<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------- ------------
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 February 7, 2000 - 7,162,154
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 -- December 31, 1999
and June 30, 1999...............................................................................3
Consolidated Statements of Income --
Three and six month periods ended December 31, 1999 and 1998....................................5
Consolidated Statements of Cash Flows --
Six months ended December 31, 1999 and 1998.....................................................6
Notes to Consolidated Financial Statements --
December 31, 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..............................................19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.....................................................19
Item 6. Exhibits and Reports on Form 8-K........................................................................19
SIGNATURES.......................................................................................................20
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
December 31, June 30,
(dollars in thousands) 1999 1999
-------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,793 $ 1,774
Accounts receivable, net of allowance for doubtful
accounts of $2,558 at December 31 and $1,952 at
June 30 30,473 24,692
Prepaid expenses 1,418 1,063
Deferred income taxes 1,212 1,212
Other current assets 2,016 4,678
-------- -------
TOTAL CURRENT ASSETS 36,912 33,419
PROPERTY AND EQUIPMENT, net of
accumulated depreciation of $11,103 at December 31
and $10,570 at June 30 51,175 50,811
COST IN EXCESS OF NET ASSETS ACQUIRED, net 12,948 13,398
OTHER ASSETS AND DEFERRED CHARGES, net 867 1,003
-------- -------
TOTAL ASSETS $101,902 $98,631
======== =======
</TABLE>
3
<PAGE> 4
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Continued)
<TABLE>
<CAPTION>
December 31, June 30,
(dollars in thousands) 1999 1999
-------- -------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,334 $ 3,834
Current portion - long-term debt and capital leases 842 817
Accrued employee compensation 3,850 5,842
Income taxes payable 697 702
Accrued other expenses 2,594 2,404
Other liabilities and deferred revenue 1,395 2,038
-------- -------
TOTAL CURRENT LIABILITIES 13,712 15,637
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS 28,825 24,854
DEFERRED TAXES PAYABLE 1,899 1,910
-------- -------
TOTAL LIABILITIES 44,436 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 7,208,654 shares at December 31
and 7,295,526 shares at June 30 72 73
Additional paid-in capital 50,701 51,217
Retained earnings 6,693 4,940
-------- -------
TOTAL SHAREHOLDERS' EQUITY 57,466 56,230
-------- -------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $101,902 $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 Six Months Ended
December 31, December 31,
------------------ ------------------
(In thousands, except per share amounts) 1999 1998 1999 1998
------- -------- ------- --------
<S> <C> <C> <C> <C>
Revenues:
Operating revenues $30,565 $ 27,092 $59,488 $ 49,421
Management fee income 957 873 1,813 1,744
------- -------- ------- --------
TOTAL REVENUES 31,522 27,965 61,301 51,165
------- -------- ------- --------
Operating expenses:
Employee compensation and benefits 18,888 17,038 37,841 31,557
Purchased services and other expenses 8,719 7,829 17,152 14,790
Depreciation and amortization 1,041 806 2,120 1,417
Related party rent 29 29 58 58
------- -------- ------- --------
TOTAL OPERATING EXPENSES 28,677 25,702 57,171 47,822
------- -------- ------- --------
Income from operations 2,845 2,263 4,130 3,343
Other (income) expense:
Interest expense 559 370 1,058 618
Other 59 (91) 50 (362)
------- -------- ------- --------
TOTAL OTHER (INCOME) EXPENSE NET 618 279 1,108 256
------- -------- ------- --------
Income before income taxes and cumulative
effect of accounting change 2,227 1,984 3,022 3,087
Provision for income taxes 935 784 1,269 1,219
------- -------- ------- --------
Income before cumulative effect of accounting change 1,292 1,200 1,753 1,868
Cumulative effect of accounting change, net of
income tax benefit of $12 in 1998 -- -- -- 20
------- -------- ------- --------
NET INCOME $ 1,292 $ 1,200 $ 1,753 $ 1,848
======= ======== ======= ========
Basic earnings per common share:
Before cumulative effect of accounting change $ 0.18 $ 0.16 $ 0.24 $ 0.25
Cumulative effect of accounting change -- -- -- --
------- -------- ------- --------
NET INCOME $ 0.18 $ 0.16 $ 0.24 $ 0.25
======= ======== ======= ========
Diluted earnings per common share:
Before cumulative effect of accounting change $ 0.18 $ 0.16 $ 0.24 $ 0.24
Cumulative effect of accounting change -- -- -- --
------- -------- ------- --------
NET INCOME $ 0.18 $ 0.16 $ 0.24 $ 0.24
======= ======== ======= ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
---------------------
(in thousands) 1999 1998
------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,753 $ 1,848
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation 1,641 1,221
Amortization 479 196
Provision for bad debts 482 372
Other 30 25
Changes in operating assets and liabilities, net of effects
