<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(MARK ONE) FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 0-16162
CHILDREN'S COMPREHENSIVE SERVICES, INC.
---------------------------------------
(Exact name of registrant as specified in its charter)
Tennessee 62-1240866
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3401 West End Ave., Suite 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 period 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 the issuer's common stock, as of the latest
practicable date:
Common Stock, $ .01 Par Value, outstanding at May 5, 2000 - 7,171,188 shares.
1
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INDEX
CHILDREN'S COMPREHENSIVE SERVICES, INC.
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets--March 31, 2000
and June 30, 1999.........................................................3
Consolidated Statements of Income--
Three and nine month periods ended March 31, 2000 and 1999................5
Consolidated Statements of Cash Flows--
Nine months ended March 31, 2000 and 1999.................................6
Notes to Consolidated Financial Statements--
March 31, 2000............................................................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.................19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...........................................20
SIGNATURES..........................................................................21
</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) 2000 1999
--------- --------
(unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,752 $ 1,774
Accounts receivable, net of allowance for doubtful
accounts of $4,239 at March 31 and $1,952 at
June 30 27,097 24,692
Prepaid expenses 1,041 1,063
Deferred income taxes 1,212 1,212
Other current assets 2,810 4,678
------- -------
TOTAL CURRENT ASSETS 35,912 33,419
PROPERTY AND EQUIPMENT, net of
accumulated depreciation of $11,494 at March 31
and $10,570 at June 30 48,237 50,811
COST IN EXCESS OF NET ASSETS ACQUIRED, net 12,713 13,398
OTHER ASSETS AND DEFERRED CHARGES, net 774 1,003
------- -------
TOTAL ASSETS $97,636 $98,631
======= =======
</TABLE>
3
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
<TABLE>
<CAPTION>
March 31, June 30,
(dollars in thousands) 2000 1999
------- -------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,239 $ 3,834
Current portion - long-term debt and capital leases 855 817
Accrued employee compensation 4,361 5,842
Income taxes payable 205 702
Accrued other expenses 4,230 2,404
Other liabilities and deferred revenue 1,297 2,038
------- -------
TOTAL CURRENT LIABILITIES 13,187 15,637
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS 25,107 24,854
DEFERRED TAXES PAYABLE 1,898 1,910
------- -------
TOTAL LIABILITIES 40,192 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 7,171,188 shares at March 31
and 7,295,526 shares at June 30 72 73
Additional paid-in capital 50,469 51,217
Retained earnings 6,903 4,940
------- -------
TOTAL SHAREHOLDERS' EQUITY 57,444 56,230
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $97,636 $98,631
======= =======
</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) 2000 1999 2000 1999
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Revenues:
Operating revenues $ 32,360 $ 30,594 $91,848 $ 80,015
Management fee income 664 955 2,477 2,699
-------- -------- ------- --------
TOTAL REVENUES 33,024 31,549 94,325 82,714
-------- -------- ------- --------
Operating expenses:
Employee compensation and benefits 19,588 19,252 57,429 50,809
Purchased services and other expenses 8,885 7,983 26,037 22,773
Depreciation and amortization 1,068 1,008 3,188 2,425
Loss on Helicon receivables and loan guarantee 2,368 -- 2,368 --
Related party rent 28 28 86 86
-------- -------- ------- --------
TOTAL OPERATING EXPENSES 31,937 28,271 89,108 76,093
-------- -------- ------- --------
Income from operations 1,087 3,278 5,217 6,621
Other (income) expense:
Interest expense 586 556 1,644 1,174
Other (10) (85) 40 (447)
-------- -------- ------- --------
TOTAL OTHER (INCOME) EXPENSE, NET 576 471 1,684 727
-------- -------- ------- --------
Income before income taxes and cumulative
effect of accounting change 511 2,807 3,533 5,894
Provision for income taxes 301 1,109 1,570 2,328
-------- -------- ------- --------
Income before cumulative effect of accounting change 210 1,698 1,963 3,566
Cumulative effect of accounting change, net of
income tax benefit of $12 in 1999 -- -- -- 20
-------- -------- ------- --------
NET INCOME $ 210 $ 1,698 $ 1,963 $ 3,546
======== ======== ======= ========
Basic earnings per common share:
Before cumulative effect of accounting change $ 0.03 $ 0.23 $ 0.27 $ 0.47
Cumulative effect of accounting change -- -- -- --
-------- -------- ------- --------
NET INCOME $ 0.03 $ 0.23 $ 0.27 $ 0.47
======== ======== ======= ========
Diluted earnings per common share:
Before cumulative effect of accounting change $ 0.03 $ 0.22 $ 0.27 $ 0.46
Cumulative effect of accounting change -- -- -- --
-------- -------- ------- --------
NET INCOME $ 0.03 $ 0.22 $ 0.27 $ 0.46
======== ======== ======= ========
</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,
--------------------------
(in thousands) 2000 1999
------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,963 $ 3,546
Adjustments to reconcile net income to net cash
(used) provided by operating activities:
Depreciation 2,458 1,969
Amortization 730 456
Provision for bad debts 839 684
Loss on Helicon receivables and loan guarantee 2,368 --
Other 61 68
Changes in operating assets and liabilities, net of effects
from acquisitions in 1999:
Accounts receivable (4,244) (4,364)
Prepaid expenses 22 (281)
Other current assets (631) (811)
Accounts payable (1,595) (103)
Accrued employee compensation (1,482) (623)
