $ 0.25 $ 0.36 $ 0.51 $ 0.64
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
--------------------------
(dollars in thousands) 1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,866 $ 5,167
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,969 1,450
Amortization 519 96
Amortization of deferred loan costs 68 26
Provision for bad debts 684 261
Changes in operating assets and liabilities, net of the effects from
acquisitions:
Accounts receivable (4,364) (1,570)
Prepaid expenses (281) (45)
Other current assets (1,172) (1,043)
Accounts payable (103) 861
Accrued employee compensation (623) 1,292
Accrued other expenses 362 (21)
Income taxes payable 246 875
Other liabilities 774 --
-------- --------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 1,945 7,349
-------- --------
INVESTING ACTIVITIES
Purchase of assets of Vendell Healthcare -- (710)
Purchase of assets of Chad Youth Center -- (1,202)
Purchase of Ameris (12,499) --
Purchase of Somerset (8,175) --
Purchase of note receivable (2,500) --
Purchase of property and equipment (3,079) (1,614)
Proceeds from sale of property and equipment -- 866
(Increase) in other assets (959) (410)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES $(27,212) $ (3,070)
-------- --------
</TABLE>
6
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
--------------------------
(dollars in thousands) 1999 1998
-------- --------
<S> <C> <C>
FINANCING ACTIVITIES
Principal payments on revolving lines of credit, long-
term borrowings and capital lease obligations $(21,736) $ (30)
Proceeds from revolving lines of credit and long-term
borrowings 34,471 --
Common Stock repurchased (6,263) --
Proceeds from issuance of Common Stock, net 389 63
Stock registration costs (68) (10)
-------- --------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 6,793 23
-------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (18,474) 4,302
Cash and cash equivalents at beginning of period 20,067 13,649
-------- --------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 1,593 $ 17,951
======== ========
</TABLE>
See notes to consolidated financial statements.
7
<PAGE> 8
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1999
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 and nine month periods ended
March 31, 1999 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 -- 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 nine months of fiscal 1999 and 1998, the Company had no items of other
comprehensive income.
NOTE D -- EARNINGS PER COMMON SHARE
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 Nine Months Ended
March 31, March 31,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BASIC:
Average shares outstanding 7,377,622 7,999,354 7,473,088 7,867,046
========== ========== ========== ==========
Net income $1,841,000 $2,987,000 $3,866,000 $5,167,000
========== ========== ========== ==========
Per share amount $ 0.25 $ 0.37 $ 0.52 $ 0.66
========== ========== ========== ==========
DILUTED:
Average shares outstanding 7,377,622 7,999,354 7,473,088 7,867,046
Net effect of dilutive stock
options and warrants 118,766 259,692 101,108 254,493
---------- ---------- ---------- ----------
TOTAL 7,496,388 8,259,046 7,574,196 8,121,539
========== ========== ========== ==========
Net income $1,841,000 $2,987,000 $3,866,000 $5,167,000
========== ========== ========== ==========
Per share amount $ 0.25 $ 0.36 $ 0.51 $ 0.64
========== ========== ========== ==========
</TABLE>
NOTE E -- ACQUISITIONS
In September 1998, the Company acquired Ameris Health Systems ("Ameris") for net
consideration of approximately $12.5 million in cash. This transaction has been
accounted for as a purchase. Pursuant to this transaction, the Company also
purchased a note receivable for $2.5 million in cash. The payment of this note,
which matures in September 1999, 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, Alabama and Pennsylvania with an aggregate capacity of
228 licensed beds.
In December 1998, the Company acquired Somerset, Inc., the operator of a
200-seat educational day treatment program located in southern California.
Consideration for this transaction consisted of approximately $8.2 million in
cash and $2.3 million in notes payable. This transaction has been accounted for
as a purchase. Cost in excess of net assets acquired totaled approximately $13.5
million for the Ameris and Somerset acquisitions, and is being amortized over
fifteen years.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and this Quarterly Report on Form 10-Q contain
forward-looking statements and should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere herein.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. 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 March 31, 1999, the Company was providing education, treatment and
juvenile justice services to approximately 4,300 at risk and troubled youth
either directly or through management contracts. A limited number of programs
for adults are also provided in specific markets. The Company currently offers
these services through the operation and management of non-residential
specialized education programs and day treatment programs and both open and
secured residential treatment centers in 14 states. These services are provided
directly or through the Company's revenue-based management contracts. 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.
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 March 31, 1999, 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, payment of these management
fees is subordinated in right of payment to amounts payable by Helicon to fund
its programs. The Company expects that this Agreement will be renewed. The
Company has also guaranteed Helicon's obligations under a bank line of credit in
the amount of $1,500,000. As of March 31, 1999, there was $487,000 outstanding
under this line of credit. See "-Liquidity and Capital Resources."
10
<PAGE> 11
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 March 31, 1999, the Company:
- Opened a 48-bed residential treatment program in Longview, Texas for
adolescent female offenders;
- Opened a 20-chair education day treatment program in Hilo, Hawaii;
- Opened a 28-bed secure juvenile detention facility in Dyersburg,
Tennessee; and
- Opened a 30-bed secure residential program for adolescent female
offenders in Mansfield, Ohio.
Prompted by recent legislation that changes the funding method for non-public
school services in California, two districts where the Company operates programs
have indicated their plans to provide their own programs and cease referrals to
the Company. While this has not had a major impact on the Company's revenues or
operating income to date, it has caused a gradual loss of census in those
programs. The Company does not expect that the majority of California school
districts with which the Company contracts will choose to provide their own
programs.
11
<PAGE> 12
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 Nine Months Ended
March 31, March 31,
---------------- ----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Operating revenues 97.0 % 96.3 % 96.7 % 96.0 %
Management fee income 3.0 3.7 3.3 4.0
------ ------ ------ ------
TOTAL REVENUES 100.0 100.0 100.0 100.0
------ ------ ------ ------
Employee compensation and benefits 60.2 57.4 60.9 59.2
Purchased services and other expenses 25.3 26.6 27.4 28.4
Depreciation and amortization 3.3 2.3 3.0 2.3
Related party rent 0.1 0.1 0.1 0.1
------ ------ ------ ------
TOTAL OPERATING EXPENSES 88.9 86.4 91.4 90.0
------ ------ ------ ------
Income from operations 11.1 13.6 8.6 10.0
Other (income) expense:
Interest expense 1.8 0.9 1.4 1.1
Interest income (0.3) (0.8) (0.5) (0.8)
Other income -- (6.1) (0.1) (2.5)
Provision for income taxes 3.8 7.6 3.1 4.7
------ ------ ------ ------
NET INCOME 5.8 % 12.0 % 4.7 % 7.5 %
====== ====== ====== ======
</TABLE>
Three Months Ended March 31, 1999 versus March 31, 1998
Operating revenues for the three months ended March 31, 1999 increased
$6,550,000 or 27.2%, to $30,594,000 as compared to $24,044,000 for the three
months ended March 31, 1998. Approximately $4,900,000 of the increase in
operating revenues is attributable to the Ameris and Somerset acquisitions. The
increase is also due to increased utilization in certain programs, other
acquisitions and the opening of new programs during the current and preceding
comparative quarters, offset by a change in the method of reimbursement for the
Company's residentially-based schools, located in Riverside and Los Angeles
Counties, California. The effect of that change, which precludes retroactive
billing from the date a child is certified for special education services to the
date of request for certification, resulted in a decrease in revenue of
approximately $400,000 over the same period last year.
Management fee income increased $19,000 for the three months ended March 31,
1999 to $955,000 from $936,000 for the three month period ended March 31, 1998.
Management fee income recognized under the Helicon Agreement for the three
months ended March 31, 1999 increased $11,000 to $340,000 from $329,000 for the
three months ended March 31, 1998.
12
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Total revenues for the three months ended March 31, 1999 increased $6,569,000,
or 26.3%, to $31,549,000 as compared to $24,980,000 for the three months ended
March 31, 1998 as a result of the factors described above.
