<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 400, Nashville, Tennessee 37203
- --------------------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (615) 250-0000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Common Stock, $ .01 Par Value, outstanding at November 9, 1999 - 7,280,407
shares.
<PAGE> 2
INDEX
CHILDREN'S COMPREHENSIVE SERVICES, INC.
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets-September 30, 1999
and June 30, 1999...................................................3
Consolidated Statements of Income --
Three months ended September 30, 1999 and 1998......................5
Consolidated Statements of Cash Flows --
Three months ended September 30, 1999 and 1998......................6
Notes to Consolidated Financial Statements --
September 30, 1999..................................................8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................18
SIGNATURES...........................................................................19
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------- -------
(dollars in thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,964 $ 1,774
Accounts receivable, net of allowance for doubtful
accounts of $1,907 at September 30 and $1,952 at
June 30 24,008 24,692
Prepaid expenses 1,413 1,063
Deferred income taxes 1,212 1,212
Other current assets 1,833 4,678
------- -------
TOTAL CURRENT ASSETS 31,430 33,419
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $10,640 at September 30 and $10,570
at June 30 49,921 50,811
COST IN EXCESS OF NET ASSETS ACQUIRED, net 13,159 13,398
OTHER ASSETS AND DEFERRED CHARGES, net 932 1,003
------- -------
TOTAL ASSETS $95,442 $98,631
======= =======
</TABLE>
3
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
September 30, June 30,
1999 1999
------- -------
(dollars in thousands)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,412 $ 3,834
Current portion - long-term debt and capital leases 829 817
Income taxes payable 88 702
Accrued employee compensation 5,048 5,842
Accrued other expenses 2,332 2,404
Other liabilities and deferred revenue 2,091 2,038
------- -------
TOTAL CURRENT LIABILITIES 12,800 15,637
LONG TERM DEBT AND CAPITAL LEASE
OBLIGATIONS 24,141 24,854
DEFERRED TAXES PAYABLE 1,921 1,910
------- -------
TOTAL LIABILITIES 38,862 42,401
------- -------
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
7,278,907 shares at September 30 and 7,295,526 shares
at June 30 73 73
Additional paid-in capital 51,106 51,217
Retained earnings 5,401 4,940
------- -------
TOTAL SHAREHOLDERS' EQUITY 56,580 56,230
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $95,442 $98,631
======= =======
</TABLE>
See notes to consolidated financial statements.
4
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------
1999 1998
-------- --------
(In thousands, except per share amounts)
<S> <C> <C>
Revenues:
Operating revenues $ 28,923 $ 22,329
Management fee income 856 871
-------- --------
TOTAL REVENUES 29,779 23,200
-------- --------
Operating expenses:
Employee compensation and benefits 18,953 14,519
Purchased services and other expenses 8,433 6,961
Depreciation and amortization 1,079 611
Related party rent 29 29
-------- --------
TOTAL OPERATING EXPENSES 28,494 22,120
-------- --------
Income from operations 1,285 1,080
Other (income) expense:
Interest expense 499 248
Other (9) (271)
-------- --------
TOTAL OTHER (INCOME) EXPENSE, NET 490 (23)
-------- --------
Income before income taxes and cumulative
effect of accounting change 795 1,103
Provision for income taxes 334 435
-------- --------
Income before cumulative effect of accounting change 461 668
Cumulative effect of accounting change, net of
income tax benefit of $12 in 1998 -- 20
-------- --------
NET INCOME $ 461 $ 648
======== ========
Basic earnings per common share:
Before cumulative effect of accounting change $ 0.06 $ 0.08
Cumulative effect of accounting change -- --
-------- --------
NET INCOME $ 0.06 $ 0.08
======== ========
Diluted earnings per common share:
Before cumulative effect of accounting change $ 0.06 $ 0.08
Cumulative effect of accounting change -- --
-------- --------
NET INCOME $ 0.06 $ 0.08
======== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------
1999 1998
------- --------
(in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 461 $ 648
Adjustments to reconcile net income
to net cash provided (used) by operating activities:
Depreciation 825 553
Amortization 254 58
Provision for bad debts 169 102
Other (52) 7
Changes in operating assets and liabilities, net of effects
from the 1998 purchase of Ameris:
Accounts receivable 515 506
Prepaid expenses (350) (435)
Other current assets 346 167
Accounts payable (1,422) 1,601
Accrued employee compensation (794) (1,913)
Accrued other expenses (19) 1,186