Accrued other expenses 327 362
Income taxes payable (497) 37
Other liabilities (742) 774
------- --------
NET CASH (USED) PROVIDED BY OPERATING
ACTIVITIES (423) 1,714
INVESTING ACTIVITIES
Purchase of Ameris Health Systems, Inc. -- (12,499)
Purchase of Somerset, Inc. -- (8,175)
Sale of assets of CCS/Bay County 3,637 --
Collection (purchase) of note receivable 2,500 (2,500)
Purchase of property and equipment (3,978) (3,079)
Proceeds from sale of property and equipment 635 --
Decrease (increase) in other assets 64 (728)
------- --------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES $ 2,858 $(26,981)
------- --------
</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,
--------------------------
(in thousands) 2000 1999
------- --------
<S> <C> <C>
FINANCING ACTIVITIES
Principal payments on revolving lines of credit, long-
term borrowings and capital lease obligations $(9,607) $(21,736)
Proceeds from revolving lines of credit and long-term
borrowings 9,900 34,471
Common stock repurchased (887) (6,263)
Proceeds from issuance of common stock, net 137 389
Stock registration costs -- (68)
------- --------
NET CASH (USED) PROVIDED BY FINANCING
ACTIVITIES (457) 6,793
------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,978 (18,474)
Cash and cash equivalents at beginning of period 1,774 20,067
------- --------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 3,752 $ 1,593
======= ========
</TABLE>
See notes to consolidated financial statements.
7
<PAGE> 8
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2000
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 (including
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
March 31, 2000 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 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.
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NOTE C -- ACCOUNTING PRONOUNCEMENTS (continued)
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 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.
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,
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BASIC:
Average shares outstanding 7,164,000 7,378,000 7,240,000 7,473,000
========== ========== ========== ==========
Net income $ 210,000 $1,698,000 $1,963,000 $3,546,000
========== ========== ========== ==========
Per share amount $ 0.03 $ 0.23 $ 0.27 $ 0.47
========== ========== ========== ==========
DILUTED:
Average shares outstanding 7,164,000 7,378,000 7,240,000 7,473,000
Net effect of dilutive stock
options and warrants 26,000 176,000 58,000 161,000
---------- ---------- ---------- ----------
TOTAL 7,190,000 7,554,000 7,298,000 7,634,000
========== ========== ========== ==========
Net income $ 210,000 $1,698,000 $1,963,000 $3,546,000
========== ========== ========== ==========
Per share amount $ 0.03 $ 0.22 $ 0.27 $ 0.46
========== ========== ========== ==========
</TABLE>
9
<PAGE> 10
NOTE E - ACQUISITIONS AND DIVESTITURES
In March 2000, the Company sold the tangible assets of CCS/Bay County in Bay
County, Florida for approximately $3.8 million. Net proceeds from this
transaction of approximately $3.6 million approximated the carrying value of the
assets sold. For the nine months ended March 31, 2000, these assets generated an
immaterial operating loss on net revenues of approximately $5 million.
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 nine months ended March
31, 1999, 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 nine
months ended March 31, 1999, 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.
NOTE F - HELICON
A licensing investigation of the residential treatment program at the Helicon
Youth Center (the "HYC") in Riverside County, California by Community Care
Licensing ("CCL"), a division of California's Department of Social Services led
to an unexpected and substantial decline in the census of the HYC during the
quarter ended March 31, 2000. This decline occurred due primarily to the
cessation of referrals to the HYC by Riverside County. The Company announced on
April 25, 2000 that Helicon had signed a settlement agreement (the "Agreement")
with CCL. Under the Agreement, Helicon's license to operate the residential
treatment program at the HYC has been disciplined for a period of two years. Due
primarily to the decline in census at the HYC, and at the related group homes,
Helicon revenues generated by these programs were below expectation during the
third quarter. With Helicon's fourth quarter revenues also projected to be well
below expectation, the Company has established a reserve for its accounts
receivable arising from its management services to, and lease arrangements with,
Helicon, as well as for its guarantee of Helicon's $1,500,000 bank line of
credit. This reserve has resulted in a nonrecurring charge of $2,368,000 to the
Company's financial results for its fiscal quarter ended March 31, 2000. In
addition to the nonrecurring charge, third quarter income was negatively
impacted due to the census reduction at the HYC and group homes which limited
Helicon's ability to pay the Company management fees and rents. The decline also
affected the performance of the educational day treatment program that the
Company operates at the HYC.
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<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 March 31, 2000, the Company was providing education, treatment and
juvenile justice services to approximately 3,800 at risk and troubled youth
either directly or through management contracts. It currently offers these
services through the operation and management of nonresidential specialized
education programs and day treatment programs and both open and secured
residential treatment centers in 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.