Employee compensation and benefits for the three months ended March 31, 1999
increased $4,655,000, or 32.4%, to $19,004,000, as compared to $14,349,000 for
the three months ended March 31, 1998. As a percentage of total revenues,
employee compensation and benefits increased from 57.4% for the three months
ended March 31, 1998 to 60.2% for the three months ended March 31, 1999. The
increase in employee compensation and benefits over the same period in the prior
year results primarily from the Company's growth. In addition, the Company
increased compensation in certain employment categories in California. These
changes in compensation structure resulted from higher base rates of pay and
staffing levels versus the same period last year. The increase in employee
compensation and benefits as a percent of revenue over the same period in the
prior year results in part from start-up operations during the quarter and from
the changes mentioned above.
Purchased services and other expenses for the three months ended March 31, 1999
increased $1,321,000, or 19.9%, to $7,956,000, as compared to $6,635,000 for the
three months ended March 31, 1998. As a percentage of total revenues, purchased
services and other expenses decreased to 25.3% for the three months ended March
31, 1999 from 26.6% for the three months ended March 31, 1998. The increase in
purchased services and other expenses over the same period in the prior year is
attributed primarily to the Company's growth. The decrease in purchased services
and other expenses as a percent of revenue over the same period in the prior
year resulted primarily from the effect of increased utilization at certain
facilities.
Depreciation and amortization for the three months ended March 31, 1999
increased $483,000, or 85.6%, to $1,047,000 as compared to $564,000 for the
three months ended March 31, 1998. The increase in depreciation and amortization
compared to the same period in the prior year is primarily attributable to the
Company's growth, including an increase in the amortization of goodwill arising
from the Company's acquisitions.
Income from operations for the three months ended March 31, 1999 increased
$107,000, or 3.1%, to $3,514,000 as compared to $3,407,000 for the three months
ended March 31, 1998, and decreased as a percentage of total revenues to 11.1%
for the three months ended March 31, 1999 from 13.6% for the three months ended
March 31, 1998 as a result of the factors described above. For the three months
ended March 31, 1999, the Company's income from operations was negatively
impacted by the fact that the Company opened four new programs during the
quarter. One of these programs, a contract in Ohio, was delayed in its opening
from February until March. The other three programs (located in Texas, Hawaii
and Tennessee) generated significant operating losses during the quarter due to
both expense issues, principally related to staffing, and
slower-than-anticipated ramp-up in census.
13
<PAGE> 14
Interest expense for the three months ended March 31, 1999 increased $333,000 to
$556,000 as compared to $223,000 for the three months ended March 31, 1998. The
increase in interest expense over the same period in the prior year is
attributed principally to debt incurred pursuant to the Somerset acquisition.
Interest income decreased $102,000 to $88,000 for the three months ended March
31, 1999 as compared to $190,000 for the three months ended March 31, 1998. 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 Company's repurchase of 700,000 shares of its outstanding Common
Stock and its acquisition of Ameris.
Other income for the three months ended March 31, 1999 was an expense of $3,000
versus income of $1,523,000 for the three months ended March 31, 1998. Other
income for the comparable prior period reflects a gain recognized on the
exchange of the Company's Houston, Texas facility for a facility in Longview,
Texas, plus cash.
Provision for income tax expense for the three months ended March 31, 1999
decreased $708,000 to $1,202,000 from $1,910,000 for the three months ended
March 31, 1998. The decrease in provision for income tax expense compared to the
same period in the prior year results primarily from the decrease in the
Company's taxable income.
Nine Months Ended March 31, 1999 versus March 31, 1998
Operating revenues for the nine months ended March 31, 1999 increased
$14,020,000 or 21.2%, to $80,015,000 as compared to $65,995,000 for the nine
months ended March 31, 1998. Approximately $8,700,000 of the increase in
operating revenues is attributable to acquisitions made during fiscal 1999. The
increase is also due to increased utilization in certain programs along with the
opening of new programs since the comparable prior period.
Management fee income decreased $56,000 for the nine months ended March 31, 1999
to $2,699,000 from $2,755,000 for the nine month period ended March 31, 1998.
Management fee income recognized under the Helicon Agreement for the nine months
ended March 31, 1999 increased $38,000 to $1,011,000 from $973,000 for the nine
months ended March 31, 1998. Other management fee income declined primarily as
the result of one contract acquired pursuant to the Vendell transaction which
was not renewed.
Total revenues for the nine months ended March 31, 1999 increased $13,964,000,
or 20.3%, to $82,714,000 as compared to $68,750,000 for the nine months ended
March 31, 1998 as a result of the factors described above.
Employee compensation and benefits for the nine months ended March 31, 1999
increased $9,663,000, or 23.8%, to $50,343,000, as compared to $40,680,000 for
the nine months ended March 31, 1998. As a percentage of total revenues,
employee compensation and benefits increased from 59.2% for the nine months
ended March 31, 1998 to 60.9% for the nine months ended March 31,
14
<PAGE> 15
1999. 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 in part from intentional
overstaffing at the Company's Montana facility during the period, as well as
higher base rates of pay and staffing levels in the Company's California
operations.
Purchased services and other expenses for the nine months ended March 31, 1999
increased $3,090,000, or 15.8%, to $22,680,000, as compared to $19,590,000 for
the nine months ended March 31, 1998. As a percentage of total revenues,
purchased services and other expenses decreased to 27.4% for the nine months
ended March 31, 1999 from 28.4% for the nine months ended March 31, 1998. 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 nine months ended March 31, 1999 increased
$941,000, or 60.8%, to $2,488,000 as compared to $1,547,000 for the nine months
ended March 31, 1998. The increase in depreciation and amortization compared to
the same period in the prior year is attributable to the Company's growth,
including an increase in the amortization of goodwill arising from the Company's
acquisitions.
Income from operations for the nine months ended March 31, 1999 increased
$260,000, or 3.8%, to $7,117,000 as compared to $6,857,000 for the nine months
ended March 31, 1998, and decreased as a percentage of total revenues to 8.6%
for the nine months ended March 31, 1999 from 10.0% for the nine months ended
March 31, 1998, as a result of the factors described above. The Company's income
from operations was negatively impacted by the fact that the Company opened four
new programs during the quarter ended March 31, 1999. One of these programs, a
contract in Ohio, was delayed in its opening from February until March. The
other three programs (located in Texas, Hawaii and Tennessee) generated
significant operating losses during the period due to both expense issues,
principally related to staffing, and slower-than-anticipated ramp-up in census.
Interest expense for the nine months ended March 31, 1999 increased $437,000, or
59.3%, to $1,174,000 as compared to $737,000 for the nine months ended March 31,
1998. The increase in interest expense over the same period in the prior year is
attributed principally to debt incurred pursuant to the Somerset acquisition.
Interest income decreased $130,000 to $393,000 for the nine months ended March
31, 1999 as compared to $523,000 for the nine months ended March 31, 1998. 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 Company's repurchase of 700,000 shares of its outstanding Common
Stock and its acquisition of Ameris.
Other income for the nine months ended March 31, 1999 was $54,000, consisting
primarily of the recognition of previously deferred gain on the sale of property
concurrent with the collection of the note receivable related to the sale. Other
income of $1,740,000 for the comparable prior period
15
<PAGE> 16
reflects a one time payment by Helicon of management fees for which a reserve
had previously been established combined with a gain on the exchange of the
Company's Houston, Texas facility for a facility in Longview, Texas, plus cash.
Provision for income tax expense for the nine months ended March 31, 1999
decreased $692,000 to $2,524,000 from $3,216,000 for the nine months ended March
31, 1998.
Liquidity and Capital Resources
Cash provided by operating activities for the nine months ended March 31, 1999
was $1,945,000 on net income of $3,866,000 as compared to cash provided of
$7,349,000 on net income of $5,167,000 for the nine months ended March 31, 1998.
An increase in accounts receivable combined with a decrease in accrued employee
compensation were the primary factors contributing to the decrease in cash
provided by operating activities during the fiscal 1999 period versus the same
period in the prior year. The increase in accounts receivable is the result of a
number of factors, including an increase in the Company's revenues and the
timing of ratification of contracts by certain of the Company's California
school district customers. The decrease in accrued employee compensation results
primarily from differences in normal pay cycles and the payment of annual
bonuses. Working capital at March 31, 1999 was $17,527,000, as compared to
$29,867,000 at June 30, 1998. The change results primarily from acquisitions
during the period and the repurchase of the Company's Common Stock.
