<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(MARK ONE) FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-16162
CHILDREN'S COMPREHENSIVE SERVICES, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Tennessee 62-1240866
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3401 West End Ave., Suite 400, Nashville, Tennessee 37203
--------------------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (615) 250-0000
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Common Stock, $.01 Par Value, outstanding at November 9, 2000 - 7,194,680
shares.
<PAGE> 2
INDEX
CHILDREN'S COMPREHENSIVE SERVICES, INC.
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets -- September 30, 2000
and June 30, 2000.............................................3
Consolidated Statements of Income --
Three months ended September 30, 2000 and 1999................5
Consolidated Statements of Cash Flows --
Three months ended September 30, 2000 and 1999................6
Notes to Consolidated Financial Statements --
September 30, 2000............................................8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk............16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................................16
SIGNATURES.....................................................................17
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
------------- --------
(dollars in thousands) (unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,611 $ 3,489
Accounts receivable, net of allowance for doubtful
accounts of $3,447 at September 30 and $3,913 at
June 30 24,772 27,203
Prepaid expenses 1,598 1,120
Deferred income taxes 1,134 1,134
Other current assets 1,930 1,716
------- -------
TOTAL CURRENT ASSETS 32,045 34,662
PROPERTY AND EQUIPMENT, net 49,879 42,448
COST IN EXCESS OF NET ASSETS ACQUIRED, net 12,244 12,479
DEFERRED INCOME TAXES 246 246
OTHER ASSETS AND DEFERRED CHARGES, net 676 734
------- -------
TOTAL ASSETS $95,090 $90,569
======= =======
</TABLE>
3
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
------------- --------
(dollars in thousands) (unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,983 $ 2,488
Current portion - long-term debt and capital leases 882 869
Income taxes payable (453) --
Accrued employee compensation 4,555 4,019
Accrued other expenses 3,192 2,702
Other current liabilities 1,199 1,359
-------- -------
TOTAL CURRENT LIABILITIES 13,358 11,437
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS 26,760 24,485
-------- -------
TOTAL LIABILITIES 40,118 35,922
-------- -------
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
7,194,680 shares at September 30 and 7,184,141 shares
at June 30 72 72
Additional paid-in capital 50,530 50,502
Retained earnings 4,370 4,073
-------- -------
TOTAL SHAREHOLDERS' EQUITY 54,972 54,647
-------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 95,090 $90,569
======== =======
</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
September 30,
---------------------
2000 1999
------- --------
<S> <C> <C>
(in thousands, except per share amounts)
Revenues:
Operating revenues $29,685 $ 28,923
Management fee income 782 856
------- --------
TOTAL REVENUES 30,467 29,779
------- --------
Operating expenses:
Employee compensation and benefits 19,285 18,953
Purchased services and other expenses 8,913 8,433
Depreciation and amortization 1,075 1,079
Related party rent 29 29
------- --------
TOTAL OPERATING EXPENSES 29,302 28,494
------- --------
Income from operations 1,165 1,285
Other (income) expense:
Interest expense 598 499
Other 37 (9)
------- --------
TOTAL OTHER (INCOME) EXPENSE, NET 635 490
------- --------
Income before income taxes 530 795
Provision for income taxes 233 334
------- --------
NET INCOME $ 297 $ 461
======= ========
Earnings per common share:
Basic $ 0.04 $ 0.06
======= ========
Diluted $ 0.04 $ 0.06
======= ========
</TABLE>
See notes to consolidated financial statements.