In September 1998, the Company acquired Ameris Health Systems, Inc. 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.
In December 1998, the Company acquired Somerset, Inc., the operator of a
200-seat educational day treatment program located in southern California.
In March 2000, the Company sold the tangible assets of CCS/Bay County in Bay
County, Florida. For the nine months ended March 31, 2000, these assets
generated an immaterial operating loss on net revenues of approximately $5
million.
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 is also entitled to receive
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
11
<PAGE> 12
Agreement"). As of March 31, 2000, 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 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. The Company has also
guaranteed Helicon's obligations under a bank line of credit in the amount of
$1,500,000. See "Helicon" and "Liquidity and Capital Resources."
Employee compensation and benefits include facility and program payrolls and
related taxes, as well as employee benefits, including insurance and worker's
compensation coverage. Employee compensation and benefits also includes general
and administrative payroll and related benefit costs.
Purchased services and other expenses include all expenses not otherwise
presented separately in the Company's statements of income. Significant
components of these expenses at the operating level include items such as
professional fees and contracted services, food, utilities, supplies, rent and
insurance. Significant components of these expenses at the administrative level
include legal, accounting, investor relations, marketing, consulting and travel
expense.
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 completed the repurchase of shares of its Common Stock under its 1
million share buyback program in January 2000. The program, approved in August
1998, was completed at an average price of $8.00 per share.
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.
Helicon
A licensing investigation of the residential treatment program at the Helicon
Youth Center (the "HYC") in Riverside County, California by Community Care
Licensing ("CCL"), a division of California's Department of Social Services, led
to an unexpected and substantial decline in the census of the HYC during the
quarter ended March 31, 2000. This decline occurred due primarily to the
cessation of referrals to the HYC by Riverside County. The Company announced on
April 25, 2000 that Helicon had signed a settlement agreement (the "Agreement")
with CCL. Under the Agreement, Helicon's license to operate the residential
treatment program at the HYC has been disciplined for a period of two years.
During this period, Helicon must not only comply with CCL regulations regarding
the operation of group homes, but also with certain other operating criteria
imposed by CCL. Should the HYC
12
<PAGE> 13
commit substantial or continuing violations of the Agreement, CCL could take
actions resulting in a temporary suspension or forfeiture of its license to
operate. As a result of the Agreement, Riverside County placing agencies have
resumed referring at-risk youth to the program.
Due primarily to the decline in census at the HYC, and at the related group
homes, Helicon revenues generated by these programs were below expectation
during the third quarter by approximately $1.1 million. With Helicon's fourth
quarter revenues also projected to be well below expectation, the Company has
established a reserve for its accounts receivable arising from its management
services to, and lease arrangements with, Helicon, as well as for its
anticipated funding of its guarantee of Helicon's $1,500,000 bank line of
credit. This reserve has resulted in a nonrecurring charge of $2,368,000
($1,373,000, or $0.19 per diluted share, after tax) to the Company's financial
results during its fiscal quarter ended March 31, 2000. In addition to the
nonrecurring charge, third quarter income was negatively impacted by
approximately $.06 per diluted share due to the census reduction at the HYC and
group homes which limited Helicon's ability to pay the Company management fees
and rents. The decline also affected the performance of the educational day
treatment program that the Company operates at the HYC.
On a going forward basis, the Company anticipates that the HYC will be limited
in its ability to pay both rent and management fees. Fourth quarter operating
results will also be impacted by reduced census at the educational day treatment
program operated at the HYC by the Company. As a result, the Company currently
expects fourth quarter results to be negatively impacted by approximately $0.04
to $0.05 per diluted share. On an annualized basis, after stabilization of the
HYC census, the ongoing negative impact on the Company's results from the
inability of the HYC to fully pay rent and management fees may approximate $0.10
per diluted share.
The HYC is located on land that is owned by, and leased from, Riverside County.
In the event that HYC were to lose its license and be unable to provide
services, Riverside County could assert a claim to the Helicon facility without
compensating the Company. However, the Company would seek to satisfy the lease's
requirements by requesting permission from Riverside County to sublease the HYC
to a qualified provider of similar services. Should the license be lost,
subleasing denied or no qualified provider secured, the Company would then be
forced to write off the value of the facility, which was carried at
approximately $6.3 million on its balance sheet as of March 31, 2000.
