1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(MARK ONE) FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF L934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-16162
CHILDREN'S COMPREHENSIVE SERVICES, INC.
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(Exact name of registrant as specified in its charter)
Tennessee 62-1240866
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
3401 West End Ave., Ste 400 Nashville, Tennessee 37203
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (615) 250-0000
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $ .01
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(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the Company
as of September 18, 2000 was $8,824,000.
The number of shares outstanding of the issuer's common stock, par value $ .01
per share, as of September 18, 2000 was 7,184,141.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the annual meeting of shareholders to be
held November 15, 2000 are incorporated by reference into Part III of this Form
10-K.
Index to Exhibits is found on sequentially numbered page 57.
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PART I
ITEM 1. BUSINESS
GENERAL
Children's Comprehensive Services, Inc., a Tennessee corporation formed
in 1985, and subsidiaries (the "Company") is one of the oldest and largest
for-profit providers of services for at-risk and troubled youth in the United
States. The Company's programs include a comprehensive continuum of services
provided in both residential and non-residential settings for youth who have
severe psychiatric disorders or who are emotionally disturbed, behaviorally
disordered, developmentally delayed, learning disabled or medically fragile. The
Company provides its services at facilities located in Alabama, Arkansas,
California, Florida, Hawaii, Kentucky, Louisiana, Ohio, Michigan, Montana,
Pennsylvania, Tennessee, Texas and Utah. As of June 30, 2000, the Company was
providing education, treatment and juvenile justice services, either directly or
through its variable fee management contracts, to approximately 3,900 at-risk
youth. In addition, the Company provides management services to community mental
health centers, behavioral units in medical facilities and third parties for
fixed fees.
RECENT DEVELOPMENTS
In May 2000, the Company announced that it had entered into a contract
with the Dallas County (Texas) Juvenile Board for the operation of an existing
juvenile justice alternative education program. This program became operational
in August 2000.
In August 2000, the Company announced that it had signed contracts to
operate a 48 bed residential treatment program and a 40 chair non-residential
day treatment program in Mecklenburg County, North Carolina. Services are
expected to commence in October.
In August 2000, the Company announced that it had signed a contract
with the Florida Department of Juvenile Justice to operate an 80-bed residential
treatment program for moderate-risk male offenders in Liberty County, Florida.
The Company began operating the facility in September.
In August 2000, the Company announced that the Company's Pennsylvania
residential treatment program had received the appropriate approvals to expand
its licensed capacity from 60 to 90 beds.
In September 2000, Helicon, Incorporated ("Helicon") and the Company
initiated the closure of the Helicon Youth Center (the "HYC") in Riverside
County, California which the Company operated under a management agreement with
Helicon. 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 previously
announced settlement agreement with Community Care Licensing ("CCL"), a division
of California Department of Social Services. Since entering the settlement
agreement, the HYC census had not been at 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 has
recorded a nonrecurring charge in fiscal 2000 for an impairment reserve of
$6,237,000 ($3,840,000 after tax), the carrying value of the HYC facility. Other
effects of the closure are discussed in "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
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THE MARKET FOR THE COMPANY'S SERVICES
The Company believes the market for its services for at-risk and
troubled youth is large and growing. The population of at-risk and troubled
youth ranges from youth who have been abused and neglected to those who are
seriously emotionally disturbed. At one end of the spectrum are at-risk youth.
These are youth who are not functioning well in school or at home, exhibit such
behavior as aggressive noncompliance with parents and authority figures, chronic
truancy, fighting, running away and alcohol or drug abuse. Children classified
as requiring special education services comprise a large subset of the at-risk
youth population. Of the 6.1 million children in special education programs
during the 1998-99 school year, 2.8 million were diagnosed as having specific
learning disabilities and over 463,000 were considered seriously emotionally
disturbed. At the other end of the spectrum are troubled youth. These are youth
who have committed serious and/or violent crimes, such as sex offenses,
robberies, assaults and drug trafficking. In 1998, there were 2.6 million
arrests of juveniles under 18 years of age, accounting for 17% of all violent
crime, 35% of all burglary arrests, 24% of all weapons arrests and 12% of murder
and aggravated assault arrests. Juveniles were involved in 13% of all drug
arrests and were involved in 27% of all serious violent crimes, including sexual
assaults, robberies and aggravated assaults. Health-risk behavior of high school
age youth is also increasing. According to the 1999 Youth Risk Behavior
Surveillance System report released by the Center for Disease Control, 50% of
students reported current alcohol use. Current marijuana use was reported by
27%, up from 14% in 1991. Those students who had used cocaine at least once
increased from 5.9% in 1991 to 9.5% in 1999. The Company believes that factors
contributing to the high rate of youth crime include the ready availability of
firearms, the prevalence of drug addiction, violence portrayed in the media and
the increase in the number of single parent homes. A census projection has
stated that the juvenile population in the United States is expected to reach 74
million by the year 2010.
The federal Individuals with Disabilities Education Act mandates that
all children with disabilities be provided a free and appropriate education
which emphasizes special education and related services designed to meet their
unique needs. Governmental agencies traditionally have provided education,
treatment and juvenile justice services for at-risk and troubled youth either
directly or through private providers of these services. The Company believes
that the increasing number of youth in the United States and the increasing
prevalence of juvenile crime have resulted in a growing demand for these
services for at-risk and troubled youth, which will make it increasingly less
likely that governmental entities will be able to provide the necessary services
directly. As a result, there is a growing trend throughout the United States
toward privatization of education, treatment and juvenile justice services, as
governments of all types face continuing pressure to control costs and improve
the quality of services. Furthermore, the Company believes that, as juvenile
crime and the demand for special education services for at-risk and troubled
youth continues to grow and receive increasing levels of attention from
lawmakers and the general public, government funding for juvenile services will
continue to increase. Although the number and scope of privatized services for
at-risk and troubled youth has increased dramatically in recent years, the
Company estimates that a relatively small percentage of these services are
currently privately managed. Based on the combination of the current demographic
and societal factors affecting at-risk and troubled youth, the Company believes
that the demand for its services for these youth will continue to increase and,
increasingly, the private sector will be called upon to meet the growing demands
for these services.
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SERVICES PROVIDED BY THE COMPANY
The Company, directly and through programs managed for Helicon,
educates and treats at-risk and troubled youth through a comprehensive continuum
of services that are designed to address the specific needs of each youth and to
return the youth to their schools or communities. At certain of its facilities
and managed locations, the Company has also provided treatment services for
adults. The Company's programs, ranging from non-residential family preservation
programs to 24-hour secure facilities, are based predominantly on models
designed to achieve behavior modification through therapy, counseling and, when
necessary, pharmaceuticals. The Company's programs include computer-based
educational/vocational training and comprehensive programs for behavior change,
including individual, group and family counseling, social and independent living
skills training, empathy development, critical thinking and problem solving,
anger management, substance abuse treatment and relapse prevention. These
programs are designed to increase self-control and effective problem-solving; to
teach youth how to understand and consider other people's values, behaviors and
feelings; to show youth how to recognize how their behavior affects other people
and why others respond to them as they do; and to teach them alternative,
responsible, interpersonal behaviors. Although certain youth in the Company's
programs require both drug treatment and therapy, the Company's goal is to
minimize or eliminate the use of drugs whenever possible over the course of its
involvement with the youth. When drug treatment is appropriate, drugs are
prescribed by licensed physicians and may be administered by Company personnel.
The Company also provides education to medically fragile youth. New services and
programs are regularly developed to address the specific needs of an identified
at-risk youth population, such as serious criminal offenders, juvenile sex
offenders or female specific programming. The Company believes that the breadth
of its services makes the Company attractive to members of the community and a
broad spectrum of payors, as well as to local, state and federal governmental
agencies. As of June 30, 2000, the Company was providing services directly and
through management contracts to approximately 2,500 youth in its non-residential
programs and 1,400 youth in its residential programs.
Comprehensive Continuum of Services. The Company offers a comprehensive
continuum of services ranging from non-restrictive programs, such as family
preservation and non-residential special education programs, to acute
psychiatric programs and secure residential facilities. The Company believes its
primary emphasis on providing a comprehensive continuum of services for at-risk
youth, as well as consistency and flexibility in the delivery of its services,
are critical to the success of its programs. Accordingly, the Company's programs
are tailored to the specific needs of each locality, each client agency, each
population and, most importantly, to the unique needs of each student or
resident. The Company believes that this continuum of services allows it to
address the specific needs of each segment of the at-risk and troubled youth
population and to satisfy the demands for such services by a community. Through
its relationship with Helicon, the Company also is able to deliver services to
governmental agencies who are required or elect to contract with not-for-profit
entities for the services offered by the Company.
Non-Residential Programs. The Company's non-residential youth services programs
are designed to meet the special needs of at-risk and troubled youth and their
families, while enabling each youth to remain in his or her home and community.
As described below, non-residential services provided by the Company may include
behavioral day treatment programs, educational day treatment programs,
alternative education programs, diversionary education programs, family
preservation programs, homebound education programs and on-site education
programs in emergency shelters and diagnostic centers.
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Behavioral Day Treatment Programs. The Company's behavioral day treatment
programs provide therapeutic treatment services to individuals with clinically
definable emotional disorders, including those with severe psychiatric disorders
who are transitioning from acute psychiatric treatment programs to other day
treatment programs, as well as treatment for chemical dependency. Treatment
under these programs includes individual and group therapy, counseling and, in
certain cases, may include pharmaceutical treatment. Each behavioral day
treatment program is overseen by a licensed physician and staffed by one or more
counselors or therapists and registered nurses.
Educational Day Treatment Programs. The Company's educational day treatment
programs provide specialized educational services for youth with clinically
definable emotional disorders. The Company also provides educational services to
medically fragile youth. These programs provide the opportunity to remedy
deficits in a student's education and foster the development of responsible
social behaviors. For these students, traditional public school programs have
not been able to sustain motivation or cooperation or have not provided needed
specialized education services. The Company's educational day treatment programs
are staffed with teachers and counselors with expertise in behavioral management
to provide high quality special education services, including specialized
teaching methods, individual and group therapy provided by licensed clinicians,
computer-based curriculum and instructional delivery and designs.
Alternative Education Programs. The Company's alternative education programs
provide educational services to youth who cannot or who are not permitted to
attend public school. These programs are designed to educate at-risk youth in a
manner that promotes public safety by reducing disruptive and delinquent
behaviors of students. The principal components of the alternative education
programs include daily computer assisted learning, behavioral counseling, job
placement, transition into public schools, family services and community
service. These programs are designed to provide youth with the education,
credentials and job skills required to be successful adults.
Diversionary Education Programs. The Company's diversionary education programs
provide educational and therapeutic day treatment services to youth whose social
function in school and society has been unsatisfactory, as well as delinquent
and status offending youth and youthful sex offenders. These programs, typically
provided in lieu of incarceration, are designed to break the cycle of repeated
teen delinquency and to strengthen the youth's ties and relationships with his
or her family and community. In addition to individually tailored academic
programs, these programs are designed to provide intensive supervision,
individualized education and counseling, vocational counseling and job placement
and independent living skills in an effort to re-motivate the student's interest
in school, develop self-discipline and improve social skills, self-esteem and
cooperation with others.
Family Preservation Programs. The Company's family preservation programs provide
a blend of home-based, intensive crisis intervention services to at-risk and
troubled youth and their families. These programs are designed to help the youth
improve their coping and living skills and strengthen and maintain the integrity
of the family, while promoting the healthy growth and development of the at-risk
and troubled youth. The objectives of these programs are to improve family
functioning and to keep the youth in the family.
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Homebound Education Programs. Homebound education programs provide educational
services to students who are pregnant or who have medical problems that prevent
them from attending school as well as to suspended special education students.
Students in these programs receive focused one-on-one instruction and continue
with the curriculum of the school normally attended by the student.
On-Site Education Programs in Shelters and Diagnostic Centers. The Company's
shelter education program provides on-site educational services at multiple
locations to at-risk and troubled youth who have been removed from their homes
and are in residence at emergency shelters and diagnostic centers. The objective
of this program is to provide continuity in a student's education in a safe and
secure environment while the youth awaits permanent placement.
Residential Programs. The Company's residential programs provide highly
structured therapeutic environments and comprehensive treatment for at-risk and
troubled youth when structured observation is necessary, when severe behavior
management needs are present or when containment and safety are required. As
described below, the Company's residential services include secure residential
programs, detention programs, acute psychiatric treatment programs, residential
psychiatric treatment programs, residential treatment programs, diagnostic and
evaluation services, therapeutic wilderness programs, and group homes.
The Company has also developed a number of gender specific programs for
female populations in secure residential and residential treatment programs.
Market demand for these programs is growing. As a leader in gender specific
programming, the Company continues to expand the number of programs available.
Secure Residential Programs. The Company's secure residential programs house
youth that are placed in such programs by the courts or state agencies. The
Company also provides gender specific secure residential programs. While in the
programs, the youth are provided with a wide range of services designed to
change negative behavior including substance abuse education, group counseling,
physical training, education, a student work program and social skills classes.
Each student receives an individualized service plan tailored to meet his or her
particular needs for the duration of the placement.
Detention Programs. The Company's detention programs house youth awaiting
disposition of their court cases. While in detention, the emotional condition
and educational needs of the youth are assessed by the Company to help the
courts determine the appropriate permanent placement following adjudication. In
addition, residents at the Company's detention centers receive educational and
treatment services, such as substance abuse and individual and group counseling,
to provide these youth with a meaningful start towards their rehabilitation.
Acute Psychiatric Treatment Programs. The Company's acute psychiatric treatment
programs provide evaluation and stabilization of individuals with severe
psychiatric disorders. Programs are based on a medical model and consist of
structured and intensive medical and/or behavioral treatments including therapy,
counseling and pharmaceuticals. The programs are supervised by licensed
physicians and represent the first step in treating severe psychiatric
disorders.
Residential Psychiatric Treatment Programs. The Company's residential
psychiatric treatment programs provide medical and behavioral treatment to
behaviorally and emotionally disturbed youth who suffer from depression,
chemical dependency and other psychiatric disorders. These treatment programs
are based on a medical model and are designed to achieve behavior modification
through the use of therapy and medical treatment, including pharmaceuticals.
Medical treatment services are provided by licensed physicians who contract with
the Company to provide such services. Services offered at these programs include
therapy groups, drug education and 12-step recovery meetings. A primary goal of
the Company's residential psychiatric programs is to develop positive support
systems for the adolescents to allow for discharge to a less structured
environment.
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Residential Treatment Programs. The Company's residential treatment programs
serve behaviorally and emotionally disturbed youth, such as youth who have
substance abuse problems, youth suffering from depression and youthful sex
offenders. While in the Company's residential treatment centers, youth
participate in individual, group and family therapy, recreation therapy and
educational programs. These programs focus on teaching more appropriate behavior
through cognitive restructuring, behavior management and counseling.
Diagnostic and Evaluation Services. The Company's diagnostic and evaluation
services are designed for youth who are in state custody and require diagnostic
services or behavioral observation. While in the Company's diagnostic and
evaluation programs, youth receive an educational workup in addition to
psychological evaluations.