5
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------
2000 1999
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<S> <C> <C>
(in thousands)
OPERATING ACTIVITIES
Net income $ 297 $ 461
Adjustments to reconcile net income
to net cash provided (used) by operating activities:
Depreciation 826 825
Amortization 249 254
Provision for bad debts 266 169
Other 104 (52)
Changes in operating assets and liabilities:
Accounts receivable 2,164 515
Prepaid expenses (478) (350)
Other current assets (214) 346
Accounts payable 1,495 (1,422)
Accrued employee compensation 536 (794)
Accrued other expenses 490 (72)
Other current liabilities (160) 53
Income taxes payable (453) (614)
------- -------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 5,122 (681)
------- -------
INVESTING ACTIVITIES
Collection of note receivable -- 2,500
Purchase of property and equipment (8,372) (477)
Proceeds from sale of property and equipment 55 643
Decrease in other assets 1 15
------- -------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES $(8,316) $ 2,681
------- -------
</TABLE>
6
<PAGE> 7
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------
2000 1999
------- -------
<S> <C> <C>
(in thousands)
FINANCING ACTIVITIES
Principal payments on revolving lines of credit, long-
term borrowings and capital lease obligations $(3,712) $(3,999)
Proceeds from revolving lines of credit and long-term borrowings 6,000 3,300
Common stock repurchased -- (171)
Proceeds from issuance of common stock, net 28 60
------- -------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 2,316 (810)
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (878) 1,190
Cash and cash equivalents at beginning of period 3,489 1,774
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,611 $ 2,964
======= =======
</TABLE>
See notes to consolidated financial statements.
7
<PAGE> 8
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 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 (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended September 30,
2000 are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 2001. 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, 2000, the Company's prior
fiscal year end.
Certain reclassifications have been made to the prior year financial statements
to conform to the fiscal 2001 presentation.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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
The Company adopted Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities", effective July 1, 2000. SFAS No. 133, as
amended, 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
SFAS No. 133's hedge criteria are included in income. The Company did not use
any derivatives and thus the adoption of SFAS No. 133 did not have any effect on
the Company's results of operations or financial position.
8
<PAGE> 9
NOTE D -- EARNINGS PER COMMON SHARE
The computation of basic earnings per common share is based on the weighted
average number of shares outstanding. Diluted earnings per common share includes
the effect of potential common shares, consisting of dilutive stock options and
warrants, and uses the treasury stock method in calculating dilution.
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------
2000 1999
---------- ----------
<S> <C> <C>
BASIC:
Average shares outstanding 7,184,256 7,282,552
========== ==========
Net income $ 297,000 $ 461,000
========== ==========
Per share amount $ 0.04 $ 0.06
========== ==========
DILUTED:
Average shares outstanding 7,184,256 7,282,552
Net effect of dilutive stock options and warrants 10,971 80,843
---------- ----------
TOTAL 7,195,227 7,363,395
========== ==========
Net income $ 297,000 $ 461,000
========== ==========
Per share amount $ 0.04 $ 0.06
========== ==========
</TABLE>
NOTE E -- HELICON
In September 2000, Helicon and the Company initiated the closure of the Helicon
Youth Center (the"HYC"). This action was taken because of difficulties
encountered in operating the program to the quality standards demanded by the
Company for the protection of both the program's youth and staff since Helicon
entered a settlement agreement with Community Care Licensing ("CCL"), a division
of California's Department of Social Services, in April 2000. Subsequent to
entering the settlement agreement, the HYC census did not reach expected levels
and the ongoing compliance efforts of CCL had created an environment in which
the programs at the HYC could not be operated effectively. Consequently, closure
of the facility was deemed to be in the best interest of the Company, as well as
the center's youth population and its staff. As a result of the closure, the
Company recorded a nonrecurring charge in fiscal 2000 for an impairment reserve
for the carrying value of the HYC facility. The HYC is located on land that is
owned by, and leased from, Riverside County, California.
9
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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, 2000. The Company undertakes no obligation to publicly release any
revisions to any forward-looking statements contained herein to reflect events
or circumstances occurring after the date hereof or to reflect the occurrence of
unanticipated events.