13
<PAGE> 14
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,
--------------------------- ---------------------------
2000 1999 2000 1999
---------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Operating revenues 98.0% 97.0% 97.4% 96.7%
Management fee income 2.0 3.0 2.6 3.3
---------- ----------- ------------ ----------
TOTAL REVENUES 100.0 100.0 100.0 100.0
---------- ----------- ------------ ----------
Employee compensation and benefits 59.3 61.0 60.9 61.4
Purchased services and other expenses 26.9 25.3 27.6 27.6
Depreciation and amortization 3.2 3.2 3.4 2.9
Loss on Helicon receivables and loan guarantee 7.2 - 2.5 -
Related party rent 0.1 0.1 0.1 0.1
---------- ----------- ------------ ----------
TOTAL OPERATING EXPENSES 96.7 89.6 94.5 92.0
---------- ----------- ------------ ----------
Income from operations 3.3 10.4 5.5 8.0
Other (income) expense:
Interest expense 1.8 1.8 1.7 1.4
Other - (0.3) - (0.5)
Provision for income taxes 0.9 3.5 1.7 2.8
Cumulative effect of accounting change - - - -
---------- ----------- ------------ ----------
NET INCOME 0.6% 5.4% 2.1% 4.3%
========== =========== ============ ==========
</TABLE>
Three Months Ended March 31, 2000 versus March 31, 1999
Operating revenues for the three months ended March 31, 2000 increased
$1,766,000, or 5.8%, to $32,360,000 as compared to $30,594,000 for the three
months ended March 31, 1999. The increase is primarily due to increased
utilization in certain programs and revenues from new programs, including
$873,000 from the Company's Pennsylvania operations which were acquired prior to
their start-up, offset by the September 1999 termination of the Eufaula, Alabama
contract and lease income from Helicon which was not recognized for the quarter
ended March 31, 2000. See "Helicon."
Management fee income decreased $291,000 for the three months ended March 31,
2000 to $664,000 from $955,000 for the three month period ended March 31, 1999.
The Company recognized no management fee income under the Helicon Agreement for
the three months ended March 31, 2000 versus $340,000 for the three months ended
March 31, 1999. See "Helicon."
Total revenues for the three months ended March 31, 2000 increased $1,475,000,
or 4.7%, to $33,024,000 as compared to $31,549,000 for the three months ended
March 31, 1999 as a result of the factors described above.
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<PAGE> 15
Employee compensation and benefits for the three months ended March 31, 2000
increased $336,000, or 1.8%, to $19,588,000, as compared to $19,252,000 for the
three months ended March 31, 1999. As a percentage of total revenues, employee
compensation and benefits decreased from 61.0% for the three months ended March
31, 1999 to 59.3% for the three months ended March 31, 2000. The increase in
employee compensation and benefits over the same period in the prior year
results primarily from the Company's growth. The decrease in employee
compensation and benefits as a percent of revenue over the same period in the
prior year results from increased utilization at certain facilities and from the
effect of lower start-up expenses in the current fiscal quarter versus the same
quarter last year.
Purchased services and other expenses for the three months ended March 31, 2000
increased $902,000, or 11.3%, to $8,885,000, as compared to $7,983,000 for the
three months ended March 31, 1999. As a percentage of total revenues, purchased
services and other expenses increased to 26.9% for the three months ended March
31, 2000 from 25.3% for the three months ended March 31, 1999. The increase in
purchased services and other expenses over the same period in the prior year is
primarily a result of the Company's growth.
During the fiscal 2000 period, the Company incurred a loss on Helicon accounts
receivable and loan guarantee in the amount of $2,368,000. See "Helicon."
Depreciation and amortization for the three months ended March 31, 2000
increased $60,000, or 6.0%, to $1,068,000 as compared to $1,008,000 for the
three months ended March 31, 1999. The increase in depreciation and amortization
compared to the same period in the prior year is primarily attributable to a net
increase in the Company's property and equipment.
Income from operations for the three months ended March 31, 2000 decreased
$2,191,000, or 66.8%, to $1,087,000 as compared to $3,278,000 for the three
months ended March 31, 1999, and decreased as a percentage of total revenues to
3.3% for the three months ended March 31, 2000 from 10.4% for the three months
ended March 31, 1999 as a result of the factors described above. See "Helicon."
Interest expense for the three months ended March 31, 2000 increased $30,000 to
$586,000 as compared to $556,000 for the three months ended March 31, 1999. The
increase in interest expense over the same period in the prior year is
attributed principally to an increase in the Company's effective interest rate.
Other (income) expense was income of $10,000 for the three months ended March
31, 2000 as compared to income of $85,000 for the three months ended March 31,
1999. The change versus the same period in the prior year is attributable
primarily to a decrease in interest income.
Provision for income tax expense for the three months ended March 31, 2000
decreased $808,000 to $301,000 from $1,109,000 for the three months ended March
31, 1999. The decrease in provision for income tax expense compared to the same
period in the prior year results 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.
15
<PAGE> 16
Nine months Ended March 31, 2000 versus March 31, 1999
Operating revenues for the nine months ended March 31, 2000 increased
$11,833,000 or 14.8%, to $91,848,000 as compared to $80,015,000 for the nine
months ended March 31, 1999. Approximately $7,555,000 of the increase in
operating revenues is attributable to entities acquired during fiscal 1999,
including the Pennsylvania operations which were acquired prior to their
start-up. The increase is also due to increased utilization in certain programs
and the opening of new programs, offset by the September 1999 termination of the
Eufaula, Alabama contract.