from acquisitions in 1998:
Accounts receivable (6,263) (3,122)
Prepaid expenses (356) (454)
Other current assets 163 38
Accounts payable 500 631
Accrued employee compensation (1,992) (3,002)
Accrued other expenses 191 (593)
Income taxes payable (5) (429)
Other liabilities (643) 1,440
------- --------
NET CASH USED BY OPERATING ACTIVITIES (4,020) (1,829)
INVESTING ACTIVITIES
Purchase of Ameris -- (12,499)
Purchase of Somerset -- (8,175)
Collection (purchase) of note receivable 2,500 (2,500)
Purchase of property and equipment (2,603) (1,234)
Proceeds from sale of property and equipment 635 --
Decrease (increase) in other assets 26 (799)
------- --------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES $ 558 $(25,207)
------- --------
</TABLE>
6
<PAGE> 7
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
---------------------
(in thousands) 1999 1998
------- --------
<S> <C> <C>
FINANCING ACTIVITIES
Principal payments on revolving lines of credit, long-
term borrowings and capital lease obligations $(4,202) $(18,242)
Proceeds from revolving lines of credit and long-term
borrowings 8,200 32,571
Common stock repurchased (622) (6,263)
Proceeds from issuance of common stock, net 105 3
Stock registration costs -- (31)
------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,481 8,038
------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 19 (18,998)
Cash and cash equivalents at beginning of period 1,774 20,067
------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,793 $ 1,069
======= ========
</TABLE>
See notes to consolidated financial statements.
7
<PAGE> 8
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
December 31, 1999
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended
December 31, 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 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.
8
<PAGE> 9
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 Six Months Ended
December 31, December 31,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BASIC:
Average shares outstanding 7,271,000 7,341,000 7,277,000 7,520,000
=========== =========== =========== ===========
Net income $ 1,292,000 $ 1,200,000 $ 1,753,000 $ 1,848,000
=========== =========== =========== ===========
Per share amount $ 0.18 $ 0.16 $ 0.24 $ 0.25
=========== =========== =========== ===========
DILUTED:
Average shares outstanding 7,271,000 7,341,000 7,277,000 7,520,000
Net effect of dilutive stock
options and warrants 70,000 173,000 75,000 152,000
----------- ----------- ----------- -----------
TOTAL 7,341,000 7,514,000 7,352,000 7,672,000
=========== =========== =========== ===========
Net income $ 1,292,000 $ 1,200,000 $ 1,753,000 $ 1,848,000
=========== =========== =========== ===========
Per share amount $ 0.18 $ 0.16 $ 0.24 $ 0.24
=========== =========== =========== ===========
</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 six months ended December
31, 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 six months
ended December 31, 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 December 31, 1999, 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 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.
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 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").
11
<PAGE> 12
As of December 31, 1999, the Company was providing consulting, management and
marketing services to Helicon at 12 programs. In addition, Helicon also leases
three facilities owned by the Company to operate its programs. Pursuant to the
Helicon Agreement, which expires September 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 "-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'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.
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 Six Months Ended
December 31, December 31,
--------------- ---------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Operating revenues 97.0% 96.9% 97.0% 96.6%
Management fee income 3.0 3.1 3.0 3.4
------ ------ ------ ------
TOTAL REVENUES 100.0 100.0 100.0 100.0
------ ------ ------ ------
Employee compensation and benefits 59.9 60.9 61.7 61.7
Purchased services and other expenses 27.7 28.0 27.9 28.9
Depreciation and amortization 3.3 2.9 3.5 2.8
Related party rent 0.1 0.1 0.1 0.1
------ ------ ------ ------
TOTAL OPERATING EXPENSES 91.0 91.9 93.2 93.5
------ ------ ------ ------
Income from operations 9.0 8.1 6.8 6.5
Other (income) expense:
Interest expense 1.8 1.3 1.7 1.2
Other 0.1 (0.3) 0.1 (0.7)
Provision for income taxes 3.0 2.8 2.1 2.4
Cumulative effect of accounting change -- -- -- --
------ ------ ------ ------
NET INCOME 4.1% 4.3% 2.9% 3.6%
====== ====== ====== ======
</TABLE>
Three Months Ended December 31, 1999 versus December 31, 1998
Operating revenues for the three months ended December 31, 1999 increased
$3,473,000, or 12.8%, to $30,565,000 as compared to $27,092,000 for the three
months ended December 31, 1998. Approximately $2,260,000 of the increase in
operating revenues is attributable to entities acquired. The remainder of the
increase is due to increased utilization in certain programs and revenues from
new programs, offset by the September 1999 termination of the Eufaula, Alabama
contract.