Income taxes payable (614) (971)
------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (681) 1,509
------- --------
INVESTING ACTIVITIES
Purchase of Ameris -- (11,652)
Collection (purchase) of note receivable 2,500 (2,500)
Purchase of property and equipment (477) (334)
Proceeds from sale of property and equipment 643 --
Decrease (increase) in other assets 15 (7)
------- --------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 2,681 (14,493)
------- --------
</TABLE>
6
<PAGE> 7
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------
1999 1998
------- --------
(in thousands)
<S> <C> <C>
FINANCING ACTIVITIES
Principal payments on revolving lines of credit, long-
term borrowings and capital lease obligations $(3,999) $ (1,763)
Proceeds from revolving lines of credit and long-term borrowings 3,300 2,773
Common stock repurchased (171) (6,263)
Proceeds from issuance of common stock, net 60 3
------- --------
NET CASH USED BY FINANCING ACTIVITIES (810) (5,250)
------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,190 (18,234)
Cash and cash equivalents at beginning of period 1,774 20,067
------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,964 $ 1,833
======= ========
</TABLE>
See notes to consolidated financial statements.
7
<PAGE> 8
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 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 month period ended September 30,
1999 are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 2000. 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, 1999, the Company's prior
fiscal year end.
Certain reclassifications have been made to the prior year financial statements
to conform to the fiscal 2000 presentation.
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 -- ACCOUNTING PRONOUNCEMENTS
During the fourth quarter of fiscal 1999 the Company adopted, effective July 1,
1998, Accounting Standards Executive Committee Statement of Position ("SOP")
98-5, "Reporting on Costs of Start-Up Activities" which required the Company,
upon adoption, to write off as a cumulative effect of a change in accounting
principle any previously capitalized start-up costs. Early adoption of SOP 98-5
resulted in the restatement of reported quarterly results for the interim
periods of fiscal 1999.
The Company has adopted Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards ("SFAS") No. 131, "Disclosure about Segments
of an Enterprise and Related Information" which requires the Company to report
segment information in annual financial
8
<PAGE> 9
NOTE C -- ACCOUNTING PRONOUNCEMENTS (continued)
statements and also requires it to report selected segment information in
interim financial reports to shareholders. The Company has determined that it
has only one reportable segment.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Subsequently SFAS No. 137 was issued,
deferring the effective date of SFAS No. 133 for one year. This Statement
requires all derivative financial instruments to be recorded on the balance
sheet at fair value. This results in the offsetting changes in fair values or
cash flows of both the hedge and the hedged item being recognized in earnings in
the same period. Changes in fair value of derivatives not meeting the
Statement's hedge criteria are included in income. The Company expects to adopt
the new Statement July 1, 2000. The Company does not expect the adoption of this
Statement to have a material effect on its results of operations or financial
position.
NOTE D -- EARNINGS PER COMMON SHARE
The computation of basic earnings per common share is based on the weighted
average number of shares outstanding. Diluted earnings per common share includes
the effect of common stock equivalents, consisting of dilutive stock options and
warrants.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------
1999 1998
---------- ----------
<S> <C> <C>
BASIC:
Average shares outstanding 7,282,552 7,698,959
========== ==========
Net income $ 461,000 $ 648,000
========== ==========
Per share amount $ 0.06 $ 0.08
========== ==========
DILUTED:
Average shares outstanding 7,282,552 7,698,959
Net effect of dilutive stock options and warrants 80,843 131,367
---------- ----------
TOTAL 7,363,395 7,830,326
========== ==========
Net income $ 461,000 $ 648,000
========== ==========
Per share amount $ 0.06 $ 0.08
========== ==========
</TABLE>
9
<PAGE> 10
NOTE E -- ACQUISITIONS
In December 1998, the Company acquired Somerset, Inc. ("Somerset"), 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 $2.4 million in notes payable. This transaction has been accounted for
as a purchase. Pro forma results of operations for the three months ended
September 30, 1998 as if the acquisition had occurred on July 1, 1998 would not
differ materially from reported amounts.