Management fee income decreased $222,000 for the nine months ended March 31,
2000 to $2,477,000 from $2,699,000 for the nine month period ended March 31,
1999. Management fee income recognized under the Helicon Agreement for the nine
months ended March 31, 2000 decreased $356,000 to $654,000 from $1,010,000 for
the nine months ended March 31, 1999, primarily as a result of the Company's not
recognizing any management fee income from Helicon in the third quarter of
fiscal 2000. See "Helicon".
Total revenues for the nine months ended March 31, 2000 increased $11,611,000,
or 14.0%, to $94,325,000 as compared to $82,714,000 for the nine months ended
March 31, 1999 as a result of the factors described above.
Employee compensation and benefits for the nine months ended March 31, 2000
increased $6,620,000, or 13.0%, to $57,429,000, as compared to $50,809,000 for
the nine months ended March 31, 1999. As a percentage of total revenues,
employee compensation and benefits decreased to 60.9% for the nine months ended
March 31, 2000 as compared to 61.4% for the nine 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, including acquisitions.
The decrease in employee compensation and benefits as a percent of revenue over
the same period in the prior year results from increased utilization at certain
facilities and from the effect of lower start-up expenses in the current fiscal
period versus the same period last year.
Purchased services and other expenses for the nine months ended March 31, 2000
increased $3,264,000, or 14.3%, to $26,037,000, as compared to $22,773,000 for
the nine months ended March 31, 1999. As a percentage of total revenues,
purchased services and other expenses was unchanged at 27.6% for the nine months
ended March 31, 2000 and March 31, 1999. 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.
During the fiscal 2000 period, the Company incurred a loss on Helicon accounts
receivable and loan guarantee in the amount of $2,368,000. See "Helicon."
Depreciation and amortization for the nine months ended March 31, 2000 increased
$763,000, or 31.5%, to $3,188,000 as compared to $2,425,000 for the nine months
ended March 31, 1999. The increase in depreciation and amortization compared to
the same period in the prior year is primarily attributable to the Company's
fiscal 1999 acquisitions as well as to other additions to property and
equipment.
16
<PAGE> 17
Income from operations for the nine months ended March 31, 2000 decreased
$1,404,000, or 21.2%, to $5,217,000 as compared to $6,621,000 for the nine
months ended March 31, 1999, and decreased as a percentage of total revenues to
5.5% for the nine months ended March 31, 2000 from 8.0% for the nine months
ended March 31, 1999, as a result of the factors described above. See "Helicon."
Interest expense for the nine months ended March 31, 2000 increased $470,000, or
40.0%, to $1,644,000 as compared to $1,174,000 for the nine months ended March
31, 1999. The increase in interest expense over the same period in the prior
year is attributed principally to debt incurred pursuant to acquisitions.
Other (income) expense for the nine months ended March 31, 2000 was expense of
$40,000 versus income of $447,000 for the nine months ended March 31, 1999. The
change from the same period in the prior year is attributable to a decrease in
interest income as a result of a decrease in cash available for investment
following the Company's share buyback program and acquisitions, as well as
income from the note receivable purchased during fiscal 1999 which was repaid in
fiscal 2000.
Provision for income tax expense for the nine months ended March 31, 2000
decreased $758,000 to $1,570,000 from $2,328,000 for the nine months ended March
31, 1999. The decrease results from the decrease in the Company's taxable income
and from 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 nine months ended March 31, 2000 was
$423,000 on net income of $1,963,000 as compared to cash provided of $1,714,000
on net income of $3,546,000 for the nine months ended March 31, 1999. An
increase in accounts receivable combined with a decrease in accrued employee
compensation were primary factors contributing to the use of cash by operating
activities during the fiscal 2000 period. The increase in accounts receivable is
the result of a number of factors, including an increase in the Company's
revenues and the conversion by the Company to a centralized billing office from
local facility billing offices. As the centralized billing office matures, the
Company anticipates that receivables will return to levels more consistent with
historical levels. The decrease in accrued employee compensation is the result
of differences in normal pay cycles and the payment of annual bonuses. Working
capital at March 31, 2000 was $22,725,000, as compared to $17,782,000 at June
30, 1999.
Cash provided by investing activities was $2,858,000 for the nine months ended
March 31, 2000 as compared to cash used by investing activities of $26,981,000
for the nine months ended March 31, 1999. The change was due primarily to the
Ameris and Somerset acquisitions in the fiscal 1999 period as compared with the
collection of the Ameris note receivable and the sale of the Bay County, Florida
assets during the first nine months of fiscal 2000. Capital expenditures for the
fiscal 2000 period include approximately $1,822,000 used to acquire and improve
a 130 acre site in west Tennessee which houses a residential treatment program.
17
<PAGE> 18
Cash of $457,000 was used by financing activities for the nine months ended
March 31, 2000, due primarily to funds used for the repurchase of shares of the
Company's Common Stock. 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, principally for the Somerset acquisition, offset by
funds used for the repurchase of shares of the Company's Common Stock.
The Company has a credit agreement (the "Credit Agreement") with SunTrust Bank
and First American National Bank (jointly "the Lenders"). 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 term of which extends through December 1, 2001. The revolving
line of credit bears interest at either (i) the one, two, three or six month
LIBOR rate plus an applicable margin, which ranges between 1.25% and 2.50% 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 .25% and 1.50%, at the Company's option.