Cash used by investing activities was $27,212,000 for the nine months ended
March 31, 1999 as compared to $3,070,000 for the nine months ended March 31,
1998, due primarily to (i) additional capital expenditures and, (ii) the Ameris
and Somerset acquisitions during fiscal 1999 versus the additional cash payment
related to the Vendell acquisition and the Chad acquisition during fiscal 1998.
Cash of $6,793,000 was provided by financing activities for the nine months
ended March 31, 1999, due primarily to borrowings under the Company's credit
facility for the Somerset acquisition offset by funds used for the repurchase of
700,000 shares of the Company's Common Stock. Cash of $23,000 was provided by
financing activities for the nine months ended March 31, 1998.
The Company has a credit agreement with SunTrust Bank and First American
National Bank (jointly "the Lenders"), the term of which extends through
December 1, 2001. Under the terms of this agreement, the Lenders have made
available to the Company, for acquisition financing and working capital
requirements, a revolving line of credit for up to $25,000,000. The credit
facility bears interest at either (i) the one, two, three or six month LIBOR
rate plus an applicable margin, which ranges between .75% and 1.75% and is
dependent on the ratio of funded debt to earnings before interest, taxes,
depreciation and amortization, or (ii) SunTrust Bank's index rate plus an
applicable margin, which ranges between .00% and .50%, at the Company's option.
The line of credit is secured primarily by the Company's accounts receivable and
equipment. At March 31, 1999, the outstanding balance under the line of credit
was $9,400,000.
16
<PAGE> 17
Additionally, effective December 1, 1998, the Company entered into a term loan
with the Lenders in the amount of $15,000,000 at a fixed interest rate. The term
loan is for a period of seven years. The Company's effective rate of interest on
the loan is 8.10%. No payment of principal is required until December 2001, at
which time increasing payments that amortize the loan fully are due over the
remaining four years of the agreement.
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 under this
agreement prohibit the Company, without the prior consent of the Lenders, 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
$500,000. The agreement also prohibits the Company from declaring dividends in
excess of 25% of the Company's net income during any fiscal year.
Pursuant to the Somerset transaction, the Company issued a note payable to the
sellers totaling $2,375,000. This note bears interest at 6%, will amortize fully
over the three year period ending December 1, 2001, and is secured by the
Company's real estate and improvements purchased pursuant to the Somerset
transaction. At March 31, 1999, $756,000 of the note is included in current
liabilities and $1,437,000 of the note is included in long-term debt.
Helicon has entered into a $1.5 million line of credit with First American
National Bank. As a condition to this line of credit, the Company agreed to
guarantee Helicon's performance under the line. At March 31, 1999, there was
$487,000 outstanding under Helicon's line of credit.
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 may also
consider other 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 flows from operations and borrowings under the Company's
line of credit. Management believes that funds from operations and amounts
available under its line of credit will provide sufficient cash flow for the
foreseeable future.
Year 2000
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
17
<PAGE> 18
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 continue 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 begun an assessment of the Y2K readiness of its payors and other
third parties with whom it does business, and will continue to focus on this
aspect of its Y2K compliance during calendar 1999. The Company has contacted all
material payors and other third party payors in an attempt to assess the effect
of any Y2K issues that may arise. The Company will continue discussion with any
non-compliant material payors in an attempt to assess and encourage their Y2K
readiness. 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 operating expenses or 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 has implemented an initial contingency plan to
address this scenario by increasing its available line of credit facility. The
Company expects to continue to assess its contingency plan during the remainder
of calendar 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
18
<PAGE> 19
only disclosures provided and will have no impact on the Company's consolidated
balance sheets or results of operations.
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position ("SOP") 98-5 "Reporting on Costs of Start-up Activities" which changes
the way in which public companies account for start-up costs. The SOP requires
most entities, upon adoption, to write off as a cumulative effect of a change in
accounting principle any previously capitalized start-up or organization costs.
This SOP is effective for financial statements for fiscal years beginning after
December 15, 1998, and will, therefore, be adopted by the Company effective July
1, 1999. At March 31, 1999 the Company had approximately $851,000 of deferred
start up costs.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
(10.1) First Amendment to Credit Agreement by and among the Company
and SunTrust Bank, Nashville, N.A. as agent and lender dated
December 1, 1998
(10.2) Second Amendment to Credit Agreement by and among the Company
and SunTrust Bank, Nashville, N.A. as agent and lender dated
April 20, 1999
(10.3) Employment Agreement between the Company and William
J Ballard, effective as of August 19, 1998
(10.4) Employment Agreement between the Company and Amy S. Harrison,
effective as of August 19, 1998
(27) Financial Data Schedule (SEC use only)
(b) Reports on Form 8-K:
None
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHILDREN'S COMPREHENSIVE SERVICES, INC.
(Registrant)
Date: May 17, 1999 /s/ WILLIAM J BALLARD
----------------------------------------------
William J Ballard
Chairman and Chief Executive Officer
Date: May 17, 1999 /s/ DONALD B. WHITFIELD
--------------------------------------------
Donald B. Whitfield
Vice President of Finance, Chief
Financial Officer (Principal
Financial and Accounting Officer)
20
<PAGE> 1
EXHIBIT 10.1
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT ("Amendment") is made and
entered into as of December 31, 1998 by and between CHILDREN'S COMPREHENSIVE
SERVICES, INC., a Tennessee corporation (the "Borrower"), SUNTRUST BANK,
NASHVILLE, N.A. ("SunTrust"), and such other banks and lending institutions
identified on the signature page hereof, all of which are referred to
collectively herein as the "Lenders"), and SUNTRUST BANK, NASHVILLE, N.A., in
its capacity as agent for Lenders and each successive agent for such Lenders as
may be appointed from time to time pursuant to the Credit Agreement (the
"Agent").
RECITALS:
A. Borrower, Lenders and Agent entered into that certain Credit
Agreement dated as of December 1, 1998 (the "Credit Agreement").
B. Borrower, Lenders and Agent desire to modify the Credit Agreement in
certain respects.
C. Those modifications are represented by this Amendment.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and adequacy of which is hereby
acknowledged, Borrower, the Lenders and Agent agree as follows:
1. Section 1.1 of the Credit Agreement entitled "DEFINITIONS" is hereby
amended to add the following definition in the appropriate alphabetical position
therein:
"Consolidated Intangible Assets" shall mean on a consolidated basis
the sum of the Consolidated Companies' cost in excess of net assets
acquired, other assets/deferred charges and any other assets that would
be classified as intangibles according to GAAP.
2. Section 7.1(d) of the Credit Agreement is hereby amended and
restated as follows:
(d) Minimum Consolidated Net Worth. Permit the Consolidated Net
Worth to be less than a minimum amount equal to: (i) $53,000,000, plus
(ii) on a fiscal quarter basis beginning with the quarter ending March
31, 1999, a cumulative amount equal to 75% of Consolidated Net Income,
or minus 100% of Consolidated Net Losses, plus (iii) 100% of the net
proceeds of any Equity Proceeds raised subsequent to December 31, 1998.
<PAGE> 2
3. The following text shall be inserted into the Credit Agreement as
Section 7.1(e):
(e) Total Consolidated Intangible Assets. Permit the Total
Consolidated Intangible Assets to exceed fifty percent (50%) of the
Consolidated Net Worth.
4. Borrower reaffirms all representations and warranties under the
Credit Agreement.
5. The Credit Agreement is not amended in any other respect.
6. Borrower reaffirms its obligations under the Credit Agreement and
the Credit Documents to which it is a party, and Borrower agrees that such
obligations are valid and binding, enforceable in accordance with its terms,
subject to no defense, counterclaim, or objection.
ENTERED INTO as of the date first set forth above.
BORROWER:
CHILDREN'S COMPREHENSIVE SERVICES, INC.
By:
------------------------------------------
Title: VP-Finance/CFO
---------------------------------------
AGENT:
SUNTRUST BANK, NASHVILLE, N.A., AS AGENT
By:
------------------------------------------
Title: VP
---------------------------------------
LENDERS:
SUNTRUST BANK, NASHVILLE, N.A.