Management fee income increased $84,000 for the three months ended December 31,
1999 to $957,000 from $873,000 for the three month period ended December 31,
1998. Management fee income recognized under the Helicon Agreement for the three
months ended December 31, 1999 decreased $11,000 to $324,000 from $335,000 for
the three months ended December 31, 1998.
Total revenues for the three months ended December 31, 1999 increased
$3,557,000, or 12.7%, to $31,522,000 as compared to $27,965,000 for the three
months ended December 31, 1998 as a result of the factors described above.
13
<PAGE> 14
Employee compensation and benefits for the three months ended December 31, 1999
increased $1,850,000, or 10.9%, to $18,888,000, as compared to $17,038,000 for
the three months ended December 31, 1998. As a percentage of total revenues,
employee compensation and benefits decreased from 60.9% for the three months
ended December 31, 1998 to 59.9% for the three months ended December 31, 1999.
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 December 31,
1999 increased $890,000, or 11.4%, to $8,719,000, as compared to $7,829,000 for
the three months ended December 31, 1998. As a percentage of total revenues,
purchased services and other expenses decreased to 27.7% for the three months
ended December 31, 1999 from 28.0% for the three months ended December 31, 1998.
The increase in purchased services and other expenses over the same period in
the prior year is attributed primarily to the Company's growth.
Depreciation and amortization for the three months ended December 31, 1999
increased $235,000, or 29.2%, to $1,041,000 as compared to $806,000 for the
three months ended December 31, 1998. The increase in depreciation and
amortization compared to the same period in the prior year is primarily
attributable to the Company's acquisitions.
Income from operations for the three months ended December 31, 1999 increased
$582,000, or 25.7%, to $2,845,000 as compared to $2,263,000 for the three months
ended December 31, 1998, and increased as a percentage of total revenues to 9.0%
for the three months ended December 31, 1999 from 8.1% for the three months
ended December 31, 1998 as a result of the factors described above.
Interest expense for the three months ended December 31, 1999 increased $189,000
to $559,000 as compared to $370,000 for the three months ended December 31,
1998. 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 was expense of $59,000 for the three months ended
December 31, 1999 as compared to income of $91,000 for the three months ended
December 31, 1998. The change versus the same period in the prior year is
attributable primarily to a decrease in interest income as a result of the
Company's share buyback program and acquisitions.
Provision for income tax expense for the three months ended December 31, 1999
increased $151,000 to $935,000 from $784,000 for the three months ended December
31, 1998. The increase in provision for income tax expense compared to the same
period in the prior year results from the increase 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.
14
<PAGE> 15
Six Months Ended December 31, 1999 versus December 31, 1998
Operating revenues for the six months ended December 31, 1999 increased
$10,067,000 or 20.4%, to $59,488,000 as compared to $49,421,000 for the six
months ended December 31, 1998. Approximately $6,680,000 of the increase in
operating revenues is attributable to entities acquired during fiscal 1999. The
increase is also due to increased utilization in certain programs along with the
opening of new programs, offset by the September 1999 termination of the
Eufaula, Alabama contract.
Management fee income increased $69,000 for the six months ended December 31,
1999 to $1,813,000 from $1,744,000 for the six month period ended December 31,
1998. Management fee income recognized under the Helicon Agreement for the six
months ended December 31, 1999 decreased $16,000 to $654,000 from $670,000 for
the six months ended December 31, 1998.
Total revenues for the six months ended December 31, 1999 increased $10,136,000,
or 19.8%, to $61,301,000 as compared to $51,165,000 for the six months ended
December 31, 1998 as a result of the factors described above.
Employee compensation and benefits for the six months ended December 31, 1999
increased $6,284,000, or 19.9%, to $37,841,000, as compared to $31,557,000 for
the six months ended December 31, 1998. As a percentage of total revenues,
employee compensation and benefits was unchanged at 61.7% for both the six
months ended December 31, 1999 and the six months ended December 31, 1998. The
increase in employee compensation and benefits over the same period in the prior
year results primarily from the Company's growth, including acquisitions.