In September 1998, the Company acquired Ameris Health Systems, Inc. ("Ameris")
for net consideration of approximately $12.5 million in cash. 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. This transaction
has been accounted for as a purchase. Pursuant to this transaction, the Company
also purchased a note receivable for $2.5 million which was collected during the
first quarter of fiscal 2000. Pro forma results of operations for the three
months ended September 30, 1998 as if the acquisition had occurred on July 1,
1998 would not differ materially from reported amounts. Cost in excess of net
assets acquired totaled approximately $13.1 million for the Ameris and Somerset
acquisitions, and is being amortized over fifteen years.
10
<PAGE> 11
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, 1999. The Company undertakes no obligation to publicly release any
revisions to any forward-looking statements contained herein to reflect events
or circumstances occurring after the date hereof or to reflect the occurrence of
unanticipated events.
General
As of September 30, 1999, the Company was providing education, treatment and
juvenile justice services to approximately 3,600 at-risk and troubled youth
either directly or through management contracts. It currently offers these
services through the operation and management of non-residential specialized
education programs and day treatment programs and both open and secure
residential treatment centers in 14 states. Revenues are recognized as services
are rendered. The Company's non-residential programs, which historically have
generated higher operating margins than the Company's residential facilities,
generally receive revenues based on per diem rates. The Company's residential
facilities generally receive revenues under either fixed fee contracts, at per
diem rates or on a cost reimbursed basis.
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 by and between Helicon
and the Company (the "Helicon Agreement"). As of September 30, 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, 2004, the Company is entitled to receive for these services
management fee income in an amount equal to 6% of the monthly gross revenues of
Helicon's programs. The payment of these management fees, however, is
subordinated in right of payment to amounts payable by Helicon to fund its
programs. At September 30, 1999, the Company has also guaranteed Helicon's
obligations under a bank line of credit in the amount of $1,500,000. See
"Liquidity and Capital Resources."
11
<PAGE> 12
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.
Other (income)expense includes income and expense items classified as
non-operating, including interest income and gains and losses on disposition of
fixed assets.
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.
In September 1998, the Company acquired Ameris Health Systems which ,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. Pursuant to this transaction, the
Company also purchased a note receivable for $2.5 million in cash which was
collected upon maturity in September 1999.
In December 1998, the Company acquired Somerset, Inc., the operator of a
200-seat educational day treatment program located in southern California.
12
<PAGE> 13
Results of Operations
The following table sets forth, for the periods indicated, the percentage
relationship to the Company's total revenues of certain items in the Company's
statements of income:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------
1999 1998
------ ------
<S> <C> <C>
Operating revenues 97.1% 96.2%
Management fee income 2.9 3.8
------ ------
TOTAL REVENUES 100.0 100.0
Employee compensation and benefits 63.6 62.6
Purchased services and other expenses 28.4 30.0
Depreciation and amortization 3.6 2.6
Related party rent 0.1 0.1
------ ------
TOTAL OPERATING EXPENSES 95.7 95.3
------ ------
Income from operations 4.3 4.7
Other (income) expense:
Interest expense 1.7 1.1
Other -- (1.2)
Provision for income taxes 1.1 1.9
Cumulative effect of accounting change -- 0.1
------ ------
NET INCOME 1.5% 2.8%
====== ======
</TABLE>
Three Months Ended September 30, 1999 versus September 30, 1998
Operating revenues for the three months ended September 30, 1999 increased
$6,594,000 or 29.5%, to $28,923,000 as compared to $22,329,000 for the three
months ended September 30, 1998. Approximately $4,400,000 of the increase in
operating revenues is attributable to acquisitions and approximately $1,700,000
of the increase is due to the opening of new programs subsequent to the first
quarter of fiscal 1999. Additionally, operating revenues decreased approximately
$300,000 versus the same quarter in the prior year due to a reduction in the
census of the Company's Eufaula, Alabama secure residential program. Effective
October 1, 1999, the Company's contract to operate this program was
discontinued.