Therapeutic Wilderness Programs. The Company's short-term therapeutic wilderness
programs are designed for relatively low-risk youth who have failed or performed
below expectations in community-based settings. These programs include
educational and counseling services, and a regimen of structured physical
activity, including drill and ceremony training and work projects. The Company's
wilderness programs are designed to educate youth and teach the discipline and
self-respect necessary to prevent a youth from repeating or engaging in more
serious delinquent behavior.
Group Homes. The Company's group home programs provide shelter care,
transitional services and independent living programs for youth in a family-like
setting in residential neighborhoods. These programs focus on teaching family
living and social skills, and include both individual and group counseling.
Management Services. In addition to management services provided to Helicon, the
Company may provide management services to Community Mental Health Centers
("CMHCs"), behavioral units in medical/surgical facilities and to third parties.
Contract terms vary in length from one to three years with reimbursement based
on the services being provided. Reimbursement ranges from the Company assuming
full control of the facility to a fixed fee for specified services. Services may
be provided in both residential and non-residential settings.
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The table below sets forth certain information regarding the programs
operated by the Company directly or through management contracts during the
fiscal year:
Average
Population Commencement of
Location Program Type FY2000 Operations
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COMPANY PROGRAMS
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Alabama Behavioral day treatment 16 June 1997
Detention, therapeutic wilderness,
secure residential 207 September 1989
Arkansas Alternative education 250 June 1997
Acute and residential psychiatric treatment 71 June 1997
California Educational day treatment 979 January 1980
Florida Behavioral day treatment, diversionary education,
alternative education 95 September 1995
Acute and residential psychiatric treatment 54 June 1997
Hawaii Educational day treatment 15 January 1999
Residential treatment 9 February 2000
Kentucky Behavioral day treatment, alternative education 60 June 1997
Acute psychiatric and residential treatment 65 June 1997
Louisiana Diversionary education, family preservation 40 November 1991
Michigan Acute psychiatric, secure residential 32 June 1997
Montana Alternative education, behavioral day treatment 160 June 1997
Acute psychiatric and residential psychiatric
treatment and detention 54 June 1997
Ohio Secure residential treatment 25 March 1999
Pennsylvania Residential psychiatric treatment 51 November 1998
Tennessee Detention, residential treatment,
diagnostic and evaluation services,
residential psychiatric treatment 330 November 1985
Texas Alternative education, educational day treatment 347 September 1996
Acute and residential psychiatric treatment,
secure residential 215 October 1997
Utah Acute psychiatric and residential treatment 83 June 1997
HELICON PROGRAMS
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Tennessee Family preservation, education day treatment,
diversionary education, on-site educational
services in emergency shelters and diagnostic
centers 427 July 1988
California Residential treatment, residential psychiatric
treatment, secure residential, 6-bed group homes 247 June 1988
In addition to the programs described above, at June 30, 2000, the
Company had a management contract with medical facilities or third parties at
one residential based location in Tennessee. The management contracts entered
into by the Company generally have original terms from one to three years. These
contracts typically provide for a fixed monthly fee and reimbursement of
expenses.
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OPERATIONAL PROCEDURES
The Company's programs are designed to provide a range of consistent,
high quality and cost-effective education, treatment and juvenile justice
services to meet a wide variety of needs for the various segments of the at-risk
and troubled youth population. All acute and certain other facilities of the
Company admit patients 24 hours per day, seven days a week. The Company
generally is responsible for the overall operation of its own and Helicon's
facilities and programs, including staff recruitment, general administration and
security and supervision of the youth in their programs.
Staff Recruitment and Training. The Company has assembled an experienced team of
managers, counselors and staff that blends program expertise with significant
business and financial experience in each area of the Company's operations. The
Company believes that its recruitment, selection and training programs provide
quality personnel experienced in the Company's approach to providing its
programs. The Company's direct care staff includes teachers, counselors, mental
health professionals (including psychiatrists and psychologists), juvenile
justice administrators and licensed clinicians. The Company prefers to recruit
direct care staff who have pursued undergraduate or graduate studies in
education and in the behavioral or social sciences. Physician members of the
direct care staff are generally independent contractors who also maintain a
private practice. In the case of physicians who relocate their practices near
Company facilities, the Company may guarantee a minimum income to such
physicians for a limited period, such as one year.
The Company's internal training policies require the Company's
teachers, counselors, security and other direct care staff to complete extensive
training. Core training includes courses in the major Company program components
such as behavior change education, positive peer culture, discipline and limit
setting, anger management and the teaching of social skills. Annual continuing
education also is required for all direct care staff. The Company demonstrates
its commitment to its employees' professional development by offering lectures,
classes and training programs.
Quality Assessment & Outcome Evaluation. The Company strives to enhance the
quality of its program offerings and the quality of its highly trained and
dedicated staff to improve the positive impact that its programs have on the
individuals they serve. The Company has developed a model of ongoing program
evaluation and quality management which the Company believes provides critical
feedback to measure the quality of its various programs. The Company has
implemented its Mastery Achievement Program ("MAP") at its facilities. The MAP
provides regular feedback on percentage achievement of standards to measure
whether a program is achieving its performance objectives. The quality of care
standard data is computer scanned on a weekly or monthly basis and graphs are
developed which show ongoing visual representations of progress towards meeting
standards. Feedback is then provided to the Company's administrators, corporate
managers and staff so that each team member is aware on a timely basis of
compliance with program standards. The Company believes that the MAP is a vital
management tool to evaluate the quality of its programs, and that it has been
useful as a marketing tool to promote the Company's programs since it provides
more meaningful and significant data than is usually provided by routine
contract licensing monitoring of programs. To obtain information on program
effectiveness, the Company contracts with a third party to provide outcome data.
This outcome research now covers the Company's Joint Commission on Accreditation
of Healthcare Organizations ("JCAHO") accredited programs but is expected to be
expanded.
In addition to measuring performance objectives, the Company has
corporate compliance policies, including an integrity hotline, formulated as a
guide to the ethical and legal conduct of its employees.
Security. The Company realizes that, in the operation of programs for at-risk
and troubled youth, a primary mission is to insure the safety of the community
within a facility, as well as the community outside. Thus, the Company's
programs emphasize security, risk assessment and close supervision by
responsible and well-trained staff.
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MARKETING
The Company's marketing activities are directed primarily toward local
and state governmental entities responsible for juvenile justice, social
services providers, education and mental health providers, as well as school
districts and juvenile courts responsible for special programs for at-risk and
troubled youth. The Company markets to behavioral health managed care providers,
physicians, businesses and parents for certain behavioral health services. The
Company also markets certain of its programs to the general public in an effort
to increase community awareness of the Company's facilities. In addition, the
Company markets its management services to Community Mental Health Centers,
medical/surgical hospitals and other smaller behavioral health providers.
Marketing efforts are conducted and coordinated by the Company's Vice President
of Business Development and other senior management personnel, individual
facility personnel, and with the aid, where appropriate, of certain independent
consultants.
Marketing to Governmental Agencies. The Company believes that it is able to
design, develop and operate its facilities and programs at a lower cost than
governmental agencies that are responsible for performing such services. The
Company focuses on adherence to proven policies and procedures and efficient
application of financial resources to provide an attractive, cost-effective
alternative to programs operated directly by governmental entities. The Company
generally pursues its governmental business opportunities in one of three ways.
The Company follows the traditional competitive process where a Request for
Proposals ("RFP") or a Request for Qualifications ("RFQ") is issued by a
government agency, with a number of companies responding, or the Company
receives unsolicited requests, generally from local school districts, for the
operation of special education programs, or the Company submits unsolicited
proposals for new or revised services. When the Company receives inquiries from
or on behalf of governmental agencies or local school districts, the Company
determines whether there is an existing need for the Company's services,
assesses the legal and political climate and the availability of funding and
competition, and then conducts an initial cost analysis to further determine
program feasibility.
Generally, governmental agencies responsible for juvenile justice or
youth education and treatment services procure services through RFPs or RFQs. As
part of the Company's process of responding to RFPs, management meets with
appropriate personnel from the agency making the request to best determine the
agency's distinct needs. If the project fits within the Company's strategy, the
Company will then submit a written response to the RFP. A typical RFP requires
bidders to provide detailed information, including the service to be provided by
the bidder, its experience and qualification and the price at which the bidder
is willing to provide the services. The Company sometimes engages independent
consultants to assist it in responding to RFPs. Based on the proposals received
in response to an RFP, the agency will award a contract to the successful
bidder. In addition to issuing formal RFPs, local jurisdictions may issue an
RFQ. In the RFQ process, the requesting agency selects a firm believed to be
most qualified to provide the requested services and then negotiates the terms
of the contract with that firm, including the price at which its services are to
be provided.
The Company also attends and promotes its services at key conferences
throughout the United States where potential government clients are present. Key
management staff are on occasion requested by governmental agencies to make
presentations at such conferences or to provide professional training.
Marketing to Referral Sources and the General Public. In marketing its services
to the general public, referral sources and payors, the Company first undertakes
market research to determine the specific behavioral care needs of the
communities served by its facilities. The Company then modifies or develops
programs and services to address those needs and promotes the availability of
those programs and services through the use of community education programs,
local talk shows and newspaper articles, media advertising and yellow pages
advertisements.
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In addition, Company employees in each facility meet regularly with
potential referral sources, including psychiatrists and other private
physicians, social workers and other community professionals. These
representatives also meet with businesses, managed care organizations and other
referral sources, all in an effort to educate these sources as to the breadth
and quality of the Company's programs.
Marketing of Management Services. The Company markets management services to
Community Mental Health Centers, behavioral units in medical/surgical facilities
and to third parties. Services under these agreements may be provided in both
residential and non-residential settings.
RELATIONSHIP WITH HELICON
The Company conducts a portion of its business through its relationship
with Helicon, a Section 501(c)(3) not-for-profit corporation. As of June 30,
2000, the Company was providing consulting, management and marketing services to
Helicon at 11 programs. The Company 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, and has recorded an impairment
reserve for the carrying value of this facility. Services provided to Helicon by
the Company include operational, management, marketing, program design,
financial and other support services, including payroll, budgeting and
accounting. The Company is entitled to receive management fees for these
services based on the 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. Prior to fiscal 1997, Helicon was unable to pay
all management fees, lease payments or advances owed the Company. At June 30,
2000, such unpaid management fees, lease payments, advances and interest due the
Company on those obligations, which totaled approximately $8.5 million, were
forgiven by the Company, based on the inability of Helicon to repay those
amounts. The $8.5 million had been fully reserved by the Company prior to fiscal
1997. During fiscal 2000, Helicon was unable to pay all management fees, lease
payments and advances due to the Company, resulting in a charge to operations in
the amount of $2,368,000. Based on the current level of operations being
maintained by Helicon, the Company does not anticipate collecting any of this
amount. The Helicon Agreement expires September 1, 2004. The Company also has
guaranteed Helicon's obligations under a bank line of credit in the amount of
$1,500,000. -- See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Note E of the notes to consolidated financial
statements.
MAJOR CUSTOMERS
During the fiscal year ended June 30, 2000, the Company had no
customers which generated 10% or more of its consolidated revenues.
SOURCES OF REVENUE
The Company's residential centers and day treatment centers receive
payments from (i) the federal government and state and local governments,
pursuant to contracts with such entities, as well as payments under Medicaid
Under 21, Medicare, CHAMPUS and other governmental programs, (ii) Blue Cross and
other private indemnity carriers, health maintenance organizations, preferred
provider organizations and other managed care programs, (iii) self-insured
employers and (iv) patients directly. In addition, the Company receives
management fees from entities, including Helicon, to which management services
are provided.
REIMBURSEMENT
In addition to receiving revenues pursuant to contracts with state and
local governments, the Company receives payment for services from insurance
companies, HMO's, PPO's, Medicare, Medicaid, CHAMPUS and directly from patients.
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Medicaid. The Medicaid program, created by the Social Security Amendments of
1965, is designed to provide medical assistance to welfare recipients, indigent
individuals who meet state eligibility standards, and certain individuals who
meet federally specified poverty guidelines. Medicaid is a joint federal and
state program. Each Medicaid program is financed with federal and state funds
and is operated by the state within federal guidelines requiring coverage of
certain individuals and services and allowing wide latitude in covering
additional individuals and services. Reimbursement rates under the Medicaid
program are set by each participating state, and rates and covered services may
vary from state to state according to a federally approved state plan. The
federal government and many states are currently considering ways to limit the
increase in the level of Medicaid funding which, in turn, could adversely affect
future levels of Medicaid reimbursement received by the Company. The Company
participates in Medicaid Under 21 programs in five states in which it operates
residential facilities.
Certain states in which the Company's facilities operate levy taxes on
provider costs or revenues, in part, to fund a portion of the Medicaid program.
The Omnibus Budget Reconciliation Act of 1990 (the "1990 Budget Act") directs
that such provider specific taxes and voluntary contributions must be excluded
from the provider's cost base for Medicaid reimbursement purposes. The Company
currently pays provider specific taxes in one state. The Company cannot predict
how these programs might be modified in the future or how the states would
respond to such modification.
Some states have been granted Medicaid waivers from the federal
government. These waivers allow the state to implement alternative programs and
still receive federal funding. States implementing such programs typically shift
Medicaid beneficiaries to managed care. Several states in which the Company
operates have been granted a Medicaid waiver. In those states, the Company
contracts with a managed care organization to provide services to enrollees who
are covered under the state Medicaid waiver program.
Medicare. Medicare is the federally funded and administered health insurance
program for the aged (individuals age 65 or older) and disabled. The Medicare
program consists of Part A and Part B. Part A generally covers inpatient
services and services furnished by other institutional health care providers.
Part B generally covers the services of doctors, suppliers of medical items and
outpatient services. While most short term acute care health care facilities
receive Medicare Part A reimbursement on a prospective basis based on the
patient's diagnosis, psychiatric facilities have been exempt (PPS Exempt) from
the Medicare prospective payment system and continue to be reimbursed on a
cost-based system. As of June 30, 2000, the Company had no Medicare inpatient
utilization.
Annual Cost Reports. In order to receive reimbursement under the Medicare and
some state Medicaid programs, the Company is required to submit cost reports
detailing the costs incurred by its facilities in providing care to Medicare and
Medicaid enrollees. These cost reports are subject to government audits which
may result in adjustments to the amounts ultimately determined to be due the
Company under these reimbursement programs. These audits often do not result in
a final determination of amounts due to providers under the programs based on
costs until several years have passed. The Company believes that adequate
provision has been made for any material adjustments that might result from all
of such audits and that final resolution of all cost reports will not have a
material adverse effect upon the Company's financial position or results of
operations.