Purchased services and other expenses for the six months ended December 31, 1999
increased $2,362,000, or 16.0%, to $17,152,000, as compared to $14,790,000 for
the six months ended December 31, 1998. As a percentage of total revenues,
purchased services and other expenses decreased to 27.9% for the six months
ended December 31, 1999 from 28.9% for the six months ended December 31, 1998.
The increase in purchased services and other expenses over the same period in
the prior year is attributed primarily to the Company's growth, including
acquisitions. The decrease in purchased services and other expenses as a percent
of revenue over the same period in the prior year results primarily from the
effect of acquired entities, which utilized purchased services and other
expenses to a lesser extent than the Company's existing programs.
Depreciation and amortization for the six months ended December 31, 1999
increased $703,000, or 49.6%, to $2,120,000 as compared to $1,417,000 for the
six months ended December 31, 1998. The increase in depreciation and
amortization compared to the same period in the prior year is primarily
attributable to the Company's acquisitions.
Income from operations for the six months ended December 31, 1999 increased
$787,000, or 23.5%, to $4,130,000 as compared to $3,343,000 for the six months
ended December 31, 1998, and increased as a percentage of total revenues to 6.8%
for the six months ended December 31, 1999 from 6.5% for the six months ended
December 31, 1998, as a result of the factors described above.
15
<PAGE> 16
Interest expense for the six months ended December 31, 1999 increased $440,000,
or 71.2%, to $1,058,000 as compared to $618,000 for the six months ended
December 31, 1998. 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 six months ended December 31, 1999 was expense of
$50,000 versus income of $362,000 for the six months ended December 31, 1998.
The change from the same period in the prior year is attributable primarily to
the decrease in interest income as a result of the Company's share buyback
program and acquisitions.
Provision for income tax expense for the six months ended December 31, 1999
increased $50,000 to $1,269,000 from $1,219,000 for the six months ended
December 31, 1998. The increase results from the increase 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 six months ended December 31, 1999 was
$4,020,000 on net income of $1,753,000 as compared to cash used of $1,829,000 on
net income of $1,848,000 for the six months ended December 31, 1998. 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. The Company anticipates that receivables will return to levels
more consistent with historical levels prior to the end of the fiscal year. The
decrease in accrued employee compensation is the result of differences in normal
pay cycles and the payment of annual bonuses. Working capital at December 31,
1999 was $23,200,000, as compared to $17,782,000 at June 30, 1999.
Cash provided by investing activities was $558,000 for the six months ended
December 31, 1999 as compared to cash used by investing activities of
$25,207,000 for the six months ended December 31, 1998. The change was due
primarily to the Ameris and Somerset acquisitions in the first half of fiscal
1999 as compared with the collection of the Ameris note receivable during the
first half of fiscal 2000. Capital expenditures for the fiscal 2000 period
include approximately $1.3 million used to acquire and improve a 130 acre site
in west Tennessee which will house a residential program.
Cash of $3,481,000 was provided by financing activities for the six months ended
December 31, 1999, due primarily to borrowings under the Company's credit
facility offset by funds used for the repurchase of shares of the Company's
Common Stock. Cash of $8,038,000 was provided by financing activities for the
six months ended December 31, 1998, 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.
16
<PAGE> 17
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 December 31, 1999, the outstanding balance under the line of
credit was $12,900,000.
Additionally, effective December 1, 1998, the Company has entered into a term
loan with the Lenders in the amount of $15,000,000 at a fixed interest rate. The
term loan is for a period of seven years. The Company's effective rate of
interest on the loan is 8.10%. No payment of principal is required until
December 2001, at which time increasing payments that amortize the loan fully
are due over the remaining four years of the agreement.
The Company's line of credit requires the Company to comply with certain
restrictive covenants with respect to its business and operations and to
maintain certain financial ratios. The restrictive covenants under this
agreement prohibit the Company, without the prior consent of the Lenders, from
entering into major corporate transactions, such as a merger, tender offer or
sale of its assets, and from incurring additional indebtedness in excess of
$500,000. The agreement also prohibits the Company from declaring dividends in
excess of 25% of the Company's net income during any fiscal year.
Pursuant to the Somerset transaction, the Company issued a note payable to the
sellers. 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 December 31,
1999, $779,000 of the note is included in current liabilities and $1,041,000 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. At December 31, 1999,
there was $1,275,000 outstanding under Helicon's line of credit.