Management fee income decreased $15,000 for the three months ended September 30,
1999 to $856,000 from $871,000 for the three month period ended September 30,
1998. Management fee income recognized under the Helicon Agreement for the three
months ended September 30, 1999 decreased $5,000 to $330,000 from $335,000 for
the three months ended September 30, 1998.
Total revenues for the three months ended September 30, 1999 increased
$6,579,000, or 28.4%, to $29,779,000 as compared to $23,200,000 for the three
months ended September 30, 1998 as a result of the factors described above.
13
<PAGE> 14
Employee compensation and benefits for the three months ended September 30, 1999
increased $4,434,000, or 30.5%, to $18,953,000, as compared to $14,519,000 for
the three months ended September 30, 1998. As a percentage of total revenues,
employee compensation and benefits increased from 62.6% for the three months
ended September 30, 1998 to 63.6% for the three months ended September 30, 1999.
The increase in employee compensation and benefits over the same period in the
prior year results primarily from the Company's growth. The increase in employee
compensation and benefits as a percent of revenue over the same period in the
prior year results in part from continuing start-up operations at the Company's
Dyersburg, Tennessee facility during the quarter and from increases in employee
benefit costs.
Purchased services and other expenses for the three months ended September 30,
1999 increased $1,472,000, or 21.1%, to $8,433,000, as compared to $6,961,000
for the three months ended September 30, 1998. As a percentage of total
revenues, purchased services and other expenses decreased to 28.4% for the three
months ended September 30, 1999 from 30.0% for the three months ended September
30, 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 impact of the
Company's acquisitions.
Depreciation and amortization for the three months ended September 30, 1999
increased $468,000, or 76.6%, to $1,079,000 as compared to $611,000 for the
three months ended September 30, 1998. The increase in depreciation and
amortization compared to the same period in the prior year is primarily
attributable to an increase in depreciation and goodwill amortization arising
from the Company's acquisitions.
Income from operations for the three months ended September 30, 1999 increased
$205,000, or 19.0%, to $1,285,000 as compared to $1,080,000 for the three months
ended September 30, 1998, and decreased as a percentage of total revenues to
4.3% for the three months ended September 30, 1999 from 4.7% for the three
months ended September 30, 1998 as a result of the factors described above.
Interest expense for the three months ended September 30, 1999 increased
$251,000 to $499,000 as compared to $248,000 for the three months ended
September 30, 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.
Other (income)expense for the three months ended September 30, 1999 decreased
$262,000 to income of $9,000 as compared to income of $271,000 for the three
months ended September 30, 1998. The decrease in other (income)expense over the
same period in the prior year results primarily from a reduction in interest
income principally due to the decrease in cash available for investment as a
result of the Company's share buyback program and its acquisition of Ameris.
14
<PAGE> 15
The provision for income taxes for the three months ended September 30, 1999
decreased $101,000 to $334,000 from $435,000 for the three months ended
September 30, 1998. The decrease in the provision compared to the same period in
the prior year results primarily from the decrease in the Company's taxable
income, offset by an increase in the Company's effective tax rate due primarily
to non-deductible goodwill amortization associated with fiscal 1999
acquisitions.
Liquidity and Capital Resources
Cash used by operating activities for the three months ended September 30, 1999
was $681,000 on net income of $461,000 as compared to cash provided of
$1,509,000 on net income of $648,000 for the three months ended September 30,
1998. Working capital at September 30, 1999 was $18,630,000, as compared to
$17,782,000 at June 30, 1999.
Cash provided by investing activities was $2,681,000 for the three months ended
September 30, 1999 as compared to cash used of $14,493,000 for the three months
ended September 30, 1998. The change was due primarily to the Ameris acquisition
in the first quarter of fiscal 1999 as compared to the collection of the Ameris
note receivable in the current period.
Cash of $810,000 was used by financing activities for the three months ended
September 30, 1999 due primarily to payments on the Company's long term debt.