General
As of September 30, 2000, the Company was providing education, treatment and
juvenile justice services to approximately 3,500 at-risk and troubled youth
either directly or through management contracts. It currently offers, or is
under contract to offer, these services through the operation and management of
non-residential specialized education programs and day treatment programs and
both open and secure residential treatment centers in 15 states. Revenues are
recognized as services are rendered. The Company's non-residential programs,
which historically have generated higher operating margins than the Company's
residential facilities, generally receive revenues based on per diem rates. The
Company's residential facilities generally receive revenues under either fixed
fee contracts, at per diem rates or on a cost reimbursed basis.
Effective July 1998 the State of California implemented legislation which
eliminated reimbursement to school districts for excused student absences. The
legislation is designed to incentivize school districts that have high absentee
rates and to encourage improvement in school attendance throughout the state.
While written for public school districts, this legislation has had some impact
on the Company's California educational day treatment programs, which
historically have been compensated for excused student absences. Some of the
Company's contracts with school districts provide no compensation for excused
student absences, generally in exchange for a higher per diem. In addition, the
legislation placed funding in the hands of the school districts, thereby
creating the potential for the districts to undertake implementation of their
own programs. Several of the school districts with which the Company has
contracts have started programs which compete with services provided by the
Company. The Company continues to monitor the implementation of this
legislation.
The Company receives management fee income from third parties for services
provided in managing a unit or facility. Reimbursement for these services is
typically based on a fixed fee plus reimbursement of expenses. The Company also
recognizes 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
10
<PAGE> 11
Helicon and the Company (the "Helicon Agreement"). See "Helicon."
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 consolidated 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.
Helicon
As of September 30, 2000, the Company was providing consulting, management and
marketing services to Helicon at 11 programs. Pursuant to the Helicon Agreement,
which expires September 1, 2004, the Company is entitled to receive for these
services management fee income in an amount equal to 6% of the monthly gross
revenues of Helicon's programs. The payment of these management fees, however,
is subordinated in right of payment to amounts payable by Helicon to fund its
programs. The Company also leases three facilities to Helicon for the operation
of certain of its programs. The Company is not currently receiving rent, nor
does it anticipate receiving any future rent payments, for one of these
facilities, the Helicon Youth Center (the "HYC"), and, in fiscal 2000, recorded
an impairment reserve for the carrying value of this facility. Also during
fiscal 2000, Helicon was unable to pay all management fees, lease payments and
advances due to the Company. Based on the current level of operations being
maintained by Helicon, the Company does not anticipate collecting any of these
amounts. The Company also has guaranteed Helicon's obligations under a bank line
of credit in the amount of $1,500,000 -- See "Liquidity".
In September 2000, Helicon and the Company initiated the closure of the HYC.
This action was taken because of difficulties encountered in operating the
program to the quality standards demanded by the Company for the protection of
both the program's youth and staff since Helicon entered a settlement agreement
with Community Care Licensing ("CCL"), a division of California's Department of
Social Services, in April 2000. Subsequent to entering the settlement agreement,
the
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HYC census did not reach expected levels and the ongoing compliance efforts
of CCL had created an environment in which the programs at the HYC could not be
operated effectively. Consequently, closure of the facility was deemed to be in
the best interest of the Company, as well as the center's youth population and
its staff. As a result of the closure, the Company recorded a nonrecurring
charge in fiscal 2000 for an impairment reserve for the carrying value of the
HYC facility. The HYC is located on land that is owned by, and leased from,
Riverside County, California.
Strategic Alternatives
In October 2000, the Company engaged McDonald Investments, Inc. as its exclusive
financial advisor to assist the Company's Board of Directors in evaluating
strategic alternatives that could enhance or maximize shareholder value.