By:
------------------------------------------
Title: VP
---------------------------------------
FIRST AMERICAN NATIONAL BANK
By:
------------------------------------------
Title: SVP
---------------------------------------
-2-
<PAGE> 1
EXHIBIT 10.2
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT ("Amendment") is made and
entered into as of April 20 , 1999 by and between CHILDREN'S COMPREHENSIVE
SERVICES, INC., a Tennessee corporation (the "Borrower"), SUNTRUST BANK,
NASHVILLE, N.A. ("SunTrust"), and such other banks and lending institutions
identified on the signature page hereof, all of which are referred to
collectively herein as the "Lenders"), and SUNTRUST BANK, NASHVILLE, N.A., in
its capacity as agent for Lenders and each successive agent for such Lenders as
may be appointed from time to time pursuant to the Credit Agreement (the
"Agent").
RECITALS:
A. Borrower, Lenders, and Agent entered into that certain Credit
Agreement dated as of December 1, 1998, as amended by a First Amendment to
Credit Agreement dated as of December 31, 1998 (herein the Credit Agreement, as
amended, shall be referred to as the "Credit Agreement").
B. Borrower, Lenders, and Agent desire to amend the Credit Agreement as
set forth herein.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and adequacy of which is hereby
acknowledged, the parties hereto agree as follows:
1. Section 7.1.(d) of the Credit Agreement shall be amended an restated
in its entirety as follows:
(d) Minimum Consolidated Net Worth. Permit the Consolidated
Net Worth to be less than a minimum amount equal to: (i)
$53,000,000, plus (ii) on a fiscal quarter basis beginning with the
quarter ending March 31, 1999, a cumulative amount equal to 75% of
Consolidated Net Income, or minus 100% of Consolidated Net Losses,
plus (iii) 100% of the net proceeds of any Equity Proceeds raised
subsequent to December 31, 1998, less (iv) all amounts paid or
exchanged by Borrower from time to time for the redemption of shares
of its own stock at any time as permitted by 7.8.(g).
2. Section 7.8. of the Credit Agreement shall be amended and restated
in its entirety as follows:
SECTION 7.8. INVESTMENTS, LOANS AND ADVANCES.
The Borrower will not, and will not permit any Consolidated
Company to, make or permit to remain outstanding any loans or
<PAGE> 2
advances to or investments in any person, and the Borrower will not,
and will not permit any Consolidated Company, to purchase or redeem
shares of stock of any Consolidated Company, except that subject to
all other provisions of this Section 7.8., the foregoing restriction
shall not apply to:
(a) investments in direct obligations of the United States
of America or any agency thereof having maturities of one year or
less;
(b) investments in commercial paper maturing one year or
less from the date of creation thereof of the highest credit rating
of a Rating Agency;
(c) investments in bankers' acceptances and certificates of
deposit having maturities of one year or less issued by commercial
banks in the United States of America having capital and surplus in
excess of $50,000,000;
(d) loans or advances to any Person made in the ordinary
course of business not to exceed $500,000 in the aggregate
outstanding at any time;
(e) the endorsement of negotiable or similar instruments in
the ordinary course of business;
(f) ownership by Borrower of stock in any other
Consolidated Company; and
(g) subsequent to April 20, 1999, the redemption by
Borrower from time to time of its own stock if the aggregate
cumulative amount paid or exchanged in the redemption of such stock
does not exceed $3,000,000.
3. Borrower reaffirms all representations and warranties under the
Credit Agreement.
4. The Credit Agreement is not amended in any other respect.
5. Borrower reaffirms its obligations under the Credit Agreement and
the Credit Documents to which it is a party, and Borrower agrees that such
obligations are valid and binding, enforceable in accordance with its terms,
subject to no defense, counterclaim, or objection.
ENTERED INTO as of the date first set forth above.
-2-
<PAGE> 3
BORROWER:
CHILDREN'S COMPREHENSIVE SERVICES, INC.
By:
------------------------------------------
Title: VP Finance-CFO
---------------------------------------
AGENT:
SUNTRUST BANK, NASHVILLE, N.A., AS AGENT
By:
------------------------------------------
Title: VP
---------------------------------------
LENDERS:
SUNTRUST BANK, NASHVILLE, N.A.
By:
------------------------------------------
Title: VP
---------------------------------------
FIRST AMERICAN NATIONAL BANK
By:
------------------------------------------
Title: SVP
---------------------------------------
-3-
<PAGE> 1
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, effective as of August 19, 1998, between
CHILDREN'S COMPREHENSIVE SERVICES, INC., a Tennessee corporation (hereinafter
the "Company"), and WILLIAM J BALLARD (hereinafter "Employee").
R E C I T A L S
The Company desires to continue to employ Employee and to be assured of
its rights to his services in a management capacity on the terms and conditions
hereinafter set forth. Employee is willing to continue his employment on such
terms and conditions. In consideration of the premises and other mutual
agreements hereinafter set forth, the parties agree as follows:
1. EMPLOYMENT. (a) The Company hereby confirms Employee's employment as
Chief Executive Officer of the Company. Employee shall perform the services and
discharge the duties normally associated with the position of Chief Executive
Officer of the Company and any other executive officer position he may hold
following a Transaction (as defined in Section 10 below). During the term of
this Agreement, Employee shall also serve without additional compensation in
such other offices of the Company or its subsidiaries or affiliates to which he
may be elected or appointed by the Board of Directors.
2. PLACE OF EMPLOYMENT. The duties Employee is to perform hereunder
shall be conducted from the Nashville, Tennessee offices of the Company.
3. TERM. Except as to the covenants set forth in Sections 7 and 8
hereof, the term of this Agreement and of the employment of Employee hereunder
shall be for a term of four (4) years commencing on the date hereof (the
"Initial Term"), and thereafter renewing for successive one year terms, each
such term to commence on the successive anniversaries of the commencement date
hereof, unless either party shall give written notice of intention to terminate
to the other party at least sixty (60) days prior to the expiration of any such
term, and subject to earlier termination as hereinafter provided.
4. ACCEPTANCE OF EMPLOYMENT. Employee hereby accepts such employment
for the compensation and upon the other terms and conditions provided for in
this Agreement and agrees to use his best efforts to serve the Company
faithfully and competently and agrees to devote substantially all his working
time and efforts to the business and affairs of the Company, to use his best
efforts to advance the best interests of the Company and not to engage in
outside business activities which interfere with the performance of his duties
hereunder. Notwithstanding the foregoing and except as provided in Section 8
hereof, Employee may engage in investing and related activities and, with the
prior approval of the Company's Board of Directors, serve on the Boards of
Directors of other companies, provided, however, that such activities do not
detract from his ability to perform his duties hereunder and do not involve the
provision of education, treatment and juvenile justice services for at-risk and
troubled youth, or otherwise compete with the business of the Company, either
directly or through management contracts, and provided
<PAGE> 2
further, that Employee may continue to serve as a director of Setech, Inc.
without the approval of the Board of Directors. Employee acknowledges that the
services to be rendered by him under this Agreement require special training,
skill, information and experience and that this Agreement is entered into for
the purpose of obtaining such skilled services for the Company. Employee
warrants and represents that he is under no contractual arrangement or agreement
or provision under law or equity which prohibits or limits his rendering to the
Company the services contemplated by this Agreement.
5. COMPENSATION. (a) As compensation for the services contemplated by
this Agreement, the Company shall pay to Employee a salary (the "Salary") of
$225,000 per year, payable in twenty-six equal bi-weekly installments of
$8,653.85. The Salary shall automatically increase to $250,000 per year
effective July 1, 1999 if the Company meets its earnings-per-share projections
for the 1999 fiscal year as set forth on Exhibit A attached hereto. In addition,
the Compensation Committee will reconsider the Salary at the end of the 1999
fiscal year and thereafter, in its discretion. Employee may also be eligible to
receive an annual bonus as determined from time to time by the Compensation
Committee of the Board of Directors.
(b) Employee shall be entitled to 4 weeks paid vacation each year,
and shall be entitled to major medical health and accident coverage and
disability insurance coverage to the extent provided to other members of the
Company's senior management. Employee shall be entitled to such other employee
benefits as the Compensation Committee of the Board of Directors of the Company,
from time to time, shall determine to be reasonable and feasible for the Company
to provide for senior management, including, without limitation, the right to
participate in the Company's stock option plan and any other benefits approved
by the Compensation Committee of the Board of Directors. In addition to the
foregoing benefits, Employee shall be entitled to other employee benefits made
available to senior executive officers of the Company.