The line of credit is secured primarily by the Company's accounts receivable and
equipment. At March 31, 2000, the outstanding balance under the line of credit
was $9,400,000.
Under the Credit Agreement, the Company also entered into a term loan with the
Lenders in the amount of $15,000,000 at a fixed interest rate. The term loan
runs through December 2005. 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 and from
repurchasing any shares of the Company's Common Stock beyond those already
repurchased pursuant to the Company's 1,000,000 share buyback program.
Pursuant to the Somerset transaction, the Company issued a note payable to the
sellers. 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, 2000,
$803,000 of the note is included in current liabilities and $634,000 of the note
is included in long-term debt.
Helicon has entered into a $1,500,000 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 this line of credit. The Company
anticipates funding the $1,500,000 and accordingly has fully reserved this
guarantee on its books. At March 31, 2000, there was $1,332,000 outstanding
under Helicon's line of credit. See "Helicon."
18
<PAGE> 19
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.
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 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 March 31, 2000, the Company had only cash equivalents, invested in high
grade, very short term securities, which are not typically subject to material
market risk and are not held for trading purposes. 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.
19
<PAGE> 20
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
(10.1) Fourth Amendment to Credit Agreement by and between the
Registrant and SunTrust Bank, Nashville, N.A. as agent and lender,
dated January 15, 2000
(10.2) Fifth Amendment to Credit Agreement by and between the
Registrant and SunTrust Bank, Nashville, N.A. as agent and lender,
dated April 21, 2000
(27) Financial Data Schedule (SEC use only)
(b) Reports on Form 8-K:
Form 8-K - Reporting date - March 13, 2000
Items reported - Item 5. Other events
The Company reported a decline in census at the Helicon Youth Center in
Riverside County, California.
20
<PAGE> 21
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 15, 2000 /s/ WILLIAM J BALLARD
-------------------------------------------------------
William J Ballard
Chairman and Chief Executive Officer
Date: May 15, 2000 /s/ DONALD B. WHITFIELD
--------------------------------------------------------
Donald B. Whitfield
Vice President of Finance, Chief Financial Officer
(Principal Financial and Accounting Officer)
21
<PAGE> 1
EXHIBIT 10.1
FOURTH AMENDMENT TO CREDIT AGREEMENT
ENTERED INTO by and between CHILDREN'S COMPREHENSIVE SERVICES, INC., a
Tennessee corporation (the "Borrower"), SUNTRUST BANK, successor-in-interest to
SunTrust Bank, Nashville, N.A. in its capacity as agent for the Lenders
("Agent"), SUNTRUST BANK, successor-in-interest to SunTrust Bank, Nashville,
N.A. ("STB"), and FIRST AMERICAN NATIONAL BANK ("FANB") (STB and FANB shall be
referred to herein as "Lenders"), as of this 15th day of January, 2000.
RECITALS:
1. The Borrower, the Lenders, and the Agent entered into a Credit
Agreement dated as of December 1, 1998, as amended by a First Amendment to
Credit Agreement dated as of December 31, 1998, a Second Amendment to Credit
Agreement dated April 20, 1999, and a Third Amendment to Credit Agreement dated
September 27, 1999 (the "Credit Agreement").
2. The Borrower, the Lenders, and the 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 8.10 of the Credit Agreement shall be amended and
restated in its entirety to read as follows:
Section 8.10. Management Group.
If any event occurs that removes from the active
management of Borrower one of the following persons:
William J. Ballard, Amy S. Harrison, or Donald B.
Whitfield.
2. The Credit Agreement is not amended in any other respect.
3. The Borrower reaffirms its obligations as set forth in the
Credit Agreement, as amended hereby, and the Borrower agrees that its
obligations thereunder are valid and binding, enforceable in accordance with its
terms, subject to no defense, counterclaim, or objection.
ENTERED INTO as of the date first above written.
<PAGE> 2
BORROWER:
CHILDREN'S COMPREHENSIVE
SERVICES, INC.
By: Donald B. Whitfield
------------------------------------------------------
Title: Vice President - Finance / Chief Financial Officer
--------------------------------------------------
AGENT:
SUNTRUST BANK, Agent
By: Mark D. Mattson
------------------------------------------------------
Title: Director
--------------------------------------------------
LENDERS:
SUNTRUST BANK
By: Mark D. Mattson
------------------------------------------------------
Title: Director
--------------------------------------------------
FIRST AMERICAN NATIONAL BANK
By: Allison H. Jones
------------------------------------------------------
Title: SVP
--------------------------------------------------
2
<PAGE> 1
EXHIBIT 10.2
FIFTH AMENDMENT TO CREDIT AGREEMENT
ENTERED into by and between CHILDREN'S COMPREHENSIVE SERVICES, INC., a
Tennessee corporation (the "Borrower"), SUNTRUST BANK, successor-in-interest to
SunTrust Bank, Nashville, N.A., in its capacity as agent for Lenders ("Agent"),
SUNTRUST BANK, successor-in-interest to SunTrust Bank, Nashville, N.A. ("STB"),
and AMSOUTH BANK, successor-in-interest to First American National Bank
("AMSOUTH") (STB and AMSOUTH shall be referred to herein as "Lenders"), as of
this 21st day of April, 2000.