Blue Cross and Commercial Insurance. Certain of the Company's facilities provide
services to individuals covered by health care insurance offered by private
commercial insurance carriers, and non-profit hospital service corporations such
as Blue Cross. Blue Cross generally pays facilities covered services at (i)
their established hospital charges, (ii) a percentage thereof, or (iii) rates
negotiated between Blue Cross and the individual facility. Other private
insurance carriers also reimburse their policyholders, or make direct payments
to facilities, for covered services at established charges or a percentage
thereof. The privately-insured patient generally is responsible to the facility
for any
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difference between the amount the insurer paid for covered items or services and
the facility's total charges for the covered items or services. Private
commercial insurance carriers have, over the past few years, tended toward
minimizing lengths of stay in facilities and lowering costs, the continuation of
which could adversely affect the Company and its operations.
GOVERNMENT REGULATION AND HOSPITAL ACCREDITATION
Licensing and Certification. The industry in which the Company operates is
subject to substantial federal, state and local government regulations. Health
care facilities are subject to periodic state licensing inspections and
Medicare, Medicaid and CHAMPUS compliance inspections to determine compliance
with their respective conditions of participation, including standards of care,
staffing, equipment, and cleanliness necessary for continued licensing or
participation in these programs. Contracts entered into between the Company and
federal, state and local governments typically contain substantial reporting
obligations and may require supervision, on-site monitoring and periodic
inspections by representatives of such governmental agencies. In addition, there
are specific laws regulating the civil commitment of psychiatric patients and
the disclosure of information regarding patients being treated for chemical
dependency or behavioral disorders. Many states have adopted a "patient's bill
of rights" which sets forth standards dealing with issues such as using the
least restrictive treatments, insuring patient confidentiality, allowing patient
access to the telephone and mail, allowing the patient to see a lawyer and
requiring the patient to be treated with dignity. The Company believes, but
cannot assure, that its facilities are in substantial compliance with all
applicable laws and regulations governing its operations.
Certificate of Need. Three of the states in which the Company operates have in
effect Certificate of Need ("CON") laws applicable to the services provided by
the Company. Under those laws, a hospital generally must obtain state approval
prior to (i) making capital expenditures in excess of certain threshold amounts,
(ii) expanding or relocating bed capacity or facilities, (iii) acquiring certain
medical equipment, or (iv) instituting certain new services. The general effect
of these laws is to increase the difficulty associated with establishing new or
expanding existing facilities or services. The Company may, however, experience
other adverse effects from state CON requirements or changes in such
requirements, including the possibility that the Company experiences adverse
financial affects because it is unable to expand or modify services in a state
with CON requirements.
Utilization Review. Federal law contains numerous provisions designed to ensure
that services rendered by healthcare facilities to Medicare and Medicaid
patients meet recognized professional standards and are medically necessary, as
well as to ensure that claims for reimbursement are properly filed. These
provisions include a requirement that a sampling of admissions of Medicare and
Medicaid patients must be reviewed by peer review organizations ("PROs") in a
timely manner to determine the medical necessity of the admissions. In addition,
under the Peer Review Improvement Act of 1982 (the "Peer Review Act"), PROs may
deny payment for services provided and, in more extreme cases, have the
authority to recommend to the federal Department of Health and Human Services
that the provider be fined or excluded from the Medicare and Medicaid programs.
Each of the Company's acute psychiatric residential facilities has
developed and implemented a quality assurance and improvement program and
implemented procedures for utilization review to meet its obligations under the
Peer Review Act. In the past, PROs have not denied significant amounts of the
Company's charges. Nevertheless, the activities of PROs and other public and
private utilization review agencies will likely continue to have the effect of
causing physicians who practice at the Company's acute psychiatric residential
facilities to reduce the number of patient admissions or their overall length of
stay. The Company believes that compliance with regulations overseen by PROs has
reduced the number of patient admissions and the length of stays of Medicare and
Medicaid patients.
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Fraud and Abuse. Various state and federal laws regulate the relationships
between providers of health care services and their referral sources, including
physicians. Among these laws are the provisions of the Social Security Act
addressing illegal remuneration (the "Anti-Kickback Statute"). The Anti-Kickback
Statute prohibits providers from soliciting, receiving, offering or paying,
directly or indirectly, any remuneration in order to induce or arrange for
referrals for items or services reimbursed under the Medicare or Medicaid
programs. A provider that violates the Anti-Kickback Statute may be subjected to
felony criminal penalties and substantial civil sanctions, including possible
exclusion from the Medicare or Medicaid programs.
In order to provide guidance to health care providers with respect to
the Anti-Kickback Statute, the Office of Inspector General ("OIG"), in July 1991
and November 1992, issued final regulations creating certain "safe harbors."
These "safe harbors" set out requirements which, if met by an individual or
entity, insulate that individual or entity from an enforcement action under the
Anti-Kickback Statute. New proposed safe harbors were issued in September 1993,
with additional clarifications being issued in July 1994. Compliance with the
Anti-Kickback safe harbors is not required by law. However, failure to comply
means that a provider is not assured of protection from investigation or
prosecution under this statute.
The Company and its subsidiaries have entered into various types of
agreements with physicians and other health care providers in the ordinary
course of operating their facilities, many of which provide for payments to such
persons by the Company as compensation for their services. The most common of
these include medical director and provider agreements with physicians. In
addition, the Company and its subsidiaries have entered into various leases,
management contracts and managed care contracts. Although all of these contracts
do not satisfy all the applicable requirements (one of which, for example,
includes a requirement that contracts with physicians to set the aggregate
amount of physician compensation in advance) contained in the Anti-Kickback
Statute safe harbor regulations that relate to such arrangements, the Company
believes that such contracts do not violate the Anti-Kickback Statute because
all of such arrangements (i) are intended to achieve legitimate business
purposes, (ii) provide compensation that is based on fair market value for items
or services that are actually provided, and (iii) are not dependent on the
volume or value of referrals. However, there can be no assurance that (i)
government enforcement agencies will not assert that certain of these
arrangements are in violation of the Anti-Kickback Statute or (ii) the
Anti-Kickback Statute will ultimately be interpreted by the courts in a manner
consistent with the Company's practices. Additional proposed safe harbors are
expected to be published in the future by the OIG, including a safe harbor for
physician recruitment. The Company is unable to predict whether its recruitment
arrangements with physicians will comply with any safe harbor regarding
physician recruitment, if adopted.
In 1989, Congress passed the legislation commonly referred to as the
Stark Bill ("Stark I") as part of the Omnibus Budget Reconciliation Act of 1989.
Stark I went into effect on January 1, 1992. Stark I prohibited certain
physician referrals to clinical laboratories in which the physician or close
family member has a "financial relationship." In 1993, Congress passed an
amendment to Stark I which became effective on January 1, 1995. This amendment
is commonly referred to as "Stark II" (collectively "Stark") and expanded the
scope of the referral prohibition to cover referrals for any of 12 "designated
health services." "Designated health services" includes both inpatient and
outpatient hospital services. Thus, Stark prohibits a physician from referring
Medicare patients to an entity in which that physician or a member of the
physician's immediate family has a "financial relationship" for the provision of
inpatient and outpatient hospital services. "Financial relationship" is defined
to include both direct and indirect "ownership interests in" and "compensation
arrangements with" the entity. Stark provides certain exceptions that exempt
certain compensation arrangements and ownership interests from the statute's
prohibitions including the rental of space and equipment, and certain personal
services and management contracts.
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The Company has attempted to tailor its financial relationships with
physicians in such a way as not to violate Stark and similar state statutes.
However, there can be no assurance that (i) government enforcement agencies will
not contend that certain of these financial relationships are in violation of
the Stark legislation, (ii) that the Stark legislation will ultimately be
interpreted by the courts in a manner consistent with the Company's practices,
or (iii) the regulations when issued in final form will result in an
interpretation by the courts in a manner consistent with the Company's
practices.
The federal government has made investigating, prosecuting and pursuing
other enforcement activities of these federal laws a major priority and the
government scrutiny of health care providers' compliance with these laws is
expected to increase during the foreseeable future. Such prosecutions and
investigations are expensive to defend and injurious to a provider's reputation,
even when no illegal conduct is ultimately found. If the federal government were
to undertake an investigation or prosecution of the Company, it would likely
have a material effect on the Company and its operations.
State Legislation. In addition to the statutes mentioned above, some of the
states in which the Company operates also have laws (i) that prohibit
corporations and other entities from employing physicians and practicing
medicine, (ii) that prohibit certain direct and indirect payments or
fee-splitting arrangements between health care providers, and (iii) that
prohibit conduct similar to that prohibited by the Anti-Kickback Statute and
Stark II. In addition, some states restrict certain business relationships
between physicians and pharmacies. Possible sanctions for violation of these
restrictions include loss of licensure and civil and criminal penalties. The
specific content and scope of these statutes vary from state to state, are often
vague and have received infrequent interpretation by the state courts and
regulatory agencies. Although the Company exercises care in an effort to
structure its arrangements with health care providers to comply with the
relevant state statutes, and although management believes that the Company is in
compliance with these laws, there can be no assurance that (i) governmental
officials charged with responsibility for enforcing these laws will not assert
that the Company or certain transactions in which it is involved are in
violation of such laws, and (ii) such state laws will ultimately be interpreted
by the courts in a manner consistent with the practices of the Company, either
of which could have a material adverse effect on the Company.
Effective July 1, 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.
Other Fraud and Abuse Laws. Various federal statutes impose severe criminal and
civil liability on health care providers that make false statements relating to
claims for payments under the Medicare, Medicaid and other government health
care programs. One of the primary statutes utilized by the government and
private citizens ("whistleblowers") has been the Federal False Claims Act
("FCA"). The FCA imposes liability on individuals or entities that knowingly
present or cause to be presented a false or fraudulent claim for payment to the
United States government. Knowingly includes not only having actual knowledge of
the falsity of the claim but also acting in reckless disregard of the truth or
falsity of the claim. This statute allows for the imposition of a civil penalty
of up to $10,000 for each false claim submitted or caused to be submitted to the
government and three times the amount of the damage to the government. A number
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of states have adopted similar laws that impose criminal and civil liability for
the submission of false claims.
In August, 1996, Congress enacted the Health Insurance Portability and
Accountability Act ("HIPAA"), which generally became effective January 1, 1997.
HIPAA strengthens federal health care fraud and abuse law enforcement efforts.
Among other things, the new legislation (i) adds several new offenses, (ii)
expands the scope of certain existing laws by including private health insurance
plans as well as the Medicare and Medicaid programs, (iii) increases penalties
for certain existing offenses, and (iv) significantly increases funding for
health care fraud and abuse detection and prosecution efforts, including
authorizing informants to share in recoveries and establishing a national health
care fraud and abuse data bank.
Among other things, HIPAA prohibits submitting a claim for
reimbursement based on a code that the person knows or "should know" will result
in a greater payment than the code "the person knows or should know" is
applicable to the item or service actually provided. HIPAA also prohibits
offering any inducements to beneficiaries in order to influence them to order or
receive Medicare or Medicaid covered items or services from a particular
provider or practitioner.
The new offenses created by HIPAA and the substantial increase in
funding devoted to health care fraud and abuse enforcement which resulted from
HIPAA, will significantly increase the likelihood that any particular health
care company will be scrutinized and investigated by federal, state and/or local
law enforcement officials. In addition, the increased penalties will strengthen
the ability of enforcement agencies to effect more numerous and larger monetary
settlements with health care providers and businesses than was previously the
case.
Healthcare Reform Initiatives. The Clinton Administration and Congress continue
to focus on health care with an emphasis on curtailing and lowering the costs of
health care in this country. In addition, several initiatives have been
introduced, some of which have been passed, that propose "parity" of mental
health benefits with other medical benefits as well as increased funding for
children's programs. At this time, it is uncertain if any significant
legislation will be enacted during the upcoming sessions of Congress. The
Company cannot predict which, if any, legislative proposals will be adopted and,
if adopted, the effect such legislation would have on the Company's business.
Accreditation. All of the Company's facilities providing acute psychiatric
treatment programs have been accredited by the Joint Commission on Accreditation
of Healthcare Organizations ("JCAHO"). The JCAHO is a voluntary national
organization which undertakes a comprehensive review for purposes of
accreditation of health care facilities. In general, hospitals and certain other
health care facilities are initially surveyed by JCAHO within 12 months after
the commencement of operations and resurveyed at triennial intervals thereafter.
JCAHO accreditation is important to maintaining relationships with both public
and private insurers, including Medicare, Medicaid, Blue Cross and other private
insurers. The Company believes that all of its facilities providing acute
psychiatric treatment programs are presently in material compliance with all
JCAHO standards of accreditation. The JCAHO review process is subjective to some
degree, however, and there can be no assurance that the Company's facilities
will be able to maintain their accreditation. Failure to maintain JCAHO
accreditation at the Company's facilities may have a material adverse effect on
the Company's operations.
COMPETITION
The at-risk youth services market is highly fragmented, with no single
company or entity holding a dominant market share. The Company competes with
other for-profit companies, not-for-profit entities, for-profit and
not-for-profit hospitals and governmental agencies that are responsible for
juvenile justice and youth education and treatment. The Company competes
primarily on the basis of the quality, range and price of services offered, its
experience in operating facilities and programs and the reputation of its
personnel. Competitors of the Company may initiate programs similar to those
provided by the
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Company without substantial capital investment or experience in management of
education, treatment or juvenile justice programs. Many of the Company's
competitors have greater resources than the Company. Although the Company
believes that its facilities compete favorably within local markets on the basis
of, among other things, the range and variety of clinical programs offered, its
expertise in child and adolescent programs, its methods of managing its
operations and utilization of case management systems, and its commitment to
continuous quality improvement and customer service, the Company also competes
in some markets with smaller local companies that may have a better
understanding of the local conditions and may be better able to gain political
and public acceptance. Certain not-for-profit entities may offer youth programs
at a lower cost than the Company due in part to government subsidies, foundation
grants, tax deductible contributions or other financial resources not available
to for-profit companies.
EMPLOYEES
At June 30, 2000, the Company had 2,050 full-time employees and 830
part-time employees. Of these 2,880 employees, 110 were corporate or regional
administrative staff and 2,770 were involved in program and facility operation
and management. Approximately 75 of the Company's employees are covered by a
Collective Bargaining Agreement between the Company's Butte, Montana facility
and the Rivendell Federation of Health Care Employees, MFT, AFT, AFL-CIO, which
agreement was ratified in January 1998 by the employees who are part of the
Collective Bargaining Unit. The term of the contract expires in December 2000.
From time to time the Company may experience union organizing efforts at certain
of its other locations. The Company believes that its relations with its
employees are good.
INSURANCE
The Company maintains professional liability insurance on a claims made
basis for all of its operations. Insurance coverage under such policies is
contingent upon a policy being in effect when a claim is made, regardless of
when the events which caused the claim occurred. The Company also maintains
general liability and umbrella coverage on an occurrence basis. The Company also
maintains insurance in amounts it deems adequate to cover property and casualty
risks, workers' compensation and director and officer liability. The Company
requires that physicians practicing at its facilities carry medical malpractice
insurance to cover their respective individual professional liabilities. There
can be no assurance that the aggregate amount and kinds of the Company's
insurance are adequate to cover all risks it may incur or that insurance will be
available in the future.