(c) Employee shall be reimbursed for all reasonable direct expenses
incurred by him on behalf of the Company in the discharge of his duties
hereunder. Employee agrees to maintain adequate records, in such form and detail
as the Company may reasonably request, of all such expenses to be reimbursed and
to make such records available to the Company for copy and inspection as and
when requested.
6. STOCK OPTION. Employee shall be granted an option to purchase
125,000 shares of the Company's common stock on the terms and conditions set
forth in the Stock Option Agreement attached hereto as Exhibit B.
7. CONFIDENTIAL INFORMATION AND NO DISPARAGEMENT. During the course of
employment by the Company and following termination of such employment,
irrespective of the reason for such termination and whether it occurs
voluntarily or involuntarily, Employee agrees not to, directly or indirectly,
without the Company's prior, express written consent, use, or divulge business
connections, customers, customer lists, marketing techniques, procedures,
operations and other aspects of the Company's business that have been
established and protected
2
<PAGE> 3
as confidential information and trade secrets and are of great value to the
Company and provide it with a substantial competitive advantage in its business
(the "Confidential Information"); provided, however, that Confidential
Information shall not be deemed to include (i) any information that is or
becomes generally available to the public other than by disclosure by Employee,
or (ii) becomes available to Employee on a nonconfidential basis from a source
other than the Company (or an agent thereof), which source is not prohibited
from disclosing such information by a legal, contractual or fiduciary
obligation. Employee also agrees to return to the Company at the time of his
termination all Company property and all Confidential Information and summaries
thereof in his possession, and Employee agrees not to copy or otherwise record
or retain such Confidential Information.
Employee recognizes that the Confidential Information is a valuable and
unique asset of the Company and, accordingly, Employee agrees that the foregoing
restriction on the use and disclosure of Confidential Information shall continue
during his employment by the Company and after his employment ceases (regardless
of whether his employment with the Company is terminated with or without Cause
(as defined in Section 12(a)) or is Constructively Terminated (as defined in
Section 10)).
Employee agrees during his employment and after his employment ceases
not to disparage the Company to third parties or in public, or otherwise take
any action or make any comment that would harm the goodwill or reputation of the
Company.
8. COMPETITION. Employee acknowledges that he has specialized knowledge
and experience in the Company's business, that his reputation and contacts
within the industry are considered to be of great value to the Company, and that
if his knowledge, experience, reputation or contacts were used to compete with
the Company, serious harm to the Company could result. Employee agrees that
during his employment by the Company and, (i) if Employee's employment with the
Company is terminated for Cause, or (ii) if Employee terminates his employment
with the Company and the Board of Directors of the Company elects to extend the
provisions of this Section 8 for the Additional Restricted Period as provided
below, then in the case of (i) and (ii) for the Additional Restricted Period
Employee shall not, without prior written consent of the Company, directly or
indirectly:
(a) solicit business from, or perform services for, any persons,
company or other entity which, at the time of termination of his employment with
the Company, is a customer or client of the Company or any of its affiliates, or
potential customers or clients of the Company with which the Company has had
substantial contact during the term of this Agreement if such business or
services are of the same general character as those engaged in or performed by
the Company or any of its affiliates;
(b) solicit for employment, or in any other fashion hire, any of the
employees of the Company or any of its affiliates; or
3
<PAGE> 4
(c) own, manage, operate, finance, join, control or
participate in the ownership, management, operation, financing or control of, or
be connected with, as a proprietor, officer, director, employee, partner,
principal, agent, representative, consultant, investor (other than as a
stockholder of a corporation listed on a national securities exchange or whose
stock is regularly traded in the over-the-counter market, provided that Employee
at no time owns, directly or indirectly, 5% or more of the outstanding stock of
any class of any such corporation) or otherwise, any business or enterprise,
located in any state in which the Company owns or manages one or more facilities
or within 100 miles of any Company location or location of a Company affiliate,
which business or enterprise is primarily engaged in the business of providing
education, treatment and juvenile justice services for at-risk and troubled
youth, either directly or through management contracts, or any other business
engaged in by the Company or any of its affiliates during the term of this
Agreement; provided however, nothing in this section shall prevent the Employee
from (i) serving as a director on the Board of Directors of another company so
long as Employee does not participate in the day-to-day management or operation
of such company or (ii) owning less than 5% of the voting stock of any public
corporation.
Notwithstanding any other provision contained herein, Employee shall
not be subject to the provisions of this Section 8 if (i) Employee terminates
his employment pursuant to Section 12(c) hereof, (ii) Employee terminates his
employment following a Constructive Termination or (iii) Employee's employment
is terminated without Cause within two (2) years following a Change in Control
(as defined in Section 10).
In the event Employee terminates his employment with the Company (other
than (i) termination pursuant to Section 12(c) hereof, or (ii) termination
following a Constructive Termination), the Board of Directors of the Company
may, at its option, elect to extend the term of the provisions of this Section 8
for the Additional Restricted Period, provided, however, that if the Board of
Directors so elects, the Company shall make bi-weekly payments to Employee equal
to one-half of his then current bi-weekly Salary payments during the Additional
Restricted Period.
For purposes of Sections 7 and 8 of this Agreement, the term "Company"
shall include any subsidiary of the Company or other entity in which the Company
has, or has the right to acquire pursuant to a written agreement, a controlling
equity interest in such entity.
The term "Additional Restricted Period" shall mean the Initial Term of
this Agreement, provided, however, that if the termination of employment occurs
during any subsequent one-year term, then the Additional Restricted Period shall
mean the remaining period of such one-year term.
9. VIOLATIONS OF COVENANTS. Employee agrees and acknowledges that he
shall not be entitled to any compensation otherwise due under this Agreement for
any period of time during which he is in violation of his obligations under this
Agreement. Employee further agrees and acknowledges that the violation by
Employee of the covenants set forth in Sections 7 and 8 hereof would cause
irreparable injury to the Company and that the remedy at law for any violation
or
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<PAGE> 5
threatened violation thereof by him would be inadequate and that the Company
shall be entitled to temporary and permanent injunctive relief or other
equitable relief without the necessity of proving actual damages.
10. SEVERANCE. Upon any Constructive Termination or upon any
termination by the Company of Employee's employment with the Company without
Cause (except on Employee's death or disability pursuant to Section 12(b)
hereof), then:
(a) Employee shall be entitled to a severance payment (the
"Severance") equal to two times (i) his Salary at the time of termination plus
(ii) the sum of his cash bonus received for each of the prior three (3) years,
divided by three (3) (which calculation shall include zero (0) for any such year
in which he did not receive a bonus); and
(b) any stock options held by Employee pursuant to any
qualified or non-qualified Company option plan shall immediately vest and become
exercisable.
Employee shall be entitled to the benefits of this Section 10 without
regard to whether he obtains additional employment upon termination of his
employment with the Company. Any Severance payable to Employee pursuant to this
Section 10 shall be paid as follows: (i) one-half of the Severance shall be paid
within fifteen (15) days of the effective date of termination of Employee's
employment and (ii) one-half of the Severance shall be paid on the January 1
immediately following the year of termination.
The provisions of this Section 10 shall supersede any contrary
provisions of any other agreement by and between the parties hereto, now
existing or hereafter created, unless the provisions of this Section 10 are
specifically modified, amended or waived in such other agreement.
For the purposes of this Agreement, 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 (a "Transaction"), less than a majority of the combined
voting power of the then outstanding securities of the Company or any
successor
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<PAGE> 6
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, as a result
of one or more elections of directors which elections were contested by
one or more shareholders, individuals who at the beginning of any such
period constitute the Board of Directors 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.
Notwithstanding the foregoing definition of "Change in Control," a
Change in Control shall not be deemed to have occurred by virtue of the
Company's issuance of securities to an underwriting syndicate in a public
offering approved by the Board of Directors.
For purposes of this Agreement, a "Constructive Termination" will be
deemed to have occurred if Employee's duties have been significantly altered
such that he is no longer entitled to perform the duties reasonably incident to
the office of Chief Executive Officer of the Company, or if the Company requires
Employee to move his principal place of employment more than thirty-five (35)
miles away from the Company's current executive offices in Nashville, Tennessee,
provided, however, that if the Company is involved in a Transaction in which it
becomes a subsidiary or division of the acquiring company, a Constructive
Termination shall not be deemed to have occurred if Employee, in connection with
or following such Transaction, is offered a position as a senior executive
officer of the acquiring company and is offered a comparable salary.