Cash of $5,250,000 was used by financing activities for the three months ended
September 30, 1998, due primarily to the repurchase of 700,000 shares of the
Company's Common Stock, offset by a net increase in the amount outstanding under
the Company's line of credit.
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 September 30, 1999, the outstanding balance under the line of
credit was $8,000,000.
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,
15
<PAGE> 16
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.
Helicon has also entered into a $1,500,000 line of credit with First American
National Bank which expires in October 2000. As a condition to this line of
credit, the Company agreed to guarantee Helicon's performance under such line of
credit. At September 30, 1999, the outstanding amount under Helicon's line of
credit was $1,500,000.
Capital expenditures during the next twelve months are expected to include the
replacement of existing capital assets as necessary, as well as the costs
associated with the opening of new programs and facilities, including the
possible purchase of certain real estate and improvements. The Company also may
consider other possible strategic acquisitions, including acquisitions of
existing programs and other companies engaged in youth services or related
businesses.
Current obligations, typically due within thirty days or less, are expected to
be funded with cash flow from operations and borrowings under the Company's line
of credit. Management believes that operations, cash on hand, amounts available
under its line of credit and outside financing sources will provide sufficient
cash flow for the next twelve months and that long-term liquidity requirements
will be met from cash flow from operations and outside financing sources.
The Year 2000 ("Y2K") issue involves the inability of some computers or
microprocessors to correctly handle the century change that will occur at
midnight, December 31, 1999. The Y2K issue, which also includes a number of
related problems, affects nearly every business in the world. The Company's
assessment of potential Y2K problems has focused on three areas: (i) the
Company's information technology ("IT") systems, (ii) its non-IT systems, and
(iii) its relationships with third parties. The Company has completed an
assessment of its IT systems' exposure to the Y2K-related problems, and
currently believes that its main IT systems, which include billing, accounting,
and payroll systems, are Y2K compliant. Although the Company has not tested the
Y2K compliance of such systems, such systems have been represented as Y2K
compliant by the vendors thereof. Certain less-critical IT systems as well as
certain individual computers and associated software are not currently Y2K
compliant, however, the Company expects to replace these systems or make them
Y2K compliant as needed.
The Company has also assessed the exposure of its non-IT systems (such as time
clocks) to Y2K problems, and does not believe that Y2K issues related to non-IT
systems will have a material adverse effect on the Company's results of
operations, financial position or cash flows.
The Company has made an assessment of the Y2K readiness of its payors and other
third parties with whom it does business. The Company has contacted all material
payors and other third parties in an attempt to minimize the effect of any Y2K
issues that may arise. Despite efforts that the Company may make in this regard,
there can be no assurance that the systems of other companies with whom it does
business will be compliant.
16
<PAGE> 17
To date, the Company has incurred no material expenses related to the Y2K
compliance of its IT and non-IT systems. The Company believes that the costs
associated with finalizing the Y2K compliance of such systems will not
materially increase the Company's future capital expenditures nor materially
affect the Company's results of operations.
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 developed a contingency plan to address
this scenario.
Inflation
Inflation has not had a significant impact on the Company's results of
operations since inception. Certain of the Company's existing contracts provide
for annual price increases based upon changes in the Consumer Price Index.
Impact of Accounting Changes
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Subsequently SFAS No. 137 was issued,
deferring the effective date of SFAS No. 133 for one year. This Statement
requires all derivative financial instruments to be recorded on the balance
sheet at fair value. This results in the offsetting changes in fair values or
cash flows of both the hedge and the hedged item being recognized in earnings in
the same period. Changes in fair value of derivatives not meeting the
Statement's hedge criteria are included in income. The Company expects to adopt
the new Statement July 1, 2000. The Company does not expect the adoption of this
Statement to have a material effect on its results of operations or financial
position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
At September 30, 1999, the Company had only cash equivalents, invested in high
grade, very short term securities, which are not typically subject to material
market risk. The Company has outstanding loans at both fixed and variable rates.