Each of the Company's contracts and the statutes of certain states
require the maintenance of insurance by the Company. The Company's contracts
provide that in the event the Company does not maintain such insurance, the
contracting agency may terminate its agreement with the Company. The Company
believes it is in compliance in all material respects with these requirements.
RISK FACTORS
In order for the Company to utilize the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995, investors are hereby cautioned
that forward looking statements in this report based upon current expectations
involve a number of risks and uncertainties that could cause the Company's
actual results to differ materially from those projected. Accordingly, investors
should consider the following important factors, among others, in reviewing this
report: the Company's exposure to potential termination or non-renewal of the
Company's contracts with Riverside County, California and the State of
Tennessee, upon which the Company was dependent for an aggregate of
approximately 14% of its revenues in fiscal 2000; changes in funding mechanisms
in the State of California that create the potential for school districts to
undertake the implementation of their own competing programs and that may reduce
or eliminate payment to the Company for excused student absences; failure of
governments and governmental agencies that contract with the Company to meet
their payment obligations to the Company or to refer youth to the Company's
programs; decreases in the levels of
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Medicaid funding, which would likely decrease the Medicaid reimbursements
received by the Company's facilities; termination of, or the Company's inability
to renew, contracts on an annual basis; the dependence of the Company's future
growth on the number of youth programs available for privatization and the
ability to obtain awards for such contracts; the Company's inability to
integrate the operations of any future acquired entities into the operations of
the Company; the inability of the Company to make additional attractive
acquisitions on favorable terms; future changes in governmental laws, rules and
regulations that could adversely affect the Company's operations; the Company's
failure to fully comply with federal and state laws and other governmental rules
and regulations and any resulting investigations, prosecutions or settlements;
reductions in reimbursements by third party payors and increasing managed care
penetration; increasingly stringent length of stay and admissions criteria;
public resistance to privatization of youth education, treatment and juvenile
justice services; negative publicity generated by opposition to the Company's
facilities by residents in areas surrounding proposed sites; potential claims or
litigation by participants in the Company's programs arising from contact with
the Company's facilities, programs, personnel or participants, including claims
related to suicides at the Company's facilities; Helicon's inability to pay
future management fees or lease payments; dependence on certain key personnel
and the ability to attract and retain additional qualified personnel;
competition with for-profit and not-for-profit entities and governmental
agencies responsible for youth education, treatment and juvenile justice
services; seasonality and quarterly fluctuations in revenues; and the effect of
certain anti-takeover provisions in the Company's charter and bylaws and under
Tennessee law. 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.
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ITEM 2. PROPERTIES
The table below sets forth certain information regarding the Company's
properties as of June 30, 2000:
Nature of Number of Number of
State Occupation Facilities Beds
----- ---------- ---------- ----
Non-Residential:
- ----------------
Arkansas Lease 5
California Own 5
California Lease 14
Florida Lease 1
Hawaii Lease 1
Louisiana Lease 1
Montana Lease 5
Texas Lease 3
Texas Right to occupy (1) 1
Residential:
- ------------
Alabama Right to occupy (1) 3 76
Alabama Own 1 80
Arkansas Own 1 77
Florida Lease 2 57
Hawaii Lease 1 24
Kentucky Own 1 72
Michigan Own 1 30
Montana Own 1 66
Pennsylvania Lease 1 90
Tennessee Own 5 330
Tennessee Right to occupy (1) 2 35
Tennessee Lease 1 32
Texas Own 1 114
Texas Right to occupy (1) 1 96
Texas Lease 1 40
Utah Own 1 80
(1) The Company acquired a right to occupy the facilities indicated rent-free
for the duration of the Company's contracts to provide these programs.
The Company owns its non-residential office and educational treatment
center in Grand Terrace, California, its educational treatment centers in
Victorville, Hemet and Riverside, California, its residential treatment centers
in Ashland City, Murfreesboro, Nashville, Newbern and Waverly, Tennessee, and
its behavioral treatment centers in Alabama, Arkansas, Kentucky, Michigan,
Montana, Tennessee, Texas and Utah. The Company leases all other facilities on a
short-term basis (generally one to five years) in the particular locality where
it conducts its programs. For the fiscal year ended June 30, 2000, the Company's
total rental expense for property was approximately $2,610,000. In addition, the
Company also has obtained a right to occupy certain facilities rent-free during
the effective period of the Company's contracts to provide education and
treatment programs in Alabama, Tennessee and Texas. The Company owns real estate
and improvements in Riverside and Ramona, California, and Murfreesboro,
Tennessee which it leases to Helicon pursuant to lease agreements which expire
July 31, 2019, December 31, 2002 and January 31, 2004, respectively. As of June
30, 2000, the Company has established an impairment reserve for the full
carrying value of its Riverside, California property which is leased to Helicon.
The Company is not currently receiving lease payments on this property and does
not anticipate doing so in the future. -- See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note E of the
notes to consolidated financial statements.
The Company leases corporate office space in Nashville, Tennessee of
approximately 23,000 square feet. The Company believes its facilities are
suitable for its current operations and programs.
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ITEM 3. LEGAL PROCEEDINGS
In June 1999, a petition was filed by the state of Montana against the
Company primarily alleging negligence in connection with a suicide at the
Company's facility in fiscal 1998. In September 1999 the Company entered into an
agreement with the State whereby the Company did not admit guilt or wrongdoing
of any kind. As a result of the Company's successful compliance with the terms
and conditions of the agreement, the State's complaint was dismissed.
The Company is involved in various other legal proceedings, none of
which are expected to have a material effect on the Company's financial position
or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders during the fourth
quarter of the fiscal year.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock trades on The NASDAQ Stock Market's National
Market under the symbol "KIDS". The following table sets forth the high and low
sale prices for each full quarter within the Company's past two fiscal years.
Year Ended June 30, 2000 High Low
--------------------------- ------ ------
Quarter Ended: June 30 $ 4 9/16 $2 1/8
March 31 6 1/2 2 1/2
December 31 7 5/8 5 3/8
September 30 8 5/8 5 1/4
Year Ended June 30, 1999 High Low
--------------------------- ------ ------
Quarter Ended: June 30 $ 6 15/16 $5 3/8
March 31 15 3/4 5
December 31 14 1/2 7 3/4
September 30 16 1/4 7
HOLDERS
As of September 18, 2000 the Company had approximately 250 shareholders
of record of its Common Stock.
DIVIDENDS
The Company has never declared or paid a cash dividend on its Common
Stock. It is the present policy of the Company's Board of Directors to retain
all available earnings to support operations; therefore, the Company does not
anticipate declaring or paying cash dividends on its Common Stock for the
foreseeable future. The declaration and payment of cash dividends in the future
will be determined based on a number of factors, including the Company's
earnings, financial condition, liquidity requirements, restrictions in financing
agreements and other factors deemed relevant by the Board of Directors. The
Company's current revolving credit agreement prohibits the Company from
declaring dividends in excess of 25% of the Company's net income during any
fiscal year.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information for the years ended June 30,
2000, 1999, 1998 and 1997, the three months ended June 30, 1996, (pursuant to
the Company's change in its fiscal year end from March 31 to June 30) and the
year ended March 31, 1996 has been derived from the financial statements of the
Company and should be read in conjunction with the financial statements, the
related notes thereto and other financial information included elsewhere herein.
All amounts for periods prior to fiscal 1998 have been restated to reflect the
pooling of interests transaction with Ventures Healthcare that was consummated
during fiscal 1998.
Three
Months Year
Year Ended June 30, Ended Ended
------------------------------------------------- June 30, March 31,
2000 1999 1998(1) 1997 1996 1996
--------- --------- -------- -------- -------- --------
(In thousands of dollars, except per share data)
Statement of Operations Data:
Revenue:
Operating revenue $ 123,435 $ 111,812 $ 90,266 $ 34,812 $ 6,482 $ 23,630
Management fee income 3,335 3,665 3,733 2,481 566 1,710
--------- --------- -------- -------- -------- --------
Total revenue 126,770 115,477 93,999 37,293 7,048 25,340
--------- --------- -------- -------- -------- --------
Operating Expenses:
Employee compensation and benefits 76,672 70,875 55,367 22,656 4,139 15,224
Purchased services and other expenses 35,775 31,512 26,610 7,872 1,307 5,095
Depreciation and amortization 4,289 3,492 2,142 1,013 191 1,025
Loss on Helicon receivables and loan
guarantee 2,368 -- -- -- -- --
Impairment loss on Helicon facility 6,237 -- -- -- -- --
Other operating expenses 115 115 115 101 25 101
--------- --------- -------- -------- -------- --------
Total operating expenses 125,456 105,994 84,234 31,642 5,662 21,445
--------- --------- -------- -------- -------- --------
Income from operations 1,314 9,483 9,765 5,651 1,386 3,895
Interest expense 2,181 1,697 972 359 210 905
Other (income) expense, net 17 (526) (2,517)(2) (990) (32) (36)
--------- --------- -------- -------- -------- --------
Income (loss) before income taxes,
extraordinary item and cumulative effect
of accounting change (884) 8,312 11,310 6,282 1,208 3,026
Provision (benefit) for income taxes (17) 3,284 4,357 (8) 311 491
--------- --------- -------- -------- -------- --------
Income (loss) before extraordinary item and
cumulative effect of accounting change (867) 5,028 6,953 6,290 897 2,535
Extraordinary item, net of tax -- -- -- 377 -- 54
Cumulative effect of accounting change, net
of tax -- 20 (3) -- -- -- --
--------- --------- -------- -------- -------- --------
Net income (loss) $ (867) $ 5,008 $ 6,953 $ 5,913 $ 897 $ 2,481
========= ========= ======== ======== ======== ========
Net income (loss) per share:
Diluted $ (0.12) $ 0.66 $ 0.84 $ 0.81 $ 0.15 $ 0.43
Dividends declared per share -- -- -- -- -- --
Balance Sheet Data:
Working capital $ 23,225 $ 17,782 $ 29,867 $ 23,853 $ 4,663 $ 3,488
Total assets 90,569 98,631 80,201 69,768 22,832 22,406
Long term debt and capital lease obligations 24,485 24,854 11,611 11,655 6,000 6,052
Shareholders' equity 54,647 56,230 57,832 49,695 12,779 11,665
(1) Fiscal 1998 reflects a full year of results from the purchase of the
assets of Vendell Healthcare which was effective June 1997.
(2) Amount includes gain on exchange of Texas properties of $1,530 and gain
on repayment by Helicon of $217 of amounts due for prior years
management fees, which had been fully reserved.
(3) Pursuant to the adoption of SOP 98-5, "Reporting on Costs on Start-up
Activities".
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and this Annual Report on Form 10-K 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. Without limiting
the foregoing, the words "believes", "anticipates", "plans", "expects" and
similar expressions are intended to identify 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 above under
"Business--Risk Factors." 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 June 30, 2000, the Company was providing education, treatment and
juvenile justice services, either directly or through management contracts, to
approximately 3,900 youth. Revenues under the Company's programs are recognized
as services are rendered. The Company's programs are delivered in both
non-residential and residential settings. 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 at per
diem rates or under fixed fee contracts. The Company also receives revenues from
management consulting contracts with other entities, including Helicon.
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. 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.
In December 1998, the Company acquired Somerset, Inc., the operator of
a 200-seat educational day treatment program located in southern California.
Consideration for this transaction consisted of approximately $8.2 million in
cash and $2.4 million in notes payable.
The Company opened or ceased operating the following programs during
fiscal 2000:
- Commenced operation of a 17 bed residential treatment program
in Panama City, Florida in August 1999;
- Ceased management of its Eufaula, Alabama secure residential
facility in September 1999;
- Opened a 36 bed residential treatment program in Hawaii in
February 2000;
- Commenced operation of a 32 bed residential treatment center
and aftercare program in West Palm Beach, Florida in March
2000; and
- Sold its Bay County, Florida facility in March 2000.
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
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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. Also,
the Company recognizes management fee income from Helicon, Inc. for consulting,
management and marketing services rendered pursuant to a management agreement
with Helicon (the "Helicon Agreement").
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, including officers' salaries, and
related benefit costs.
Purchased services and other expenses include all expenses not
otherwise presented separately in the Company's consolidated statements of
operations. Significant components of these expenses at the operating level
include items such as 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.
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's population, and net revenues contributed by the program, approach
intended levels, primarily because the Company staffs its programs in
anticipation 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 June 30, 2000, the Company was providing consulting, management
and marketing services to Helicon at 11 programs. In addition, Helicon also
leases three facilities owned by the Company to operate certain of its programs.
The Company is not currently receiving rent, and does not expect to receive
future rent payments, for one of these facilities, the Helicon Youth Center(the
"HYC"). Pursuant to the Helicon Agreement, 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 Helicon Agreement expires in September 2004. 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."
A licensing investigation of the residential treatment program at 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 in April 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 was
disciplined for a period of two years. During this period, Helicon was required
not only to comply with CCL regulations regarding the operation of group homes,
but also with certain other operating criteria imposed by CCL. Had the HYC
committed substantial or continuing violations of the Agreement, CCL could have
taken actions resulting in a temporary suspension or forfeiture of its license
to operate.
Due primarily to the decline in census at the HYC, and at certain
related 6-bed group homes, Helicon revenues generated by these programs were
significantly below expectation during the last six months of fiscal 2000. As a
result of this issue, the Company provided an allowance for doubtful
collectibility for certain of its accounts receivable arising from its
management
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services to, and lease arrangements with, Helicon, and provided Helicon with
$1,500,000 with which to repay its bank line of credit. These actions resulted
in a nonrecurring charge of $2,368,000 to the Company's financial results during
its fiscal quarter ended March 31, 2000. In addition to the nonrecurring charge,
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.
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 the Agreement with CCL.
Since entering the settlement agreement, the HYC census had not been at 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 has recorded a nonrecurring charge in fiscal 2000 for an impairment
reserve of $6,237,000, the carrying value of the HYC facility. The HYC is
located on land that is owned by, and leased from, Riverside County.