11. NONASSIGNMENT. Neither party hereto may assign any rights or
obligations hereunder, except that upon the occurrence of a Change in Control,
this Agreement shall bind and inure to the benefit of both Employee and the
Company's successors and assigns, or the acquiring or surviving corporation, as
the case may be.
12. TERMINATION. (a) Termination With Cause. If, during the term of
this Agreement, Employee breaches or fails to perform a material provision of
this Agreement (including his duties hereunder), engages in conduct harmful to
the Company, or willfully disregards the lawful instructions of the Board of
Directors of the Company (which breach, failure to perform, harmful conduct or
willful disregard of lawful instructions is not cured by Employee within 30 days
following written notice thereof by the Company to Employee), engages in
fraudulent conduct, or is convicted of a crime or misdemeanor involving moral
turpitude or dishonesty, then this Agreement shall at the election of the
Company, terminate (i) immediately upon conviction, or (ii) upon a reasonable
determination by the Board of Directors that Employee has failed to cure such
breach, failure to perform a material provision of this Agreement, conduct
harmful to the
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<PAGE> 7
Company or willful disregard of lawful instructions, or has engaged in
fraudulent conduct (the occurrence of such events, singly or collectively, being
"Cause" for termination), and the Company shall have no further obligations
hereunder.
(b) Termination on Death or Disability. If, during the term of this
Agreement, Employee dies or becomes mentally or physically incapacitated or
disabled so as to be unable to perform his duties, then this Agreement shall
terminate as of the last day of the month in which Employee dies or his mental
or physical incapacity or disability is established (the "Termination Date") and
the Company shall pay to Employee (or his heirs or executors) all Salary accrued
through the Termination Date and any other accrued and unpaid benefits to which
Employee was entitled as of the Termination Date. Upon any termination of
Employee's employment with the Company due to the Employee's death, unless
otherwise provided by the related option plan or option agreement, any stock
options held by Employee pursuant to any qualified or non-qualified Company
option plan shall immediately vest and become exercisable. Employee's mental or
physical incapacity or disability shall be conclusively evidenced by Employee's
inability to perform services hereunder for a period of sixty (60) consecutive
business days.
(c) Termination by the Employee. This Agreement may be terminated by
Employee upon the material breach by the Company of any material provision
hereof, by providing thirty (30) days' prior written notice to the Company, in
which event Employee shall be bound by the provisions of Section 7 hereof but
shall not be bound by the provisions of Section 8 hereof.
13. NOTICES. Any notice or other communication under this Agreement
shall be in writing and shall be sent by certified or registered mail addressed
to the respective parties as follows:
If to the Company:
Children's Comprehensive Services, Inc.
3401 West End Avenue
Suite 500
Nashville, TN 37203
Attention: Chief Financial Officer
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<PAGE> 8
with a copy to:
Children's Comprehensive Services, Inc.
3401 West End Avenue
Suite 500
Nashville, Tennessee 37203
Attn: Compensation Committee of Board of Directors
If to Employee:
William J Ballard
2 Peach Blossom Square
Nashville, Tennessee 37205
Any such notice or other communication shall be deemed to have been given when
deposited, postage paid, in the United States mail. Either of the above
addresses may be changed at any time on ten days' prior notice given in the
manner provided above.
14. GOVERNING LAW. This Agreement shall be governed in all respects by
the laws of the State of Tennessee.
15. HEADINGS. The headings herein are for convenience for reference
only and shall not be deemed to be part of the substance of this Agreement.
16. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement
between the parties with respect to the subject matter hereof and may be changed
or supplemented only by a written agreement signed by the Employee and the
Company.
17. ENFORCEABILITY; SEVERABILITY. It is the intention of the Company
and Employee that the provisions of this Agreement shall be enforced to the
fullest extent permissible under the laws and public policies of the laws of the
State of Tennessee, but that the unenforceability (or the modification to
conform with such laws or public policies) of any provisions hereof shall not
render unenforceable or impair the remainder of this Agreement. Accordingly, if
any provision of this Agreement shall be determined to be invalid or
unenforceable, either in whole or in part, this Agreement shall be deemed
amended to delete or modify, as necessary, the offending provisions and to alter
the balance of this Agreement in order to render the same valid and enforceable
to the fullest extent permissible as aforesaid. The provisions of this Agreement
shall be deemed severable, and the invalidity or unenforceability of any one or
more of the provisions hereof shall not affect the validity and enforceability
of the other provisions hereof. In the event that any provision of Section 8
relating the time period and/or geographical areas of restriction shall be
declared by a court of competent jurisdiction to exceed the maximum time period
and/or geographical areas of restriction such court deems reasonable and
enforceable, said time period and/or geographical areas of restriction shall be
deemed to become and thereafter be the maximum
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<PAGE> 9
time period and/or geographical area of restriction that such court deems
reasonable and enforceable.
18. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which when so executed shall be deemed to be an original,
and such counterparts shall together constitute one and the same instrument.
IN WITNESS WHEREOF, the Company and Employee have executed this
Agreement as of the date first above written.
CHILDREN'S COMPREHENSIVE
SERVICES, INC.
By:
-----------------------------------------
Title:
--------------------------------------
WILLIAM J BALLARD
---------------------------------------------
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<PAGE> 1
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, effective as of August 19, 1998, between
CHILDREN'S COMPREHENSIVE SERVICES, INC., a Tennessee corporation (hereinafter
the "Company"), and AMY S. HARRISON (hereinafter "Employee").
R E C I T A L S
The Company desires to continue to employ Employee and to be assured of
its rights to her services in a management capacity on the terms and conditions
hereinafter set forth. Employee is willing to continue her employment on such
terms and conditions. In consideration of the premises and other mutual
agreements hereinafter set forth, the parties agree as follows:
1. EMPLOYMENT. (a) The Company hereby confirms Employee's employment as
President of the Company. Employee shall perform the services and discharge the
duties normally associated with the position of President of the Company and any
other executive officer position she may hold following a Transaction (as
defined in Section 10 below). During the term of this Agreement, Employee shall
also serve without additional compensation in such other offices of the Company
or its subsidiaries or affiliates to which she may be elected or appointed by
the Board of Directors.
2. PLACE OF EMPLOYMENT. The duties Employee is to perform hereunder
shall be conducted from the Grand Terrace, California offices of the Company.
From time to time, as requested by the Chief Executive Officer or the Board of
Directors, Employee shall travel to and perform services in Nashville,
Tennessee, the location of the Company's headquarters.
3. TERM. Except as to the covenants set forth in Sections 7 and 8
hereof, the term of this Agreement and of the employment of Employee hereunder
shall be for a term of four (4) years commencing on the date hereof (the
"Initial Term"), and thereafter renewing for successive one year terms, each
such term to commence on the successive anniversaries of the commencement date
hereof, unless either party shall give written notice of intention to terminate
to the other party at least sixty (60) days prior to the expiration of any such
term, and subject to earlier termination as hereinafter provided.
4. ACCEPTANCE OF EMPLOYMENT. Employee hereby accepts such employment
for the compensation and upon the other terms and conditions provided for in
this Agreement and agrees to use her best efforts to serve the Company
faithfully and competently and agrees to devote substantially all her working
time and efforts to the business and affairs of the Company, to use her best
efforts to advance the best interests of the Company and not to engage in
outside business activities which interfere with the performance of her duties
hereunder. Notwithstanding the foregoing and except as provided in Section 8
hereof, Employee may engage in investing and related activities and, with the
prior approval of the Company's Board of Directors, serve on the Boards of
Directors of other companies, provided, however, that such activities do not
detract from her ability to perform her duties hereunder and do not involve the
provision of education,
<PAGE> 2
treatment and juvenile justice services for at-risk and troubled youth, or
otherwise compete with the business of the Company, either directly or through
management contracts. Employee acknowledges that the services to be rendered by
her under this Agreement require special training, skill, information and
experience and that this Agreement is entered into for the purpose of obtaining
such skilled services for the Company. Employee warrants and represents that she
is under no contractual arrangement or agreement or provision under law or
equity which prohibits or limits her rendering to the Company the services
contemplated by this Agreement.