RECITALS
1. The Borrower, the Lenders, and the Agent entered into a Credit
Agreement dated as of December 1, 1998, as amended by a First Amendment to
Credit Agreement dated as of December 31, 1998, a Second Amendment to Credit
Agreement dated as of April 20, 1999, a Third Amendment to Credit Agreement
dated as of September 27, 1999, and Fourth Amendment to Credit Agreement dated
as of January 15, 2000 (herein collectively the "Credit Agreement").
2. The Borrower, the Lenders, and the 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. The definition of "Acquisition" as used in Section 1.1 of the
Credit Agreement shall be amended and restated as follows:
"Acquisition" shall mean the acquisition by any Consolidated
Company of any of the following: (a) the controlling interest in any
Person, (b) a Consolidated Company, or (c) substantially all of the
Property of any Person, or (d) assets or Property of any Person in
which the consideration paid or exchanged exceeds $2,000,000.
2. The definition of "Applicable Margin" as used in Section 1.1
of the Credit Agreement shall be amended and restated as follows:
Applicable Margin" shall mean the number of basis points per
annum determined in accordance with the table set forth below based on
the fiscal quarter-end ratio of Borrower's Funded Debt to EBITDA:
<PAGE> 2
<TABLE>
<CAPTION>
TIER I TIER II TIER III TIER IV
------ ------- -------- -------
<S> <C> <C> <C> <C>
Ratio of Funded < 1.5 to 1.0 >=1.5 to 1.0 and >=2.00 to 1.0 and >=2.5 to 1.0
Debt to EBITDA < 2.00 to 1.0 < 2.5 to 1.0
Applicable 30 basis points; 30 basis points 50 basis points 50 basis points
Margin for per annum per annum per annum per annum
Facility Fee
Applicable 125 basis points 167.5 basis points 200 basis points 250 basis points
Margin for per annum per annum per annum per annum
Eurodollar
Advances
Applicable 25 basis points 67.5 basis points 100 basis points 150 basis points
Margin for Base per annum per annum per annum per annum
Rate Advances
</TABLE>
3. The definition of "Consolidated EBITDA" as used in Section
1.1 of the Credit Agreement shall be amended and restated as follows:
"Consolidated EBITDA" shall mean for any fiscal period of
Borrower, an amount equal to the sum of (A) Consolidated EBIT, plus (B)
depreciation and amortization expenses to the extent deducted in
determining such Consolidated EBIT as determined on a consolidated
basis in accordance with GAAP, plus (C) for the fiscal quarter ending
March 31, 2000 only an amount equal to the Borrower's write-down of
uncollectible receivables related to Helicon, Inc. and the costs
associated with a loan guarantee of Borrower related to Helicon, Inc.,
not to exceed in the aggregate $2,368,000 plus (D) the historical
consolidated EBITDA of any Person adjusted for known and detailed
expense cuts acceptable to Agent for such period which accrued prior to
the date such Person became a Consolidated Company or was merged into
and consolidated with the Borrower or any other Consolidated Company or
such Person's assets were acquired by the Borrower or any other
Consolidated Company (and the underlying records of such Person shall
be audited to the extent the Borrower is required pursuant to
Regulation S-X of the SEC to present audited financial information for
such Person in documents filed by it with the SEC). If audited
financial records are not available for acquired companies, pro-forma
financial statements (subject to review and acceptance by the Agent)
will be substituted.
4. Section 7.1(a) of the Credit Agreement is amended and
restated as follows:
(a) Funded Debt to EBITDA. Suffer or permit, as of the
last day of any fiscal quarter, the ratio of (A) Consolidated Funded
Debt to (B) the sum of (i) Consolidated EBITDA minus (ii) dividends
paid, to exceed 3.0 to 1.0, as calculated for the most recently
concluded fiscal quarter and the immediately three (3) preceding fiscal
quarters.
2
<PAGE> 3
5. Section 7.1(b) of the Credit Agreement is amended and restated
as follows:
(b) Fixed Charge Coverage Ratio. (i) From the date hereof
through the fiscal quarter ending December 31, 2001 and as calculated
for the most recently concluded fiscal quarter and the immediately
three (3) preceding fiscal quarters, suffer or permit, the ratio of (A)
the sum of (1) Consolidated EBIT, plus, (2) for the fiscal quarter
ending March 31, 2000 only an amount equal to the Borrower's write-down
of uncollectible receivables related to Helicon, Inc. and costs
associated with a loan guarantee of Borrower related to Helicon, Inc.,
not to exceed in the aggregate $2,368,000, plus (3) Consolidated Rental
Expense, minus (4) 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 2.5 to 1.0,
and (ii) commencing with the fiscal quarter ending March 31, 2002 and
throughout the term of this Agreement, as calculated for the most
recently concluded fiscal quarter and the immediately three (3)
preceding fiscal quarters, 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 Term Loans to be
less than 2.0 to 1.0.