On a going forward basis, the Company anticipates that, on an
annualized basis, the ongoing negative impact on the Company's results of
operations from the licensing investigation and subsequent closure of the HYC
may approximate $3 million in revenues and $0.13-0.14 in earnings per diluted
share.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage relationship to total revenues of certain items in the Company's
statements of operations:
Year Ended June 30,
--------------------------------
2000 1999 1998
------ ------ ------
Operating revenues 97.4% 96.8% 96.0%
Management fee income 2.6 3.2 4.0
------ ------ ------
Total revenues 100.0 100.0 100.0
------ ------ ------
Employee compensation and benefits 60.5 61.4 58.9
Purchased services and other expenses 28.2 27.3 28.3
Depreciation and amortization 3.4 3.0 2.3
Loss on Helicon receivables
and loan guarantee 1.9 -- --
Impairment loss on Helicon facility 4.9 -- --
Related party rent 0.1 0.1 0.1
------ ------ ------
Total operating expenses 99.0 91.8 89.6
------ ------ ------
Income from operations 1.0 8.2 10.4
Other (income) expense:
Interest expense 1.7 1.5 1.0
Other -- (0.4) (2.6)
Provision for (benefit from) income taxes -- 2.8 4.6
------ ------ ------
Net income (loss) (0.7%) 4.3% 7.4%
====== ====== ======
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26
FISCAL 2000 VERSUS FISCAL 1999
Total revenues for fiscal 2000 increased by $11,293,000 or 9.8% to
$126,770,000, as compared to $115,477,000 for fiscal 1999. Operating revenues
for fiscal 2000 increased by $11,623,000 or 10.4% to $123,435,000, as compared
to $111,812,000 for fiscal 1999. The increase in operating revenues results from
acquisitions (7%), new programs (4%) and the net increase in revenues at
existing programs (3%), offset by the termination of the Company's Eufaula,
Alabama contract and sale of its Bay County, Florida facility (3%) and rents and
management fees due from Helicon which were not recognized (1%). Included as
part of acquisitions are programs purchased by the Company in the developmental
stage.
Management fee income recognized under the Helicon Agreement for fiscal
2000 decreased $435,000 to $887,000, as compared to $1,322,000 for fiscal 1999.
The decline is primarily due to Helicon's inability to pay fees as a result of a
licensing investigation at the HYC. See--"Helicon" and Note E of notes to the
consolidated financial statements. Management fee income from other sources
increased 4.5%, from $2,343,000 in fiscal 1999 to $2,448,000 in fiscal 2000,
primarily due to income generated by a limited-term contract during fiscal 2000.
Employee compensation and benefits for fiscal 2000 increased
$5,797,000, or 8.2%, to $76,672,000, as compared to $70,875,000 for fiscal 1999.
As a percentage of total revenues, employee compensation and benefits decreased
to 60.5% for fiscal 2000 from 61.4% for fiscal 1999. The increase in employee
compensation and benefits over the prior year is primarily the result of the
Company's growth, both from new programs and acquisitions. The decrease in
employee compensation and benefits as a percent of revenues over the prior year
results primarily from the opening of new programs combined with intentional
overstaffing at the Company's Montana facility during the prior year.
Purchased services and other expenses for fiscal 2000 increased
$4,263,000, or 13.5%, to $35,775,000, as compared to $31,512,000 for fiscal
1999. As a percentage of total revenues, purchased services and other expenses
increased to 28.2% for fiscal 2000 from 27.3% for fiscal 1999. The increase in
purchased services and other expenses over the prior year results primarily from
the Company's growth, both from new programs and acquisitions. The increase in
purchased services and other expenses as a percent of revenues over the prior
year results primarily from increases in bad debt expense and insurance costs.
Depreciation and amortization increased $797,000, or 22.8%, to
$4,289,000 for fiscal 2000 from $3,492,000 for fiscal 1999. The increase in
depreciation and amortization over the prior fiscal year is attributable
primarily to the depreciation associated with the purchase of equipment plus
depreciation and goodwill amortization associated with the Company's
acquisitions.
During fiscal 2000, the Company incurred a loss on Helicon accounts
receivable and loan guarantee in the amount of $2,368,000. In addition, an
impairment loss in the amount of $6,237,000 was recorded in fiscal 2000 for the
carrying value of the Helicon Youth Center facility following the closure of the
facility. See "Helicon" and Note E of notes to the consolidated financial
statements.
Income from operations decreased $8,169,000, to $1,314,000 for fiscal
2000 from $9,483,000 for fiscal 1999, and decreased as a percentage of total
revenues to 1.0% for fiscal 2000 from 8.2% for fiscal 1999, as a result of the
factors described above.
Interest expense increased $484,000, or 28.5%, to $2,181,000 for fiscal
2000 from $1,697,000 for fiscal 1999. The increase in interest expense over the
prior fiscal year is attributable principally to interest on the debt incurred
as part of the Somerset acquisition combined with an increase in the Company's
effective interest rate.
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Other income or expense decreased from income of $526,000 in fiscal
1999 to a net expense of $17,000 in fiscal 2000. The decrease from the same
period in the prior year is attributable primarily 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 and the repayment in fiscal
2000 of the note receivable purchased during fiscal 1999.
Provision for (benefit from) income taxes for fiscal 2000 decreased to
$(17,000) from $3,284,000 for fiscal 1999. The decrease results primarily from
the decrease in taxable income for fiscal 2000 versus fiscal 1999, offset by an
increase in the Company's effective tax rate due primarily to non-deductible
goodwill amortization associated with fiscal 1999 acquisitions.
FISCAL 1999 VERSUS FISCAL 1998
Total revenues for fiscal 1999 increased by $21,478,000 or 22.8% to
$115,477,000, as compared to $93,999,000 for fiscal 1998. Operating revenues for
fiscal 1999 increased by $21,546,000 or 23.9% to $111,812,000, as compared to
$90,266,000 for fiscal 1998. The increase in operating revenues results from
acquisitions (16%), new programs (4%) and the net increase in revenues at
existing programs (3%). Included as part of acquisitions are programs purchased
by the Company in the developmental stage.
Management fee income recognized under the Helicon Agreement for fiscal
1999 increased $29,000 to $1,322,000, as compared to $1,293,000 for fiscal 1998.
Management fee income from other sources decreased 4.0%, from $2,440,000 in
fiscal 1998 to $2,343,000 in fiscal 1999 due to the termination of an acquired
contract.
Employee compensation and benefits for fiscal 1999 increased
$15,508,000, or 28.0%, to $70,875,000, as compared to $55,367,000 for fiscal
1998. As a percentage of total revenues, employee compensation and benefits
increased to 61.4% for fiscal 1999 from 58.9% for fiscal 1998. The increase in
employee compensation and benefits over the prior year is primarily the result
of the Company's growth, both from new programs and acquisitions. The increase
in employee compensation and benefits as a percent of revenues over the prior
year results primarily from the opening of programs combined with intentional
overstaffing at the Company's Montana facility.
Purchased services and other expenses for fiscal 1999 increased
$4,902,000, or 18.4%, to $31,512,000, as compared to $26,610,000 for fiscal
1998. As a percentage of total revenues, purchased services and other expenses
decreased to 27.3% for fiscal 1999 from 28.3% for fiscal 1998. The increase in
purchased services and other expenses over the prior year results primarily from
the Company's growth, both from new programs and acquisitions.
Depreciation and amortization increased $1,350,000, or 63.0%, to
$3,492,000 for fiscal 1999 from $2,142,000 for fiscal 1998. The increase in
depreciation and amortization over the prior fiscal year is attributable
primarily to the depreciation associated with the purchase of equipment plus
depreciation and goodwill amortization associated with the Company's
acquisitions.
Income from operations decreased $282,000, or 2.9%, to $9,483,000 for
fiscal 1999 from $9,765,000 for fiscal 1998, and decreased as a percentage of
total revenues to 8.2% for fiscal 1999 from 10.4% for fiscal 1998, as a result
of the factors described above.
Interest expense increased $725,000, or 74.6%, to $1,697,000 for fiscal
1999 from $972,000 for fiscal 1998. The increase in interest expense over the
prior fiscal year is attributable principally to interest on the debt incurred
as part of the Somerset acquisition.
Other income decreased from $2,517,000 in fiscal 1998 to $526,000 in
fiscal 1999. Other income for fiscal 1998 is primarily attributable to interest
income, a recognized gain in the amount of $1,530,000 arising from an exchange
of properties and a one-time payment from Helicon of management fees, for which
a reserve had previously been established, in the amount of $217,000. Other
income
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for fiscal 1999 results primarily from interest income and the recognition of a
portion of the gain on a prior year sale of property pursuant to receipt of the
final payment on a note receivable. Interest income declined over the prior year
primarily due to the decrease in cash available for investment following the
Ameris acquisition and the Company's repurchase of a portion of its Common
Stock.
Provision for income taxes for fiscal 1999 decreased to $3,284,000 from
$4,357,000 for fiscal 1998. The decrease results primarily from the decrease in
taxable income for fiscal 1999 versus fiscal 1998.
Pursuant to the adoption of Accounting Standards Executive Committee
Statement of Position 98-5, "Reporting on Costs of Start-Up Activities",
effective July 1, 1998, the Company wrote off, as a cumulative effect of a
change in accounting principle, previously capitalized start-up costs in the
amount of $20,000, net of tax.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for fiscal 2000 was $1,251,000 on
a net loss of $867,000 as compared to $4,466,000 for fiscal 1999 on net income
of $5,008,000. Working capital at June 30, 2000 was $23,225,000, as compared to
$17,782,000 at June 30, 1999.
Cash provided by investing activities was $1,496,000 for fiscal 2000 as
compared to cash used of $27,788,000 for fiscal 1999. The change in fiscal 2000
as compared to fiscal 1999 is due primarily to the purchase of Ameris and
Somerset during fiscal 1999 as compared with the sale of the assets of the
Company's Bay County, Florida facility and collection of a note receivable,
related to the Ameris transaction, in fiscal 2000. Cash used by financing
activities was $1,032,000 for fiscal 2000 as compared to cash provided of
$5,029,000 for fiscal 1999, due primarily to decreases in the Company's net
long-term borrowings and in the Company's repurchase of its Common Stock.
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 rate plus an
applicable margin, which ranges between 0.25% and 1.50%, at the Company's
option. At June 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.
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Pursuant to the Somerset transaction, 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 Somerset transaction. At June
30, 2000, $1,241,000 was outstanding under the note.
The Company has also agreed to guarantee Helicon's performance under a
$1,500,000 line of credit from AmSouth Bank ("AmSouth"). The Company provided
Helicon with $1,500,000 to repay the outstanding balance at March 31, 2000. At
June 30, 2000, there was no outstanding balance under Helicon's line of credit.
See--"Helicon" and Note E of notes to the consolidated financial statements.
Capital expenditures during fiscal 2001 are expected to include the
replacement of existing capital assets as necessary, as well as the expenditures
associated with the opening of new programs and facilities, including the
purchase of certain real estate and improvements. The Company also may consider
possible strategic acquisitions, including acquisitions of existing programs and
other companies engaged in the youth services business.
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 revolving line of credit. Management believes that operations, cash on
hand, amounts available under its revolving 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.
INFLATION
Inflation has not had a significant impact on the Company's results of
operations since inception. Certain of the Company's existing contracts provide
for annual price increases based upon changes in the Consumer Price Index.
IMPACT OF ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." 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 the
Statement's hedge criteria are included in income. The Company will adopt SFAS
NO. 133 effective 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.
IMPACT OF THE YEAR 2000 ISSUE
In prior years, the Company discussed the nature and progress of its
plans to become Year 2000 ready. In late 1999, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
mission critical information technology and non-information technology systems
and believes those systems successfully responded to the Year 2000 date change.
To date, the Company has incurred no material expenses associated with the
remediation of its systems. The Company is not aware of any material problems
resulting from Year 2000 issues, either with its internal systems or the
products and services of third parties.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
At June 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 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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Children's Comprehensive Services, Inc.
We have audited the accompanying consolidated balance sheets of Children's
Comprehensive Services, Inc. and subsidiaries as of June 30, 2000 and 1999, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended June 30, 2000. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Children's Comprehensive Services, Inc. and subsidiaries at June 30, 2000 and
1999, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended June 30, 2000, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note A to the consolidated financial statements, the Company
changed its method of accounting for start-up costs in fiscal 1999.
Ernst & Young LLP
Nashville, Tennessee
August 25, 2000 except for Note E,
as to which the date is September 11, 2000
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
June 30,
-------------------
2000 1999
------- -------
(dollars in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,489 $ 1,774
Accounts receivable, net of allowance for doubtful
accounts of $3,913 in 2000 and $1,952 in 1999 27,203 24,692
Prepaid expenses 1,120 1,063
Deferred income taxes 1,134 1,212
Other current assets 1,716 4,678
------- -------
TOTAL CURRENT ASSETS 34,662 33,419
PROPERTY AND EQUIPMENT, net 42,448 50,811
COST IN EXCESS OF NET ASSETS ACQUIRED,
at cost, net of accumulated amortization of
$1,602 in 2000 and $683 in 1999 12,479 13,398
DEFERRED INCOME TAXES 246 --
OTHER ASSETS AND DEFERRED CHARGES, at cost,
net of accumulated amortization of $459 in 2000
and $240 in 1999 734 1,003
------- -------
TOTAL ASSETS $90,569 $98,631
======= =======
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
June 30,
-------------------
2000 1999
------- -------
(dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,488 $ 3,834
Current portion - long-term debt and capital leases 869 817
Income taxes payable -- 702
Accrued employee compensation 4,019 5,842
Accrued other expenses 2,702 2,404
Other current liabilities 1,359 2,038
------- -------
TOTAL CURRENT LIABILITIES 11,437 15,637
DEFERRED INCOME TAXES -- 1,910
LONG-TERM DEBT 24,426 24,741
OBLIGATION UNDER CAPITAL LEASES 59 113
------- -------
TOTAL LIABILITIES 35,922 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 7,184,141 shares in 2000
and 7,295,526 shares in 1999 72 73
Additional paid-in capital 50,502 51,217
Retained earnings 4,073 4,940
------- -------
TOTAL SHAREHOLDERS' EQUITY 54,647 56,230
------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $90,569 $98,631
======= =======
See notes to consolidated financial statements.
-34-
35
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30,
----------------------------------
2000 1999 1998
--------- --------- --------
(In thousands, except per share amounts) Revenues:
Operating revenues $ 123,435 $ 111,812 $ 90,266
Management fee income 3,335 3,665 3,733
--------- --------- --------
TOTAL REVENUES 126,770 115,477 93,999
--------- --------- --------
Operating expenses:
Employee compensation and benefits 76,672 70,875 55,367
Purchased services and other expenses 35,775 31,512 26,610
Depreciation and amortization 4,289 3,492 2,142
Loss on Helicon receivables and loan guarantee 2,368 -- --
Impairment loss on Helicon facility 6,237 -- --
Related party rent 115 115 115
--------- --------- --------
TOTAL OPERATING EXPENSES 125,456 105,994 84,234
--------- --------- --------
Income from operations 1,314 9,483 9,765
Other (income) expense:
Interest expense 2,181 1,697 972
Other 17 (526) (2,517)
--------- --------- --------
TOTAL OTHER (INCOME) EXPENSE, NET 2,198 1,171 (1,545)
--------- --------- --------
Income (loss) before income taxes and
cumulative effect of accounting change (884) 8,312 11,310
Provision for (benefit from) income taxes (17) 3,284 4,357
--------- --------- --------
Income (loss) before cumulative effect of accounting change (867) 5,028 6,953
Cumulative effect of accounting change,
net of income tax benefit of $12 -- 20 --
--------- --------- --------
NET INCOME (LOSS) $ (867) $ 5,008 $ 6,953
========= ========= ========
Basic earnings (loss) per common share:
Before cumulative effect of accounting change $ (0.12) $ 0.67 $ 0.87
Cumulative effect of accounting change -- -- --
--------- --------- --------
NET INCOME (LOSS) $ (0.12) $ 0.67 $ 0.87
========= ========= ========
Diluted earnings (loss) per common share:
Before cumulative effect of accounting change $ (0.12) $ 0.66 $ 0.84
Cumulative effect of accounting change -- -- --
--------- --------- --------
NET INCOME (LOSS) $ (0.12) $ 0.66 $ 0.84
========= ========= ========
Weighted average shares outstanding:
Basic 7,226 7,450 7,983
Diluted 7,226 7,585 8,233
See notes to consolidated financial statements.