5. COMPENSATION. (a) As compensation for the services contemplated by
this Agreement, the Company shall pay to Employee a salary (the "Salary") of
$225,000 per year, payable in twenty-six equal bi-weekly installments of
$8,653.85. The Salary shall automatically increase to $250,000 per year
effective July 1, 1999 if the Company meets its earnings-per-share projections
for the 1999 fiscal year as set forth on Exhibit A attached hereto. In addition,
the Compensation Committee will reconsider the Salary at the end of the 1999
fiscal year and thereafter, in its discretion. Employee may also be eligible to
receive an annual bonus as determined from time to time by the Compensation
Committee of the Board of Directors.
(b) Employee shall be entitled to reasonable paid vacation, and
shall be entitled to major medical health and accident coverage and disability
insurance coverage to the extent provided to other members of the Company's
senior management. Employee's vacation shall not accrue from year to year.
Employee shall be entitled to such other employee benefits as the Compensation
Committee of the Board of Directors of the Company, from time to time, shall
determine to be reasonable and feasible for the Company to provide for senior
management, including, without limitation, the right to participate in the
Company's stock option plan and any other benefits approved by the Compensation
Committee of the Board of Directors. In addition to the foregoing benefits,
Employee shall be entitled to other employee benefits made available to senior
executive officers of the Company.
(c) Employee shall be reimbursed for all reasonable direct expenses
incurred by her on behalf of the Company in the discharge of her duties
hereunder. Employee agrees to maintain adequate records, in such form and detail
as the Company may reasonably request, of all such expenses to be reimbursed and
to make such records available to the Company for copy and inspection as and
when requested.
6. STOCK OPTION. Employee shall be granted an option to purchase
125,000 shares of the Company's common stock on the terms and conditions set
forth in the Stock Option Agreement attached hereto as Exhibit B.
7. CONFIDENTIAL INFORMATION AND NO DISPARAGEMENT. During the course of
employment by the Company and following termination of such employment,
irrespective of the reason for such termination and whether it occurs
voluntarily or involuntarily, Employee agrees not to, directly or indirectly,
without the Company's prior, express written consent, use, or divulge business
connections, customers, customer lists, marketing techniques, procedures,
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<PAGE> 3
operations and other aspects of the Company's business that have been
established and protected as confidential information and trade secrets and are
of great value to the Company and provide it with a substantial competitive
advantage in its business (the "Confidential Information"); provided, however,
that Confidential Information shall not be deemed to include (i) any information
that is or becomes generally available to the public other than by disclosure by
Employee, or (ii) becomes available to Employee on a nonconfidential basis from
a source other than the Company (or an agent thereof), which source is not
prohibited from disclosing such information by a legal, contractual or fiduciary
obligation. Employee also agrees to return to the Company at the time of her
termination all Company property and all Confidential Information and summaries
thereof in her possession, and Employee agrees not to copy or otherwise record
or retain such Confidential Information.
Employee recognizes that the Confidential Information is a valuable and
unique asset of the Company and, accordingly, Employee agrees that the foregoing
restriction on the use and disclosure of Confidential Information shall continue
during her employment by the Company and after her employment ceases (regardless
of whether her employment with the Company is terminated with or without Cause
(as defined in Section 12(a)) or is Constructively Terminated (as defined in
Section 10)).
Employee agrees during her employment and after her employment ceases
not to disparage the Company to third parties or in public, or otherwise take
any action or make any comment that would harm the goodwill or reputation of the
Company.
8. COMPETITION. Employee acknowledges that she has specialized
knowledge and experience in the Company's business, that her reputation and
contacts within the industry are considered to be of great value to the Company,
and that if her knowledge, experience, reputation or contacts were used to
compete with the Company, serious harm to the Company could result. Employee
agrees that during her employment by the Company and, (i) if Employee's
employment with the Company is terminated for Cause, or (ii) if Employee
terminates her employment with the Company and the Board of Directors of the
Company elects to extend the provisions of this Section 8 for the Additional
Restricted Period as provided below, then in the case of (i) and (ii) for the
Additional Restricted Period Employee shall not, without prior written consent
of the Company, directly or indirectly:
(a) solicit business from, or perform services for, any persons,
company or other entity which, at the time of termination of her employment with
the Company, is a customer or client of the Company or any of its affiliates, or
potential customers or clients of the Company with which the Company has had
substantial contact during the term of this Agreement if such business or
services are of the same general character as those engaged in or performed by
the Company or any of its affiliates;
(b) solicit for employment, or in any other fashion hire, any of
the employees of the Company or any of its affiliates; or
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<PAGE> 4
(c) own, manage, operate, finance, join, control or
participate in the ownership, management, operation, financing or control of, or
be connected with, as a proprietor, officer, director, employee, partner,
principal, agent, representative, consultant, investor (other than as a
stockholder of a corporation listed on a national securities exchange or whose
stock is regularly traded in the over-the-counter market, provided that Employee
at no time owns, directly or indirectly, 5% or more of the outstanding stock of
any class of any such corporation) or otherwise, any business or enterprise,
located in any state in which the Company owns or manages one or more facilities
or within 100 miles of any Company location or location of a Company affiliate,
which business or enterprise is primarily engaged in the business of providing
education, treatment and juvenile justice services for at-risk and troubled
youth, either directly or through management contracts, or any other business
engaged in by the Company or any of its affiliates during the term of this
Agreement; provided however, nothing in this section shall prevent the Employee
from (i) serving as a director on the Board of Directors of another company so
long as Employee does not participate in the day-to-day management or operation
of such company, (ii) owning less than 5% of the voting stock of any public
corporation or (iii) becoming employed by the California State Department of
Education to work with its public school systems or programs, provided, however,
that Employee recuses herself from consideration of any matters involving the
Company or any of its subsidiaries or affiliates including, but not limited to,
any Advocate School or programs related thereto or offered thereby.
Notwithstanding any other provision contained herein, Employee shall
not be subject to the provisions of this Section 8 if (i) Employee terminates
her employment pursuant to Section 12(c) hereof, (ii) Employee terminates her
employment following a Constructive Termination or (iii) Employee's employment
is terminated without Cause within two (2) years following a Change in Control
(as defined in Section 10).
In the event Employee terminates her employment with the Company (other
than (i) termination pursuant to Section 12(c) hereof, or (ii) termination
following a Constructive Termination), the Board of Directors of the Company
may, at its option, elect to extend the term of the provisions of this Section 8
for the Additional Restricted Period, provided, however, that if the Board of
Directors so elects, the Company shall make bi-weekly payments to Employee equal
to one-half of her then current bi-weekly Salary payments during the Additional
Restricted Period.
For purposes of Sections 7 and 8 of this Agreement, the term "Company"
shall include any subsidiary of the Company or other entity in which the Company
has, or has the right to acquire pursuant to a written agreement, a controlling
equity interest in such entity.
The term "Additional Restricted Period" shall mean the Initial Term of
this Agreement, provided, however, that if the termination of employment occurs
during any subsequent one-year term, then the Additional Restricted Period shall
mean the remaining period of such one-year term.
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<PAGE> 5
9. VIOLATIONS OF COVENANTS. Employee agrees and acknowledges that she
shall not be entitled to any compensation otherwise due under this Agreement for
any period of time during which she is in violation of her obligations under
this Agreement. Employee further agrees and acknowledges that the violation by
Employee of the covenants set forth in Sections 7 and 8 hereof would cause
irreparable injury to the Company and that the remedy at law for any violation
or threatened violation thereof by her would be inadequate and that the Company
shall be entitled to temporary and permanent injunctive relief or other
equitable relief without the necessity of proving actual damages.
10. SEVERANCE. Upon any Constructive Termination or upon any
termination by the Company of Employee's employment with the Company without
Cause (except on Employee's death or disability pursuant to Section 12(b)
hereof), then:
(a) Employee shall be entitled to a severance payment (the
"Severance") equal to two times (i) her Salary at the time of termination plus
(ii) the sum of her cash bonus received for each of the prior three (3) years,
divided by three (3) (which calculation shall include zero (0) for any such year
in which she did not receive a bonus); and
(b) any stock options held by Employee pursuant to any qualified or
non-qualified Company option plan shall immediately vest and become exercisable.