Alternatives to be evaluated are expected to range from a continuation of the
Company's existing business strategy in which it expands its operations as an
independent publicly held company to a possible sale of the Company in whole or
in part.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
relationship to the Company's total revenues of certain items in the Company's
statements of income:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------
2000 1999
----- -----
<S> <C> <C>
Operating revenues 97.4% 97.1%
Management fee income 2.6 2.9
----- -----
TOTAL REVENUES 100.0 100.0
----- -----
Employee compensation and benefits 63.3 63.6
Purchased services and other expenses 29.3 28.4
Depreciation and amortization 3.5 3.6
Related party rent 0.1 0.1
----- -----
TOTAL OPERATING EXPENSES 96.2 95.7
----- -----
Income from operations 3.8 4.3
Other (income) expense:
Interest expense 2.0 1.7
Other 0.1 --
Provision for income taxes 0.7 1.1
----- -----
NET INCOME 1.0% 1.5%
===== =====
</TABLE>
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Three Months Ended September 30, 2000 versus September 30, 1999
Operating revenues for the three months ended September 30, 2000 increased
$762,000, or 2.6%, to $29,685,000, as compared to $28,923,000 for the three
months ended September 30, 1999. The increase in operating revenues consists of
approximately $1,300,000 due to the opening of new programs subsequent to the
first quarter of fiscal 2000 and approximately $2,100,000 due to same center
revenue increases, net of decreases of approximately $2,600,000 versus the same
quarter in the prior year due to the termination of the Company's Eufaula,
Alabama contract, reductions as a result of the closure of the Helicon Youth
Center and the sale of the Bay County, Florida facility.
Management fee income decreased $74,000 for the three months ended September 30,
2000 to $782,000 from $856,000 for the three month period ended September 30,
1999. Management fee income recognized under the Helicon Agreement for the three
months ended September 30, 2000 decreased $125,000 to $205,000 from $330,000 for
the three months ended September 30, 1999.
Total revenues for the three months ended September 30, 2000 increased $688,000,
or 2.3%, to $30,467,000 as compared to $29,779,000 for the three months ended
September 30, 1999 as a result of the factors described above.
Employee compensation and benefits for the three months ended September 30, 2000
increased $332,000, or 1.8%, to $19,285,000, as compared to $18,953,000 for the
three months ended September 30, 1999. As a percentage of total revenues,
employee compensation and benefits decreased from 63.6% for the three months
ended September 30, 1999 to 63.3% for the three months ended September 30, 2000.
The increase in employee compensation and benefits over the same period in the
prior year results primarily from the Company's growth.
Purchased services and other expenses for the three months ended September 30,
2000 increased $480,000, or 5.7%, to $8,913,000, as compared to $8,433,000 for
the three months ended September 30, 1999. As a percentage of total revenues,
purchased services and other expenses increased to 29.3% for the three months
ended September 30, 2000 from 28.4% for the three months ended September 30,
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. The increase
in purchased services and other expenses as a percent of revenue over the same
period in the prior year results primarily from an increase in insurance costs
and increased utilization of contracted services at certain locations.
Depreciation and amortization for the three months ended September 30, 2000
decreased $4,000 to $1,075,000 from $1,079,000 for the three months ended
September 30, 1999. The decrease in depreciation and amortization compared to
the same period in the prior year is primarily attributable to the cessation of
depreciation on the Helicon Youth Center, offset by depreciation of new capital
expenditures.
Income from operations for the three months ended September 30, 2000 decreased
$120,000, or 9.3%, to $1,165,000 as compared to $1,285,000 for the three months
ended September 30, 1999, and
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<PAGE> 14
decreased as a percentage of total revenues to 3.8% for the three months ended
September 30, 2000 from 4.3% for the three months ended September 30, 1999 as a
result of the factors described above.
Interest expense for the three months ended September 30, 2000 increased $99,000
to $598,000 as compared to $499,000 for the three months ended September 30,
1999. The increase in interest expense over the same period in the prior year is
attributed to increases in both interest rates and outstanding borrowings. The
increase in borrowing results primarily from the Company's purchase of property
in North Carolina.
Other (income) expense for the three months ended September 30, 2000 decreased
$46,000 to expense of $37,000 as compared to income of $9,000 for the three
months ended September 30, 1999.
The provision for income taxes for the three months ended September 30, 2000
decreased $101,000 to $233,000 from $334,000 for the three months ended
September 30, 1999. The decrease in the provision compared to the same period in
the prior year results primarily from the decrease in the Company's taxable
income.