-35-
36
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock, Retained
$.01 par value Additional Earnings/ Total
--------------------- Paid-In Accumulated Shareholders'
Shares Amount Capital (Deficit) Equity
---------- ------- -------- -------- --------
(dollars in thousands)
Balance at July 1, 1997 7,916,236 $ 79 $ 56,637 $ (7,021) $ 49,695
Stock issued:
Exercise of options 58,789 -- 98 98
Exercise of warrant 5,758 -- 30 30
Acquisition of Chad 58,000 1 1,065 1,066
Stock registration costs (10) (10)
Net income for the year 6,953 6,953
---------- ------- -------- -------- --------
Balance at June 30, 1998 8,038,783 80 57,820 (68) 57,832
Stock issued:
Exercise of options 78,700 1 460 461
Pursuant to employee stock
purchase plan 23,043 -- 109 109
Shares repurchased (845,000) (8) (7,104) (7,112)
Stock registration costs (68) (68)
Net income for the year 5,008 5,008
---------- ------- -------- -------- --------
Balance at June 30, 1999 7,295,526 73 51,217 4,940 56,230
Stock issued:
Exercise of options 6,000 -- 25 25
Pursuant to employee stock
purchase plan 37,615 -- 146 146
Shares repurchased (155,000) (1) (886) (887)
Net (loss) for the year (867) (867)
---------- ------- -------- -------- --------
Balance at June 30, 2000 7,184,141 $ 72 $ 50,502 $ 4,073 $ 54,647
========== ======= ======== ======== ========
See notes to consolidated financial statements.
-36-
37
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
--------------------------------
2000 1999 1998
-------- -------- --------
(in thousands)
OPERATING ACTIVITIES
Net income (loss) $ (867) $ 5,008 $ 6,953
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Deferred income taxes (2,078) (530) (334)
Depreciation 3,310 2,783 1,973
Amortization 979 709 169
Amortization of deferred loan costs 159 114 33
Provision for bad debts 2,192 1,275 1,329
Loss on Helicon receivables 868 -- --
Impairment loss on Helicon facility 6,237 -- --
Cumulative effect of accounting change -- 20 --
Changes in operating assets and
liabilities, net of effects from
acquisitions:
Accounts receivable (5,702) (6,064) (2,732)
Prepaid expenses (57) (367) 18
Other current assets 462 (403) (223)
Accounts payable (1,346) 1,057 207
Accrued employee compensation (1,823) 188 2,063
Accrued other expenses 298 (83) 884
Income taxes payable (702) 123 (7)
Other current liabilities (679) 636 (264)
-------- -------- --------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,251 4,466 10,069
-------- -------- --------
INVESTING ACTIVITIES
Purchase of assets of Vendell
Healthcare, Inc. -- -- (709)
Purchase of Chad Youth Center -- -- (1,202)
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 (5,329) (4,293) (2,217)
Proceeds from sale of property and
equipment 638 29 866
(Increase) decrease in other assets 50 (350) (467)
-------- -------- --------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES $ 1,496 $(27,788) $ (3,729)
-------- -------- --------
-37-
38
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year Ended June 30,
--------------------------------
2000 1999 1998
-------- -------- --------
(in thousands)
FINANCING ACTIVITIES
Proceeds from revolving lines
of credit and long-term borrowings $ 9,900 $ 36,071 $ --
Principal payments on revolving
lines of credit, long-term
borrowings and capital lease
obligations (10,216) (24,432) (40)
Repurchase of shares of common
stock (887) (7,112) --
Proceeds from issuance of common
stock, net 171 570 128
Stock registration costs -- (68) (10)
-------- -------- --------
NET CASH (USED) PROVIDED BY
FINANCING ACTIVITIES (1,032) 5,029 78
-------- -------- --------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,715 (18,293) 6,418
Cash and cash equivalents at
beginning of year 1,774 20,067 13,649
-------- -------- --------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 3,489 $ 1,774 $ 20,067
======== ======== ========
SUPPLEMENTAL INFORMATION
Income taxes paid $ 2,599 $ 3,426 $ 4,569
Interest paid 1,966 1,363 963
See notes to consolidated financial statements.
-38-
39
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business -- Children's Comprehensive Services, Inc. and its
subsidiaries (the "Company") provide a continuum of services to at-risk and
troubled youth. The Company emphasizes education, treatment and juvenile justice
services, primarily to federal, state and local governmental entities charged
with the responsibility for providing such services. The Company offers these
services through the operation and management of education and treatment
programs and both open and secured residential treatment centers in Alabama,
Arkansas, California, Florida, Hawaii, Kentucky, Louisiana, Michigan, Montana,
Ohio, Pennsylvania, Tennessee, Texas and Utah. The Company also provides
consulting, management and marketing services to other entities, including a
not-for-profit corporation which provides similar services.
Basis of Consolidation -- The consolidated financial statements include
the accounts of Children's Comprehensive Services, Inc. and its subsidiaries.
All significant intercompany transactions and balances have been eliminated.
Cash Equivalents -- The Company considers all highly liquid investments
with a maturity of four months or less when purchased to be cash equivalents.
Property and Equipment -- Property and equipment are recorded at cost
and depreciated using the straight-line method over the following estimated
useful lives:
Land improvements 30 years
Buildings and improvements 2 - 30 years
Furniture and equipment 3 - 7 years
Other Assets and Deferred Charges -- For fiscal years prior to July 1,
1998, contract pre-opening costs (incremental direct costs incurred to open
facilities in new market areas) were amortized using the straight-line method
over the lesser of the initial contract term or one year. Effective July 1,
1998, the Company adopted Statement of Position ("SOP") 98-5, "Reporting on
Costs of Start-up Activities", under which all pre-opening costs are expensed as
incurred. SOP 98-5 requires entities, upon adoption, to write off as a
cumulative effect of a change in accounting principle any previously capitalized
start-up or organizational costs. Deferred loan costs are amortized over the
term of the related loans. Amortization of deferred loan costs is included in
interest expense.
Cost in Excess of Net Assets Acquired -- The cost in excess of net
assets acquired is amortized using the straight-line method over fifteen years.
Revenue Recognition -- Revenues from youth education, treatment and
juvenile justice contracts with governmental entities are recognized as services
are rendered. Revenues from residential psychiatric and behavioral day treatment
services are recognized as such services are rendered, at the Company's
estimated net realizable amounts from the recipient, third party payors and
others for the service rendered. The receivables arising from such contracts or
services are unsecured and generally are due within thirty days.
Use of Estimates -- 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.
-39-
40
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair Value of Financial Instruments -- The following methods and
assumptions were used by the Company in estimating its fair value disclosures
for the following financial instruments:
Cash and Cash Equivalents -- The carrying amounts reported
approximate fair value.
Accounts Receivable and Accounts Payable -- The carrying
amounts reported approximate fair value.
Long-Term Debt and Capital Leases -- The carrying amounts
reported approximate fair value. The fair value of the
Company's long term debt and capital leases are estimated
using discounted cash flow analyses, based on the Company's
current incremental borrowing rates for similar types of
borrowing arrangements.
Long-Lived Assets -- Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. Accordingly, when indicators of impairment are present, the Company
periodically evaluates the carrying value of property and equipment and
intangible assets.
Stock Based Compensation -- The Company grants stock options for a
fixed number of shares to employees and directors with an exercise price equal
to the fair value of the shares at the date of grant. The Company accounts for
stock option grants in accordance with Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations and, accordingly, recognizes no compensation expense for the
stock option grants.
Income Per Common Share -- The Company calculates income per common
share in accordance with SFAS No. 128, "Earnings per Share". The computation of
basic income per common share is based on the weighted average number of shares
outstanding. Diluted income 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.
Income Taxes -- Income taxes are accounted for under the provisions of
SFAS No. 109, "Accounting for Income Taxes". Deferred income tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rate
and laws that will be in effect when the differences are expected to reverse.
Comprehensive Income -- During fiscal 2000, 1999 and 1998, the Company
had no items of other comprehensive income.
Reclassifications -- Certain reclassifications have been made to the
prior years financial statements to conform to the fiscal 2000 presentation.
New Pronouncements -- In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." 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 will adopt
SFAS No. 133 effective July 1, 2000. The Company does not expect adoption of
this Statement to have a material effect on its results of operations or
financial position.
-40-
41
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B--ACQUISITIONS, MERGERS AND DIVESTITURES
In March 2000, the Company sold the tangible assets of CCS/Bay County
in Bay County, Florida for net proceeds of approximately $3.6 million. The net
proceeds approximated the carrying value of the assets sold. For the year ended
June 30, 2000, these assets generated an immaterial operating loss on net
revenues of approximately $5.0 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 fiscal 1999 and
1998 as if the acquisition had occurred on July 1, 1997 would not differ
materially from reported amounts. Cost in excess of net assets acquired of $7.5
million is being amortized over fifteen years.
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 fiscal 1999
and 1998 as if the acquisition had occurred on July 1, 1997 would not differ
materially from reported amounts. Cost in excess of net assets acquired of $5.4
million is being amortized over fifteen years.
In February 1998, the Company acquired Chad Youth Enhancement Center,
Inc. ("Chad"), a 46 bed residential treatment center located in Ashland City,
Tennessee for $1.2 million in cash and $1.1 million (58,000 shares) of the
Company's Common Stock. This transaction has been accounted for as a purchase.
Pro forma results of operations for fiscal 1998 as if the acquisition had
occurred on July 1, 1997 would not differ materially from reported amounts. Cost
in excess of net assets acquired of $809,000 is being amortized over fifteen
years.
In January 1998, the Company effected a merger with Ventures Healthcare
of Gainesville, Inc. ("Ventures"). Ventures provides management services to
Community Mental Health Centers and other not-for-profit entities. The merger
was accounted for as a pooling of interests. The Company issued 146,580 shares
of common stock pursuant to this transaction.
NOTE C--PROPERTY AND EQUIPMENT
June 30,
----------------------------
2000 1999
------------ ------------
Property and equipment consists of:
Land and improvements $ 4,477,000 $ 4,990,000
Buildings and improvements 45,858,000 46,656,000
Furniture and equipment 10,609,000 9,651,000
Construction in progress 61,000 84,000
------------ ------------
61,005,000 61,381,000
Less: Accumulated depreciation (12,320,000) (10,570,000)
Impairment reserve (Note E) (6,237,000) --
------------ ------------
$ 42,448,000 $ 50,811,000
============ ============
-41-
42
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D--CAPITAL LEASE OBLIGATIONS
Equipment under capital leases with a cost basis of $245,000 has been
included in property and equipment as of June 30, 2000 and 1999. The related
accumulated amortization balances totaled $147,000 and $98,000, respectively.
Future minimum payments, by fiscal year and in the aggregate, under the
capital leases are as follows:
Year ending June 30:
2001 $ 62,000
2002 63,000
---------
Total minimum lease payments 125,000
Amount representing interest (12,000)
---------
Present value of minimum lease payments
(including $54,000 classified as current) $ 113,000
=========
NOTE E--HELICON INCORPORATED
Helicon, Incorporated ("Helicon"), a 501(c)(3) tax exempt corporation
not affiliated with the Company, operates youth treatment programs in California
and youth education programs in Tennessee. The majority of youth in Helicon
youth treatment programs are also involved in the Company's educational
treatment programs.
The Company provides management and marketing services to Helicon for
which it is entitled to a management fee of 6% of the monthly gross revenue of
Helicon's programs. The management agreement expires September 1, 2004.
Management fee income totaled $887,000, $1,322,000 and $1,293,000 for the years
ended June 30, 2000, 1999 and 1998, respectively.
The Company also leases real property to Helicon. Real estate and
improvements with a cost of $10,290,000 and a carrying value of $1,074,000
(after recording an impairment reserve of $6,237,000 for the Helicon Youth
Center (the "HYC")), were leased, under operating lease arrangements, to Helicon
at June 30, 2000. In September 2000, Helicon and the Company initiated the
closure of the HYC and consequently the Company does not expect to receive any
future rent payments due it under the HYC lease. Annual rental income due under
this lease is $720,000. Future minimum rental income due under these operating
leases, excluding amounts due under the HYC lease, as of June 30, 2000 is as
follows:
Year ending June 30:
2001 $233,000
2002 233,000
2003 165,000
2004 56,000
2005 and thereafter --
--------
Total $687,000
========
Lease income totaled $535,000, $953,000 and $946,000 for the years ended June
30, 2000, 1999 and 1998, respectively.
-42-
43
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E--HELICON INCORPORATED (continued)
A licensing investigation of the residential treatment program at the
HYC 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 fiscal 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 was 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
fiscal 2000. As a result of this issue, the Company provided an allowance for
doubtful collectibilty of $868,000 for its accounts receivable arising from its
management services to, and lease arrangements with, Helicon for amounts due the
Company as of March 31, 2000, and provided Helicon $1,500,000 with which to
repay its bank line of credit. These actions 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, 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.
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 the Agreement with CCL.
Since entering the settlement agreement, the HYC census had not been at 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 has recorded a nonrecurring charge in fiscal 2000 for an impairment
reserve of $6,237,000, the carrying value of the HYC facility. The HYC is
located on land that is owned by, and leased from, Riverside County.
Prior to fiscal 1997, Helicon was unable to pay all management fees,
lease payments, or advances owed the Company. At June 30, 2000, such unpaid
management fees, lease payments, advances and interest due the Company on those
obligations, which totaled approximately $8.5 million, were forgiven by the
Company. The $8.5 million had been fully reserved by the Company prior to fiscal
1997. Additionally, during fiscal 2000, Helicon was unable to pay all management
fees, lease payments and advances due to the Company, resulting in a charge to
operations in the amount of $2,368,000. Based on the current level of operations
being maintained by Helicon, management does not anticipate collecting any of
these amounts.
Helicon has obtained through AmSouth Bank ("AmSouth") a $1,500,000
revolving line of credit. This line of credit matures in October 2000. The
Company facilitated Helicon in this process by agreeing to guarantee Helicon's
performance under the line of credit. As discussed above, during fiscal 2000 the
Company provided Helicon $1,500,000 with which to repay its bank line of credit.
At June 30, 2000, there was no balance outstanding under Helicon's line of
credit.
-43-
44
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F--LONG-TERM DEBT AND 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 rate plus an
applicable margin, which ranges between 0.25% and 1.50%, at the Company's
option. At June 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 Somerset transaction, 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 Somerset transaction. At June
30, 2000, $1,241,000 was outstanding under the note.