For loans with fixed interest rates, a hypothetical 10% change in interest rates
would have no impact on the Company's future earnings and cash flows related to
these instruments. A hypothetical 10% change in interest rates would have an
immaterial impact on the fair values of these instruments. For loans with
variable interest rates, a hypothetical 10% change in interest rates would have
an immaterial impact on the Company's future earnings, cash flows and fair
values related to these instruments.
17
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
(10) Third Amendment to Credit Agreement by and between the
Registrant and SunTrust Bank, Nashville, N.A. as agent and lender,
dated September 27, 1999
(27) Financial Data Schedule. (SEC use only)
(b) Reports on Form 8-K:
None
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHILDREN'S COMPREHENSIVE SERVICES, INC.
(Registrant)
Date: November 15, 1999 /s/ WILLIAM J BALLARD
--------------------------------------------
William J Ballard
Chairman and Chief Executive Officer
Date: November 15, 1999 /s/ DONALD B. WHITFIELD
--------------------------------------------
Donald B. Whitfield
Vice President of Finance, Chief Financial
Officer (Principal Financial and Accounting
Officer)
19
<PAGE> 1
EXHIBIT 10
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT ("Amendment") is made and
entered into as of September 27, 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 and a Second Amendment to Credit
Agreement dated as of April 20, 1999 (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.(b) of the Credit Agreement shall be amended and
restated in its entirety as follows:
(b) Fixed Charge Coverage Ratio. (i) from the date
hereof until the fiscal quarter ending December 31, 2001,
suffer or permit, as of the last day of any fiscal quarter,
the ratio of (A) the sum of: (1) Consolidated EBIT, plus (2)
Consolidated Rental Expense, minus (3) dividends paid to (B)
the sum of (1) Consolidated Interest Expense, plus (2)
Consolidated Rental Expense to be less than 3.0 to 1.0
(provided, however, that for the fiscal quarters ending
September 30, 1999, and December 31, 1999, Borrower shall not
suffer or permit such ratio to be less than 2.7 to 1.0, and
provided, however for the fiscal quarter ending on March 31,
2000, Borrower shall not suffer or permit such ratio to be
less than 2.8 to 1.0); and (ii) commencing with the fiscal
quarter ending March 31, 2002 and throughout the term of this
Agreement, suffer or permit, as of the last day of any fiscal
quarter, the ratio of (A) the sum of: (1) Consolidated EBIT,
plus (2) Consolidated Rental Expense, minus (3) dividends paid
to (B) the sum of (1) Consolidated Interest Expense, plus (2)
Consolidated Rental Expense plus (3) principal payments paid
on the Term Loans to be less than 2.0 to 1.0.
<PAGE> 2
2. Borrower reaffirms all representations and warranties under the
Credit Agreement.
3. The Credit Agreement is not amended in any other respect.
4. 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: /s/ Donald B. Whitfield
------------------------------------
Title: VP - Finance/CFO
---------------------------------
AGENT:
SUNTRUST BANK, NASHVILLE, N.A., AS AGENT
By: /s/ Karen Cole Ahern
------------------------------------
Title: SVP
---------------------------------
LENDERS:
SUNTRUST BANK, NASHVILLE, N.A.
By: /s/ Karen Cole Ahern
------------------------------------
Title: SVP
---------------------------------
FIRST AMERICAN NATIONAL BANK
By: /s/ Allison H. Jones
------------------------------------
Title: SVP
---------------------------------
-2-
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CHILDREN'S COMPREHENSIVE SERVICES, INC. FOR THE THREE
MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,964
<SECURITIES> 0
<RECEIVABLES> 25,915
<ALLOWANCES> 1,907
<INVENTORY> 0
<CURRENT-ASSETS> 31,430
<PP&E> 60,561
<DEPRECIATION> 10,640
<TOTAL-ASSETS> 95,442
<CURRENT-LIABILITIES> 12,800
<BONDS> 0
0
0
<COMMON> 73
<OTHER-SE> 56,507
<TOTAL-LIABILITY-AND-EQUITY> 95,442
<SALES> 0
<TOTAL-REVENUES> 29,779
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 28,494
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 499
<INCOME-PRETAX> 795
<INCOME-TAX> 334
<INCOME-CONTINUING> 461
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 461
<EPS-BASIC> .06
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