Capital expenditures during the next twelve months are expected to include the
replacement of existing capital assets as necessary, as well as the costs
associated with the opening of new programs and facilities, including the
possible purchase of certain real estate and improvements. The Company may also
consider other strategic acquisitions, including acquisitions of existing
programs and other companies engaged in youth services or related businesses.
17
<PAGE> 18
Current obligations, typically due within thirty days or less, are expected to
be funded with cash flows from operations and borrowings under the Company's
line of credit. Management believes that funds from operations and amounts
available under its line of credit will provide sufficient cash flow for the
foreseeable future.
Year 2000
The Year 2000 ("Y2K") issue involves the inability of some computers or
microprocessors to correctly handle the century change that occurred at
midnight, December 31, 1999. The Company's assessment of potential Y2K problems
focused on three areas: (i) the Company's information technology ("IT") systems,
(ii) its non-IT systems, and (iii) its relationships with third parties. To
date, the Company has not experienced any meaningful disruption in its primary
IT systems or non-IT systems due to Y2K-related problems. To date, the Company
has incurred no material expenses related to the Y2K compliance of its IT and
non-IT systems.
Regarding its relationships with third parties, the Company has contacted all
material payors in an attempt to assess the effect of any Y2K issues that may
arise. The Company has not encountered any material problems attributed to
non-compliant payors at this time. Despite efforts that the Company may make in
this regard, there can be no assurance that the systems of other entities with
whom it does business are compliant.
The Company believes that its most likely worst case Y2K scenario is that some
of its material third party payors are not Y2K compliant and will have
difficulty processing and paying the Company's bills, which could affect the
Company's cash flows. The Company has implemented a contingency plan to address
this scenario by increasing its available line of credit. The Company expects to
continue to assess this contingency plan.
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.
18
<PAGE> 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
At December 31, 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.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its Annual Meeting of Shareholders on November 17, 1999 (the
"Annual Meeting"). At the Annual Meeting, the shareholders of the Company voted
to elect six directors, William J Ballard, Amy S. Harrison, Martha A. Petrey,
Ph.D., Thomas B. Clark, Joseph A. Fernandez, Ed.D., and David L. Warnock for
one-year terms and until their successors are duly elected and qualified. The
following table sets forth the number of votes cast for and against/withheld
with respect to each of the nominees for director:
<TABLE>
<CAPTION>
Nominee For Against/Withheld
------------------------ --------- ----------------
<S> <C> <C>
William J Ballard 5,099,731 517,957
Amy S. Harrison 5,099,731 517,957
Martha A. Petrey, Ph.D. 5,099,731 517,957
Thomas B. Clark 5,099,931 517,757
Joseph A. Fernandez, Ed.D. 5,099,931 517,757
David L. Warnock 5,127,931 489,757
</TABLE>
The shareholders of the Company also voted to ratify the selection of Ernst &
Young LLP as the Company's independent auditors for the 2000 fiscal year. The
selection of the Company's auditors was ratified with 5,604,600 votes cast for
ratification and 13,088 votes cast against ratification or withheld.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
(27) Financial Data Schedule (SEC use only)
(b) Reports on Form 8-K: None
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHILDREN'S COMPREHENSIVE SERVICES, INC.
(Registrant)
Date: February 14, 2000 /s/ WILLIAM J BALLARD
--------------------------------------------
William J Ballard
Chairman and Chief Executive Officer
Date: February 14, 2000 /s/ DONALD B. WHITFIELD
--------------------------------------------
Donald B. Whitfield
Vice President of Finance, Chief
Financial Officer (Principal Financial
and Accounting Officer)
20
<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 SIX
MONTHS ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,793
<SECURITIES> 0
<RECEIVABLES> 33,031
<ALLOWANCES> 2,558
<INVENTORY> 0
<CURRENT-ASSETS> 36,912
<PP&E> 62,278
<DEPRECIATION> 11,103
<TOTAL-ASSETS> 101,902
<CURRENT-LIABILITIES> 13,712
<BONDS> 28,825
72
0
<COMMON> 0
<OTHER-SE> 57,394
<TOTAL-LIABILITY-AND-EQUITY> 101,902
<SALES> 0
<TOTAL-REVENUES> 61,301
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 57,171
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,058
<INCOME-PRETAX> 3,022
<INCOME-TAX> 1,269
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,753
<EPS-BASIC> 0.24
<EPS-DILUTED> 0.24
</TABLE>