Future principal maturities of long-term debt are as follows at June
30, 2000:
Year ending June 30:
2001 $ 815,000
2002 11,101,000
2003 3,475,000
2004 3,750,000
2005 and thereafter 6,100,000
------------
Total 25,241,000
Less current portion (815,000)
------------
Total long-term $ 24,426,000
============
-44-
45
CHILDREN'S COMPREHENSIVE SERVICES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G--INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets as of June 30,
2000 and 1999 are as follows:
June 30,
--------------------------
2000 1999
----------- -----------
Deferred tax liabilities:
Depreciation, amortization
and asset impairment $ 385,000 $ 2,356,000
Other 293,000 125,000
----------- -----------
Total deferred tax liabilities 678,000 2,481,000
----------- -----------
Deferred tax assets:
Net operating loss and credit
carryforwards 805,000 879,000
Accrued expenses 1,231,000 1,054,000
Other 22,000 --
----------- -----------
Total deferred tax assets 2,058,000 1,933,000
Valuation allowance for deferred
tax assets -- (150,000)
----------- -----------
Net deferred tax assets 2,058,000 1,783,000
----------- -----------
Net deferred tax liabilities (assets) $(1,380,000) $ 698,000
=========== ===========
Management has evaluated the need for a valuation allowance for all or
a portion of the deferred tax assets. Based upon taxable income in prior
carryback years and from the forecast of future pretax book income, management
believes that all of the deferred tax assets will be realized. Accordingly, no
valuation allowance has been recorded for the year ended June 30, 2000. The
valuation allowance decreased $150,000 for the year ended June 30, 2000.
Income tax expense (benefit) is allocated in the financial statements
as follows:
Year Ended June 30,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
Income (loss) before cumulative effect of
accounting change $ (17,000) $ 3,284,000 $ 4,357,000
Cumulative effect of accounting change -- (12,000) --
----------- ----------- -----------
Total $ (17,000) $ 3,272,000 $ 4,357,000
=========== =========== ===========
-45-
46
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G--INCOME TAXES (continued)
The provision for (benefit from) income taxes applicable to income
(loss) before cumulative effect of accounting change is as follows:
Year Ended June 30,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
Current:
Federal $ 1,137,000 $ 3,156,000 $ 3,808,000
State 924,000 658,000 883,000
----------- ----------- -----------
2,061,000 3,814,000 4,691,000
----------- ----------- -----------
Deferred:
Federal (1,092,000) (192,000) (247,000)
State (986,000) (338,000) (87,000)
----------- ----------- -----------
(2,078,000) (530,000) (334,000)
----------- ----------- -----------
Provision for (benefit from)
income taxes $ (17,000) $ 3,284,000 $ 4,357,000
=========== =========== ===========
The reconciliation of income tax expense (benefit) attributable to
income (loss) before cumulative effect of accounting change computed at the
federal statutory tax rate of 34% for the year ended June 30, 2000 and 35% for
the years ended June 30, 1999 and 1998 to income tax expense (benefit) is as
follows:
Year Ended June 30,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
Income tax expense (benefit) at
federal statutory rate $ (301,000) $ 2,909,000 $ 3,959,000
Change in valuation allowance (150,000) -- --
Reversal of previously recorded tax
accruals -- (263,000) (141,000)
State income tax, net of federal
benefit (41,000) 338,000 517,000
Goodwill amortization 306,000 212,000 --
Nondeductible expenses and other 169,000 88,000 22,000
----------- ----------- -----------
Provision for (benefit from) income
taxes $ (17,000) $ 3,284,000 $ 4,357,000
=========== =========== ===========
At June 30, 2000, the Company had state tax net operating loss
carryforwards of $14,200,000 which expire from 2014 through 2020.
NOTE H--SHAREHOLDERS' EQUITY
Warrants -- The Company had warrants to purchase 9,616 shares of common
stock outstanding at July 1, 1997, at an exercise price of $5.20 per share.
Warrants to purchase 5,758 shares were exercised during fiscal 1998. Warrants to
purchase 3,858 shares remain outstanding at June 30, 2000 and expire in 2004.
-46-
47
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H--SHAREHOLDERS' EQUITY (continued)
Stock Options -- The following table sets forth outstanding stock
options under the Company's stock option plans as of June 30, 2000, 1999 and
1998 for the purchase of the Company's Common Stock:
Weighted
Average
Option Exercise
Options Shares Prices Price
- ---------------------------- ------------ ------------ ------------
Outstanding at July 1, 1997 588,450 $ .62-18.00 $ 8.99
Granted 170,500 17.64-18.25 17.72
Exercised (58,789) .62-15.38 1.67
Forfeited (5,874) 5.25-15.38 13.96
------------ ------------ ------------
Outstanding at June 30, 1998 694,287 1.50-18.25 11.72
Granted 595,550 5.85-12.82 9.49
Exercised (78,700) 1.50-7.00 5.86
Forfeited (183,566) 10.85-17.64 16.25
------------ ------------ ------------
Outstanding at June 30, 1999 1,027,571 3.25-18.25 10.07
Granted 240,850 2.85-6.91 3.70
Exercised (6,000) 3.25-5.25 4.08
Forfeited (485,144) 3.25-18.25 11.37
------------ ------------ ------------
Outstanding at June 30, 2000 777,277 $2.85-18.00 $ 7.33
============
Options exercisable and shares available for future grant are as
follows:
June 30,
---------------------------------------
2000 1999 1998
------- ------- -------
Options exercisable 395,823 391,847 371,091
Shares available for grant 465,883 333,875 767,825
The following table summarizes information about stock options
outstanding at June 30, 2000:
Options Outstanding Options Exercisable
- --------------------------------------------------------- -----------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise at June 30, Contractual Exercise at June 30, Exercise
Prices 2000 Life Price 2000 Price
- --------------------------------------------------------- -----------------------
$ 2.85- 5.75 319,673 8 $ 3.44 134,473 $ 4.25
5.76-11.00 289,570 9 7.46 101,316 7.62
12.00-18.25 168,034 7 14.30 160,034 14.34
- ------------- --------- -----------
$ 2.85-18.25 777,277 395,823
========= ===========
Options exercisable at June 30, 2000, 1999 and 1998 had weighted
average exercise prices of $9.19, $10.37 and $5.41, respectively.
-47-
48
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H--SHAREHOLDERS' EQUITY (continued)
The 1997 Stock Incentive Plan was approved by the Company's
shareholders at the 1997 Annual Meeting and replaced both the Company's 1987
Employee Stock Option Plan, which expired in June 1997, and the Company's 1989
Stock Option Plan for Non-Employee Directors. No additional options will be
awarded under either of the replaced plans.
The following table summarizes common shares reserved at June 30, 2000:
Warrants 3,858
1987 Employee Stock Option Plan 209,973
1989 Stock Option Plan for Non-Employee Directors 30,000
1997 Stock Incentive Plan 537,304
-------
Total common shares reserved 781,135
=======
SFAS No. 123, "Accounting for Stock-Based Compensation", defines a fair
value based method of accounting for an employee stock option or similar equity
instrument. This statement gives entities a choice of recognizing related
compensation expense by adopting the fair value method or to continue to measure
compensation using the intrinsic value approach under APB Opinion No. 25
"Accounting for Stock Issued to Employees". The Company has elected to follow
APB No. 25 and related interpretations in accounting for its stock compensation
plans because, as discussed below, the alternative fair value accounting
provided for under SFAS No. 123 requires use of option valuation models that
were not developed for use in valuing employee stock options. Under APB No. 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, which also requires that the information be determined
as if the Company has accounted for its employee stock options granted
subsequent to March 31, 1995 under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for the years ended June 30, 2000, 1999, and 1998, respectively:
risk-free interest rate of 6%, 7.5% and 7.5%; no annual dividend yield;
volatility factor of 1.025, .898, and .477 based on daily closing prices for the
year; and an expected option life of 6 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
-48-
49
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H--SHAREHOLDERS' EQUITY (continued)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
Year Ended June 30,
--------------------------------------
2000 1999 1998
--------- --------- ---------
Pro forma net income (loss) $ (3,569) $ 1,979 $ 5,745
Pro forma earnings (loss) per share
Basic $ (0.49) $ 0.27 $ 0.72
Diluted (0.49) 0.26 0.70
The weighted average fair value per share for options granted during
the years ended June 30, 2000, 1999 and 1998 totaled $3.70, $9.49 and $9.94,
respectively. The estimated remaining contractual life of options outstanding is
8 years.
Preferred Stock -- The shareholders of the Company have authorized the issuance
of up to 10 million shares of preferred stock, $1.00 par value, on such terms as
the directors of the Company may determine, with full authority in the Board of
Directors to fix series, conversion rights and other provisions applicable to
such preferred stock. No specific terms or provisions have been set, and no
preferred shares have been issued.
Dividends -- The Company's revolving credit agreement (see Note F) prohibits the
Company from declaring dividends in excess of 25% of the Company's net income
during any fiscal year.
Share Repurchase -- In August 1998, the Company's Board of Directors authorized
the repurchase of up to 1,000,000 shares of the Company's Common Stock. Shares
repurchased totaled 155,000 and 845,000 during fiscal 2000 and 1999,
respectively. The shares of stock repurchased were retired.
Shareholder Rights Plan -- The Company's Board of Directors has adopted a
shareholder rights plan to protect the interests of the Company's shareholders
if the Company is confronted with coercive or unfair takeover tactics by
encouraging third parties interested in acquiring the Company to negotiate with
the Board of Directors. The shareholder rights plan is a plan by which the
Company has distributed rights ("Rights") to purchase (at the rate of one Right
per share of common stock) shares of common stock at an exercise price of $75.00
per Right. The Rights are attached to the common stock and may be exercised only
if a person or group acquires 10% or more of the outstanding common stock. Upon
such an event, the Rights "flip-in" and each holder of a Right will thereafter
have the right to receive, upon exercise, common stock having a value equal to
two times the exercise price. All Rights beneficially owned by the acquiring
person or group triggering the "flip-in" will be null and void. Additionally, if
a third party were to take certain action to acquire the Company, such as a
merger or other business combination, the Rights would "flip-over" and entitle
the holder to acquire shares of the acquiring person with a value of two times
the exercise price. The Rights are redeemable by the Company at any time before
they become exercisable for $0.01 per Right and expire in 2008. In order to
prevent dilution, the exercise price and number of Rights per share of common
stock will be adjusted to reflect splits and combinations of, and common stock
dividends on, the common stock.
-49-
50
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I--EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
Year Ended June 30,
------------------------------------------
2000 1999 1998
------------ ------------ ----------
Numerator
Numerator for basic and
diluted earnings (loss) per share:
Income (loss) before
cumulative effect of
accounting change $ (867,000) $ 5,028,000 $6,953,000
Cumulative effect of accounting
change -- 20,000 --
------------ ------------ ----------
Net income (loss) $ (867,000) $ 5,008,000 $6,953,000
============ ============ ==========
Denominator
Denominator for basic earnings (loss)
per share:weighted-average shares 7,225,806 7,450,063 7,982,624
Effect of dilutive stock options
and warrants -- 134,804 250,618
------------ ------------ ----------
Denominator for diluted earnings (loss)
per share:adjusted-weighted-average
shares 7,225,806 7,584,867 8,233,242
============ ============ ==========
Year Ended June 30,
------------------------------------------
2000 1999 1998
------------ ------------ ----------
Basic earnings (loss) per share
Before cumulative effect of
accounting change $ (0.12) $ 0.67 $ 0.87
Cumulative effect of accounting
change -- -- --
------------ ------------ ----------
Net income (loss) $ (0.12) $ 0.67 $ 0.87
============ ============ ==========
Diluted earnings (loss) per share
Before cumulative effect of
accounting change $ (0.12) $ 0.66 $ 0.84
Cumulative effect of accounting
change -- -- --
------------ ------------ ----------
Net income (loss) $ (0.12) $ 0.66 $ 0.84
============ ============ ==========
The Company reported a net loss for fiscal 2000; therefore, the effect
of considering potentially dilutive securities would be anti-dilutive.
Securities that could potentially dilute basic income per share in the future
that were not included in the computation of diluted income per share because to
do so would have been anti-dilutive for fiscal 2000, 1999 and 1998 were 777,000,
914,000 and 44,000 shares, respectively.
-50-
51
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J--EMPLOYEE BENEFIT PLAN
The Company has a Salary Reduction Plan under section 401(k) of the
Internal Revenue Code. Under this plan, employees paid on a salary only basis
may defer not less than 1% and not more than 20% of pre-tax compensation each
year, subject to Internal Revenue Service limitations, through contributions to
a designated investment fund. Under the provisions of the plan, the Company may
contribute a discretionary amount to be determined each year. No discretionary
contributions have been made under the plan. Administrative costs under the plan
totaled $42,000, $45,000 and $25,000 for the years ended June 30, 2000, 1999,
and 1998, respectively.
Pursuant to shareholder approval, the Company implemented an Employee
Stock Purchase Plan in January 1999. Under this plan, eligible employees can
elect to have amounts withheld from their compensation which are used to
purchase stock in the Company at 85% of the lesser of the market price of the
stock at the beginning or the end of each calendar quarter. Withholding amounts
are fixed prior to the beginning of each calendar quarter. During fiscal 2000
and 1999, 37,615 shares and 23,043 shares, respectively, of the Company's Common
Stock were purchased at prices ranging from $2.60 to $5.63 and $4.73 to $4.78
per share, respectively.
NOTE K--COMMITMENTS
The following is a schedule, by year, of future minimum rental payments
required under operating leases that have initial or remaining terms in excess
of one year as of June 30, 2000:
Year ending June 30:
2001 $1,732,000
2002 1,340,000
2003 1,087,000
2004 741,000
2005 and thereafter 498,000
----------
Total $5,398,000
==========
Certain of the leases have renewal options of up to 5 years. Total rental
expense for all operating leases and other rental arrangements for the years
ended June 30, 2000, 1999 and 1998 was $3,516,000, $3,040,0000 and $2,301,000,
respectively.
NOTE L--CONTINGENCIES
Montana Litigation -- In June 1999, a petition was filed by the State of Montana
against the Company primarily alleging negligence in connection with a suicide
at the Company's facility in fiscal 1998. In September 1999 the Company entered
into an agreement with the State whereby the Company did not admit guilt or
wrongdoing of any kind. As a result of the Company's successful compliance with
the terms and conditions of the agreement, the State's complaint was dismissed.
Other Litigation -- The Company is involved in various other legal proceedings,
none of which are expected to have a material effect on the Company's financial
position or results of operations.
-51-
52
CHILDREN'S COMPREHESIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Laws and Regulations -- Laws and regulations governing Medicare and Medicaid
programs are complex and subject to interpretation. The Company believes that it
is in substantial compliance with all applicable laws and regulations.
Compliance with such laws and regulations can be subject to future governmental
review and interpretation. Noncompliance could result in regulatory action
including fines, penalties, and exclusion from the Medicare and Medicaid
programs.