Liquidity and Capital Resources
Cash provided by operating activities for the three months ended September 30,
2000 was $5,122,000 on net income of $297,000 as compared to cash used of
$681,000 on net income of $461,000 for the three months ended September 30,
1999. Working capital at September 30, 2000 was $18,687,000, as compared to
$23,225,000 at June 30, 2000.
Cash used by investing activities was $8,316,000 for the three months ended
September 30, 2000 as compared to cash provided of $2,681,000 for the three
months ended September 30, 1999. The change was due primarily to the collection
of a note receivable in the first quarter of fiscal 2000 as compared to capital
expenditures related to new programs, including the purchase of property in
North Carolina for approximately $6,600,000, in the current period. A portion of
the North Carolina property is not required for the new program and is being
evaluated for sale or other potential use.
Cash of $2,316,000 was provided by financing activities for the three months
ended September 30, 2000 due primarily to borrowing used to fund capital
expenditures. Cash of $810,000 was used by financing activities for the three
months ended September 30, 1999, primarily due to a reduction in the amount
outstanding under the Company's line of credit.
The Company has a credit agreement (the "Credit Agreement") with SunTrust Bank
and AmSouth 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
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<PAGE> 15
rate plus an applicable margin, which ranges between 0.25% and 1.50%, at the
Company's option. At September 30, 2000, the outstanding balance under the
revolving line of credit was $9,000,000.
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 8.10% effective interest rate.
The term loan extends through December 2005. No payment of principal is required
until January 2002, at which time increasing payments that amortize the loan
fully are due over the remaining four years of the agreement.
The Credit Agreement 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. The revolving line of credit and term
loan are secured primarily by the Company's accounts receivable and equipment.
Pursuant to the Company's acquisition of Somerset, Inc. in December 1998, the
Company issued a note payable to the sellers totaling $2,375,000. This note
bears interest at 6%, amortizes over the three year period ending December 1,
2001, and is secured by real estate and improvements purchased pursuant to the
transaction. At September 30, 2000, $1,041,000 was outstanding under the note.
Helicon has entered into a $1,500,000 line of credit with AmSouth Bank which
expires in October 2001. As a condition to this line of credit, the Company
agreed to guarantee Helicon's performance under such line of credit. At
September 30, 2000, the outstanding amount under Helicon's line of credit was
$520,000.
Capital expenditures during the next twelve months are expected to include the
replacement of existing capital assets as necessary, as well as the costs
associated with the opening of new programs and facilities, including the
possible purchase of certain real estate and improvements. The Company also may
consider other possible strategic acquisitions, including acquisitions of
existing programs and other companies engaged in youth services or related
businesses.
Current obligations, typically due within thirty days or less, are expected to
be funded with cash flow from operations and borrowings under the Company's line
of credit. Management believes that operations, cash on hand, amounts available
under its line of credit and outside financing sources will provide sufficient
cash flow for the next twelve months and that long-term liquidity requirements
will be met from cash flow from operations and outside financing sources.
15
<PAGE> 16
Inflation
Inflation has not had a significant impact on the Company's results of
operations since inception. Certain of the Company's existing contracts provide
for annual price increases based upon changes in the Consumer Price Index.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At September 30, 2000, 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
(3) Amended and Restated Bylaws
(27) Financial Data Schedule. (SEC use only)
(b) Reports on Form 8-K:
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHILDREN'S COMPREHENSIVE SERVICES, INC.
---------------------------------------
(Registrant)
Date: November 14, 2000 /s/ WILLIAM J BALLARD
--------------------------------------------------
William J Ballard
Chairman and Chief Executive Officer
Date: November 14, 2000 /s/ DONALD B. WHITFIELD
--------------------------------------------------
Donald B. Whitfield
Vice President of Finance, Chief Financial Officer
(Principal Financial and Accounting Officer)
17