Employee shall be entitled to the benefits of this Section 10 without
regard to whether she obtains additional employment upon termination of her
employment with the Company. Any Severance payable to Employee pursuant to this
Section 10 shall be paid as follows: (i) one-half of the Severance shall be paid
within fifteen (15) days of the effective date of termination of Employee's
employment and (ii) one-half of the Severance shall be paid on the January 1
immediately following the year of termination.
The provisions of this Section 10 shall supersede any contrary
provisions of any other agreement by and between the parties hereto, now
existing or hereafter created, unless the provisions of this Section 10 are
specifically modified, amended or waived in such other agreement.
For the purposes of this Agreement, 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
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<PAGE> 6
(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 (a "Transaction"), 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, as a result
of one or more elections of directors which elections were contested by
one or more shareholders, individuals who at the beginning of any such
period constitute the Board of Directors 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.
Notwithstanding the foregoing definition of "Change in Control," a
Change in Control shall not be deemed to have occurred by virtue of the
Company's issuance of securities to an underwriting syndicate in a public
offering approved by the Board of Directors.
For purposes of this Agreement, a "Constructive Termination" will be
deemed to have occurred if Employee's duties have been significantly altered
such that she is no longer entitled to perform the duties reasonably incident to
the office of President of the Company, or if the Company requires Employee to
move her principal place of employment more than thirty-five (35) miles away
from the Company's current executive offices in Grand Terrace, California,
provided, however, that if the Company is involved in a Transaction in which it
becomes a subsidiary or division of the acquiring company, a Constructive
Termination shall not be deemed to have occurred if Employee, in connection with
or following such Transaction, is offered a position as a senior executive
officer of the acquiring company and is offered a comparable salary.
11. NONASSIGNMENT. Neither party hereto may assign any rights or
obligations hereunder, except that upon the occurrence of a Change in Control,
this Agreement shall bind and inure to the benefit of both Employee and the
Company's successors and assigns, or the acquiring or surviving corporation, as
the case may be.
12. TERMINATION. (a) Termination With Cause. If, during the term of
this Agreement, Employee breaches or fails to perform a material provision of
this Agreement (including her duties hereunder) or engages in conduct harmful to
the Company, or willfully disregards the lawful instructions of the Chief
Executive Officer or Board of Directors of the Company (which breach, failure to
perform, harmful conduct or willful disregard of lawful instructions is not
cured by Employee within 30 days following written notice thereof by the Company
to Employee), engages
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<PAGE> 7
in fraudulent conduct, or is convicted of a crime or misdemeanor involving moral
turpitude or dishonesty, then this Agreement shall at the election of the
Company, terminate (i) immediately upon conviction, or (ii) upon a reasonable
determination by the Board of Directors that Employee has failed to cure such
breach or failure to perform a material provision of this Agreement, conduct
harmful to the Company or willful disregard of lawful instructions, or has
engaged in fraudulent conduct (the occurrence of such events, singly or
collectively, being "Cause" for termination), and the Company shall have no
further obligations hereunder.
(b) Termination on Death or Disability. If, during the term of this
Agreement, Employee dies or becomes mentally or physically incapacitated or
disabled so as to be unable to perform her duties, then this Agreement shall
terminate as of the last day of the month in which Employee dies or her mental
or physical incapacity or disability is established (the "Termination Date") and
the Company shall pay to Employee (or her heirs or executors) all Salary accrued
through the Termination Date and any other accrued and unpaid benefits to which
Employee was entitled as of the Termination Date. Upon any termination of
Employee's employment with the Company due to the Employee's death, unless
otherwise provided by the related option plan or option agreement, any stock
options held by Employee pursuant to any qualified or non-qualified Company
option plan shall immediately vest and become exercisable. Employee's mental or
physical incapacity or disability shall be conclusively evidenced by Employee's
inability to perform services hereunder for a period of sixty (60) consecutive
business days.
(c) Termination by the Employee. This Agreement may be terminated
by Employee upon the material breach by the Company of any material provision
hereof, by providing thirty (30) days' prior written notice to the Company, in
which event Employee shall be bound by the provisions of Section 7 hereof but
shall not be bound by the provisions of Section 8 hereof.
13. NOTICES. Any notice or other communication under this Agreement
shall be in writing and shall be sent by certified or registered mail addressed
to the respective parties as follows:
If to the Company:
Children's Comprehensive Services, Inc.
3401 West End Avenue
Suite 500
Nashville, TN 37203
Attention: Chief Financial Officer
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<PAGE> 8
with a copy to:
Children's Comprehensive Services, Inc.
3401 West End Avenue
Suite 500
Nashville, Tennessee 37203
Attn: Compensation Committee of Board of Directors
If to Employee:
Amy S. Harrison
9561 Box Springs Mountain Road
Moreno Valley, California 92388
Any such notice or other communication shall be deemed to have been given when
deposited, postage paid, in the United States mail. Either of the above
addresses may be changed at any time on ten days' prior notice given in the
manner provided above.
14. GOVERNING LAW. THE COMPANY IS A TENNESSEE CORPORATION WITH
HEADQUARTERS LOCATED IN NASHVILLE, TENNESSEE, AND EMPLOYEE AND THE COMPANY
HEREBY EXPRESSLY AGREE THAT THIS AGREEMENT SHALL BE GOVERNED IN ALL RESPECTS BY
THE LAWS OF THE STATE OF TENNESSEE.
15. HEADINGS. The headings herein are for convenience for reference
only and shall not be deemed to be part of the substance of this Agreement.
16. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement
between the parties with respect to the subject matter hereof and may be changed
or supplemented only by a written agreement signed by the Employee and the
Company.
17. ENFORCEABILITY; SEVERABILITY. It is the intention of the Company
and Employee that the provisions of this Agreement shall be enforced to the
fullest extent permissible under the laws and public policies of the laws of the
State of Tennessee, but that the unenforceability (or the modification to
conform with such laws or public policies) of any provisions hereof shall not
render unenforceable or impair the remainder of this Agreement. Accordingly, if
any provision of this Agreement shall be determined to be invalid or
unenforceable, either in whole or in part, this Agreement shall be deemed
amended to delete or modify, as necessary, the offending provisions and to alter
the balance of this Agreement in order to render the same valid and enforceable
to the fullest extent permissible as aforesaid. The provisions of this Agreement
shall be deemed severable, and the invalidity or unenforceability of any one or
more of the provisions hereof shall not affect the validity and enforceability
of the other provisions hereof. In the event that any provision of Section 8
relating the time period and/or geographical areas of restriction shall be
declared by a court of competent jurisdiction to exceed the maximum time period
and/or
8
<PAGE> 9
geographical areas of restriction such court deems reasonable and enforceable,
said time period and/or geographical areas of restriction shall be deemed to
become and thereafter be the maximum time period and/or geographical area of
restriction that such court deems reasonable and enforceable.
18. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which when so executed shall be deemed to be an original,
and such counterparts shall together constitute one and the same instrument.
IN WITNESS WHEREOF, the Company and Employee have executed this
Agreement as of the date first above written.
CHILDREN'S COMPREHENSIVE
SERVICES, INC.
By: /s/ William J Ballard
---------------------------------------
Title: Chairman/CEO
------------------------------------
AMY S. HARRISON
/s/ Amy Susan Harrison
-------------------------------------------
9
<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 NINE
MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,593
<SECURITIES> 0
<RECEIVABLES> 25,103
<ALLOWANCES> 1,520
<INVENTORY> 0
<CURRENT-ASSETS> 32,126
<PP&E> 60,196
<DEPRECIATION> 9,756
<TOTAL-ASSETS> 98,072
<CURRENT-LIABILITIES> 14,599
<BONDS> 0
0
0
<COMMON> 74
<OTHER-SE> 55,682
<TOTAL-LIABILITY-AND-EQUITY> 98,072
<SALES> 0
<TOTAL-REVENUES> 82,714
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 75,597
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,174
<INCOME-PRETAX> 6,390
<INCOME-TAX> 2,524
<INCOME-CONTINUING> 3,866
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,866
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.51
</TABLE>