Professional Liability Risk -- The Company maintains professional liability
insurance on a claims made basis for all of its operations. The Company also
evaluates its exposure relating to incurred but not reported professional
liability claims and has recorded a related accrual on its consolidated balance
sheets. Management is aware of no potential professional liability claims whose
settlement, if any, would have a material adverse effect on the Company's
consolidated financial position or results of operations.
NOTE M--RELATED PARTY TRANSACTIONS
In June 1996, the Company entered into a one-year agreement with Joseph
Fernandez and Associates, Inc. for marketing and consulting services. Joseph A.
Fernandez, a director of the Company, serves as President of Joseph Fernandez
and Associates, Inc. This agreement was continued on a month to month basis from
July 1997 until its termination in March 1998. Payments under this agreement
during fiscal 1998, including reimbursable expenses, totaled $33,000.
The Company rents certain operating properties from Amy S. Harrison and
Martha A. Petrey, Ph.D., officers and directors of the Company. Payments under
these month-to-month rental arrangements totaled $115,000 for each of the years
ended June 30, 2000, 1999, and 1998, respectively.
NOTE N--QUARTERLY FINANCIAL INFORMATION (Unaudited)
The following table sets forth selected quarterly operating data.
Amounts for fiscal 1999 have been restated to reflect the adoption of SOP 98-5
effective July 1, 1998.
2000 1999
-------------------------------------------- -------------------------------------------
First Second Third Fourth First Second Third Fourth
------- ------- ------- -------- ------- ------- ------- -------
(in thousands except per share amounts)
Total revenues $29,779 $31,522 $33,024 $ 32,445 $23,200 $27,965 $31,549 $32,763
Income from operations 1,285 2,845 1,087 2,334 1,080 2,263 3,278 2,862
Net income (loss) before
cumulative effect of
accounting change 461 1,292 210 (2,830) 668 1,200 1,698 1,462
Net income (loss) 461 1,292 210 (2,830) 648 1,200 1,698 1,462
Income per share, diluted:
Before cumulative effect of
accounting change 0.06 0.18 0.03 (0.39) 0.09 0.16 0.22 0.20
Net income (loss) $ 0.06 $ 0.18 $ 0.03 $ (0.39) $ 0.08 $ 0.16 $ 0.22 $ 0.20
*******
-52-
53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
INFORMATION REQUIRED BY ITEM 10 (DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT), ITEM 11 (EXECUTIVE COMPENSATION), ITEM 12 (SECURITY OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT), AND ITEM 13 (CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS), will be included in the Company's Proxy Statement to
be filed within 120 days of June 30, 2000 and is incorporated herein by
reference.
-53-
54
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The following financial statements of Children's Comprehensive
Services, Inc. are included in Part II, Item 8:
Page
----
Consolidated Balance Sheets-June 30, 2000 and 1999 33
Consolidated Statements of Operations for the Years Ended
June 30, 2000, 1999 and 1998 35
Consolidated Statements of Shareholders' Equity for
the Years Ended June 30, 2000, 1999 and 1998 36
Consolidated Statements of Cash Flows for the Years
Ended June 30, 2000, 1999 and 1998 37
Notes to Consolidated Financial Statements 39
(2) Financial Statement Schedules
Schedule II - Valuation and qualifying accounts 56
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
applicable or not required under their related instructions or the
required information is included in the financial statements or notes
thereto.
(3) Management Contracts and Compensatory Plans or Arrangements
1997 Stock Incentive Plan, (included herein as Exhibit 10.12.)
(b) Reports on Form 8-K
None
(c) Exhibits
The exhibits listed in the accompanying index to exhibits on page 57
are filed as part of this annual report on Form 10-K.
-54-
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: September 28, 2000 By: /s/ William J Ballard
----------------------------------------
William J Ballard
Chairman, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: September 28, 2000 /s/William J Ballard
----------------------------------------
William J Ballard
Chairman, Chief Executive Officer
and Director (Principal Executive
Officer)
Date: September 28, 2000 /s/Amy S. Harrison
----------------------------------------
Amy S. Harrison
Vice Chairman, President, Chief
Operating Officer and Director
Date: September 28, 2000 /s/Martha A. Petrey, Ph.D.
----------------------------------------
Martha A. Petrey, Ph.D.
Executive Vice President and Director
Date: September 28, 2000 /s/Donald B. Whitfield
----------------------------------------
Donald B. Whitfield
Vice President - Finance and Chief
Financial Officer (Principal Financial
and Accounting Officer)
Date: September 28, 2000 /s/John C. Edmunds
----------------------------------------
John C. Edmunds
Vice President - Secretary and Treasurer
Date: September 28, 2000 /s/Thomas B. Clark
----------------------------------------
Thomas B. Clark
Director
Date: September 28, 2000 /s/Joseph A. Fernandez, Ed.D.
----------------------------------------
Joseph A. Fernandez, Ed.D.
Director
Date: September 28, 2000 /s/David L. Warnock
----------------------------------------
David L. Warnock
Director
-55-
56
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
CHILDREN'S COMPREHENSIVE SERVICES, INC.
- ------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C--ADDITIONS COL D. COL E.
- ------------------------------------------------------------------------------------------------------------
(1) Charged to
Balance Charged to Other Balance
at Beginning Costs and Accounts- Deductions- at End
DESCRIPTION of Period Expenses Describe Describe of Period
- ------------------------------------------------------------------------------------------------------------
Year ended June 30, 2000:
Deducted from asset accounts:
Allowance for doubtful
accounts $1,952,000 $3,060,000 $ -0- $1,099,000(1) $ 3,913,000
Property impairment reserve -0- 6,237,000 -0- -0- 6,237,000
---------- ---------- ------------- ---------- -----------
Totals $1,952,000 $9,297,000 $ -0- $1,099,000 $10,150,000
========== ========== ============= ========== ===========
Year ended June 30, 1999:
Deducted from asset accounts:
Allowance for doubtful
accounts $1,865,000 $1,275,000 $ -0- $1,188,000(1) $ 1,952,000
---------- ---------- ------------- ---------- -----------
Totals $1,865,000 $1,275,000 $ -0- $1,188,000 $ 1,952,000
========== ========== ============= ========== ===========
Year ended June 30, 1998:
Deducted from asset accounts:
Allowance for doubtful
accounts $2,361,000 $1,329,000 $ -0- $1,825,000(1) $ 1,865,000
---------- ---------- ------------- ---------- -----------
Totals $2,361,000 $1,329,000 $ -0- $1,825,000 $ 1,865,000
========== ========== ============= ========== ===========
(1) Uncollectible accounts written off against allowance account.
-56-
57
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
- ------ ----------------------
3.1 Restated Charter, as amended. (1)
3.2 By-Laws. (2)
4.1 Specimen Stock Certificate. (6)
4.2 Shareholder Rights Agreement (13)
10.1 Non-competition Agreement between Registrant and Amy S. Harrison. (3)
10.2 Non-Competition Agreement between Registrant and Martha A. Petrey. (3)
10.3 Registration Agreement between Registrant and Amy S. Harrison and
Martha A. Petrey. (3)
10.4 1987 Employee Stock Option Plan, as amended. (7)
10.5 1989 Stock Option Plan for Non-Employee Directors. (4)
10.6 Assignment and Sublease between Registrant and Helicon Incorporated.
(5)
10.7 Warrant Agreement dated October 1, 1996, between the Registrant and
Joseph A. Fernandez. (10)
10.8 Consulting and Marketing Agreement effective as of August 1, 1992,
dated September 22, 1994, by and between the Registrant and Helicon
Incorporated. (7)
10.9 First Amendment, dated September 1, 1999, to the Consulting and
Marketing Agreement effective as of August 1, 1992 by and between the
Registrant and Helicon Incorporated. (18)
10.10 Registration Rights Agreement, dated September 20, 1993, by and between
the Registrant and T. Rowe Price Strategic Partners Fund II, L.P. (8)
10.11 Guaranty and Suretyship Agreement dated January 29, 1996, by and
between First American National Bank, the Registrant and Helicon
Incorporated. (8)
10.12 1997 Stock Incentive Plan. (10)
10.13 Lease Agreement dated September 26, 1989 between the Registrant and the
Equitable Life Assurance Society of the United States. (10)
10.14 First Amendment, dated February 21, 1990, to the lease between the
Registrant and the Equitable Life Assurance Society of the United
States. (10)
10.15 Second Amendment, dated March 1, 1993, to the lease between the
Registrant and the Equitable Life Assurance Society of the United
States. (10)
10.16 Third Amendment, dated October 26, 1993, to the lease between
Registrant and the Equitable Life Assurance Society of the United
States. (10)
10.17 Fourth Amendment, dated March 11, 1999, to the lease between Registrant
and the Equitable Life Assurance Society of the United States. (18)
10.18 Fifth Amendment, dated March 31, 1999, to the lease between Registrant
and the Equitable Life Assurance Society of the United States. (18)
10.19 Sixth Amendment, dated January 7, 2000, to the lease between Registrant
and Highwoods/Tennessee Holdings L.P., successor-in-interest to the
Equitable Life Assurance Society of the United States.
10.20 Merger Agreement by and between Ventures Healthcare of Gainesville,
Inc. and the Registrant dated January 19, 1998 (11)
10.21 Merger Agreement by and between Chad Youth Enhancement Center, Inc. and
CLG Management Company, LLC and the Registrant dated February 12, 1998
(11)
10.22 Asset Exchange Agreement by and between Meadow Pines Hospital, Inc. and
the Registrant dated February 23, 1998 (11)
10.23 Agreement and Plan of Merger, dated as of September 9, 1998, between
the Registrant and Ameris Health Systems, Inc. (12)
10.24 Stock Purchase Agreement between the Registrant and William M. Bosic,
Donald J. Bosic, Joseph C. McCoy and Somerset, Inc. (14)
-57-
58
INDEX TO EXHIBITS (Continued)
10.25 First Addendum to Stock Purchase Agreement between the Registrant and
William M. Bosic, Donald J. Bosic, Joseph C. McCoy and Somerset, Inc.
(14)
10.26 Agreement of Purchase and Sale and Joint Escrow Instructions between
the Registrant and BMB Enterprises. (14)
10.27 Asset Purchase Agreement between the Registrant and Behavioral Medicine
Professionals, Inc. (14)
10.28 Asset Purchase Agreement between the Registrant and B and B Leasing.
(14)
10.29 Noncompetition, Confidentiality and Nonsolicitation Agreement between
the Registrant and Joseph C. McCoy. (14)
10.30 Noncompetition, Confidentiality and Nonsolicitation Agreement between
the Registrant and Donald J. Bosic. (14)
10.31 Noncompetition, Confidentiality and Nonsolicitation Agreement between
the Registrant and William M. Bosic. (14)
10.32 Children's Comprehensive Services, Inc. Employee Stock Purchase Plan
(15)
10.33 Credit Agreement by and among the Company and SunTrust Bank, Nashville,
N.A. as agent and lender dated December 1, 1998 (16)
10.34 First Amendment to Credit Agreement by and among the Company and
SunTrust Bank, Nashville, N.A. as agent and lender dated December 1,
1998 (17)
10.35 Second Amendment to Credit Agreement by and among the Company and
SunTrust Bank, Nashville, N.A. as agent and lender dated April 20, 1999
(17)
10.36 Third Amendment to Credit Agreement by and between the Registrant and
SunTrust Bank, Nashville, N.A. as agent and lender, dated September 27,
1999 (19)
10.37 Fourth Amendment to Credit Agreement by and between the Registrant and
SunTrust Bank, Nashville, N.A. as agent and lender, dated January 15,
2000 (20)
10.38 Fifth Amendment to Credit Agreement by and between the Registrant and
SunTrust Bank, Nashville, N.A. as agent and lender, dated April 21,
2000 (20)
10.39 Employment Agreement between the Company and William J Ballard,
effective as of August 19, 1998 (17)
10.40 Employment Agreement between the Company and Amy S. Harrison, effective
as of August 19, 1998 (17)
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule
(1) Incorporated herein by reference from Registrant's Registration
Statement on Form S-2, filed August 15, 1996 (Reg. No. 333-8387).
(2) Incorporated herein by reference from Registrant's Registration
Statement on Form S-1, filed October 11, 1989 (Reg. No. 33-31527).
(3) Incorporated herein by reference from Registrant's Form 8-K, dated
April 12, 1988, reporting the acquisition of Advocate Schools (File No.
0-16162).
(4) Incorporated herein by reference from Registrant's Registration
Statement on Form S-8, filed February 14, 1990 (Reg. No. 2-33-33499).
(5) Incorporated herein by reference from Registrant's Form 10-K for the
fiscal year ended March 31, 1990, dated June 28, 1990 (File No.
0-16162).
(6) Incorporated herein by reference from Registrant's Form 10-K for the
fiscal year ended March 31, 1994, dated June 28, 1994 (File No.
0-16162).
(7) Incorporated herein by reference from Registrant's Form 10-K for the
fiscal year ended March 31, 1995, dated June 28, 1995 (File No.
0-16162).
(8) Incorporated herein by reference from Registrant's Form 10-K for the
fiscal year ended March 31, 1996, dated June 28, 1996 (File No.
0-16162).
(9) Incorporated herein by reference from Registrant's Form 10-Q for the
period ended December 31, 1996, dated February 13, 1997 (File No.
0-16162).
(10) Incorporated herein by reference from Registrant's Form 10-K for the
fiscal year ended June 30, 1997, dated September 29, 1997 (File No.
0-16162).
(11) Incorporated herein by reference from Registrant's Form 10-K for the
fiscal year ended June 30, 1998, dated September 29, 1998 (File No.
0-16162).
(12) Incorporated herein by reference from Registrant's Form 8-K, dated
September 24, 1998, reporting the merger agreement with Ameris Health
Systems, Inc. (File No. 0-16162)
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59
(13) Incorporated herein by reference from Registrant's Form 8-K, dated
November 25, 1998, reporting the adoption of a shareholder rights plan.
(File No. 0-16162).
(14) Incorporated herein by reference from Registrant's Form 8-K, dated
December 16, 1998, reporting the acquisition of Somerset, Inc. (File
No. 0-16162).
(15) Incorporated herein by reference from Registrant's Form S-8 dated
December 22, 1998 (File No. 0-16162).
(16) Incorporated herein by reference from Registrant's Form 10-Q for the
period ended December 31, 1998, dated February 15, 1999 (File No.
0-16162).
(17) Incorporated herein by reference from Registrant's Form 10-Q for the
period ended March 31, 1999, dated May 17, 1999 (File No. 0-16162).
(18) Incorporated herein by reference from Registrant's Form 10-K for the
fiscal year ended June 30, 1999, dated September 28, 1999 (File No.
0-16162).
(19) Incorporated herein by reference from Registrant's Form 10-Q for the
period ended September 30, 1999, dated November 15, 1999 (File No.
0-16162).
(20) Incorporated herein by reference from Registrant's Form 10-Q for the
period ended March 31, 2000, dated May 15, 2000 (File No. 0-16162).
-59-