6. Section 7.1(c) of the Credit Agreement is amended and
restated as follows:
(c) Consolidated Funded Debt to Total Capitalization
Ratio. Permit, as of last day of any fiscal quarter, the ratio of
Consolidated Funded Debt to Total Capitalization to be greater than .45
to 1.0.
7. Section 7.8(g) of the Credit Agreement shall be deleted.
8. Section 7.12 of the Credit Agreement shall be amended and
restated as follows:
SECTION 7.12 ACQUISITIONS.
(a) Without the prior written consent of the Required
Lenders, the Borrower will not, and will not permit any Consolidated
Company, to make, Acquisitions where the total aggregate consideration
paid in such Acquisitions exceeds during any four (4) consecutive
fiscal quarters an amount equal to $10,000,000. For the purpose hereof,
the consideration paid shall include the sum of: (A) all cash paid
and/or Debt assumed, plus (B) the principal amount of any promissory
notes given, plus (C) the value of any stock given, and (D) the value
of any other Property given or transferred in respect of such
Acquisition. Provided further that for the purpose of this provision,
Borrower's Acquisition in Mecklenberg County, North Carolina to be
completed prior to July 31, 2000 shall be excluded.
3
<PAGE> 4
(b) The Borrower will not, and will not permit any
Consolidated Company, to make Acquisitions where the consideration paid
to the seller is in excess of $5,000,000, provided that this provision
may be waived by the Required Lenders at the request of Borrower and in
the sole discretion of Required Lenders, and provided that in
connection with any request by the Borrower that the Required Lenders
waive this provision, the Borrower provides to the Agent and the
Lenders an information package to include, but not be limited to,
historical financial statements on the Person being acquired showing
the impact of the acquisition on the Borrower's historical operating
performance and existing balance sheet, projections detailing the
expected performance of the Consolidated Companies going forward, a
detailed listing of the assets being purchased in the transaction, a
certificate executed by Borrower's chief financial officer showing the
effect on a pro forma basis of any Acquisition on the financial
covenants set forth in Section 7.1. herein, any other information
requested by Agent, and a statement that the proposed acquisition will
not create a Default or Event of Default. For the purpose hereof, the
consideration paid shall include the sum of: (A) all cash paid and/or
Debt assumed, plus (B) the principal amount of any promissory notes
given, plus (C) the value of any stock given, and (D) the value of any
other Property given or transferred in respect of such Acquisition.
For the purposes of this provision, Borrower's Acquisition in
Mecklenberg County, North Carolina to be completed prior to July 31,
2000 shall be excluded.
9. The Credit Agreement shall be amended to include new Section
7.16 to read as follows:
7.16 TREASURY STOCK.
Neither the Borrower nor any of its Subsidiaries shall
purchase shares of its own stock or the stock of any Subsidiary.
10. The Credit Agreement is not amended in any other respect.
11. The Borrower reaffirms its obligations as set forth in the
Credit Agreement, as amended hereby, and the Borrower agrees that its
obligations thereunder are valid and binding, enforceable in accordance with its
terms, subject to no defense, counterclaim, or objection.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
[SIGNATURES ON NEXT PAGE]
4
<PAGE> 5
ENTERED INTO as of the date first above written.
BORROWER:
CHILDREN'S COMPREHENSIVE
SERVICES, INC.
By: /s/ Donald B. Whitfield
----------------------------------------
Title: VP-Finance/CEO
------------------------------------
AGENT:
SUNTRUST BANK, Agent
By: /s/ Stephen C. Baird
----------------------------------------
Title: Corporate Banking Officer
------------------------------------
LENDERS:
SUNTRUST BANK
By: /s/ Stephen C. Baird
----------------------------------------
Title: Corporate Banking Officer
------------------------------------
AMSOUTH BANK, successor-in-interest to
FIRST AMERICAN NATIONAL BANK
By: /s/ Allison H. Jones
----------------------------------------
Title: Senior Vice President
------------------------------------
5
<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
MONTH PERIOD ENDED MARCH 31, 2000 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-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 3,752
<SECURITIES> 0
<RECEIVABLES> 31,336
<ALLOWANCES> 4,239
<INVENTORY> 0
<CURRENT-ASSETS> 35,912
<PP&E> 58,366
<DEPRECIATION> 11,494
<TOTAL-ASSETS> 97,636
<CURRENT-LIABILITIES> 13,187
<BONDS> 25,107
0
0
<COMMON> 72
<OTHER-SE> 57,372
<TOTAL-LIABILITY-AND-EQUITY> 97,636
<SALES> 0
<TOTAL-REVENUES> 94,325
<CGS> 0
<TOTAL-COSTS> 0
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<INCOME-PRETAX> 3,533
<INCOME-TAX> 1,570
<INCOME-CONTINUING> 1,963
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> 1,963
<EPS-BASIC> .27
<EPS-DILUTED> .27
</TABLE>
