1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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 of (I.R.S. Employer
incorporation or organization) Identification Number)
3401 West End Ave., Suite 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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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
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The number of shares outstanding of the issuer's common stock, as of the latest
practicable date.
Common Stock, $ .01 Par Value, outstanding at February 5, 2000 - 7,206,648
shares
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INDEX
CHILDREN'S COMPREHENSIVE SERVICES, INC.
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets -- December 31, 2000
and June 30, 2000......................................................3
Consolidated Statements of Income --
Three and six month periods ended December 31, 2000 and 1999...........5
Consolidated Statements of Cash Flows --
Six months ended December 31, 2000 and 1999............................6
Notes to Consolidated Financial Statements --
December 31, 2000......................................................8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............................18
Item 6. Exhibits and Reports on Form 8-K...............................................18
SIGNATURES..............................................................................19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands) December 31, June 30,
2000 2000
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(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 962 $ 3,489
Accounts receivable, net of allowance for doubtful
accounts of $3,496 at December 31 and $3,913 at
June 30 25,686 27,203
Property held for sale 3,150 --
Prepaid expenses 1,224 1,120
Deferred income taxes 1,134 1,134
Other current assets 1,565 1,716
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TOTAL CURRENT ASSETS 33,721 34,662
PROPERTY AND EQUIPMENT, net 47,263 42,448
COST IN EXCESS OF NET ASSETS ACQUIRED, net 12,009 12,479
DEFERRED INCOME TAXES 246 246
OTHER ASSETS AND DEFERRED CHARGES, net 614 734
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TOTAL ASSETS $93,853 $90,569
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(dollars in thousands) December 31, June 30,
2000 2000
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(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,966 $ 2,488
Current portion - long-term debt and capital leases 890 869
Accrued employee compensation 4,490 4,019
Income taxes payable (431) --
Accrued other expenses 3,001 2,702
Other liabilities and deferred revenue 819 1,359
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TOTAL CURRENT LIABILITIES 12,735 11,437
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 25,535 24,485
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TOTAL LIABILITIES 38,270 35,922
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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 7,206,648 shares at December 31
and 7,184,141 shares at June 30 72 72
Additional paid-in capital 50,555 50,502
Retained earnings 4,956 4,073
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TOTAL SHAREHOLDERS' EQUITY 55,583 54,647
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $93,853 $90,569
======= =======
See notes to consolidated financial statements.
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended
December 31, December 31,
----------------- -----------------
(in thousands, except per share amounts) 2000 1999 2000 1999
------- ------- ------- -------
Revenues:
Operating revenues $31,315 $30,565 $61,000 $59,488
Management fee income 849 957 1,631 1,813
------- ------- ------- -------
TOTAL REVENUES 32,164 31,522 62,631 61,301
------- ------- ------- -------
Operating expenses:
Employee compensation and benefits 19,827 18,888 39,112 37,841
Purchased services and other expenses 9,490 8,719 18,403 17,152
Depreciation and amortization 1,150 1,041 2,225 2,120
Related party rent 38 29 67 58
------- ------- ------- -------
TOTAL OPERATING EXPENSES 30,505 28,677 59,807 57,171
------- ------- ------- -------
Income from operations 1,659 2,845 2,824 4,130
Other (income) expense:
Interest expense 601 559 1,199 1,058
Other 11 59 48 50
------- ------- ------- -------
TOTAL OTHER (INCOME) EXPENSE, NET 612 618 1,247 1,108
------- ------- ------- -------
Income before income taxes 1,047 2,227 1,577 3,022
Provision for income taxes 461 935 694 1,269
------- ------- ------- -------
NET INCOME $ 586 $ 1,292 $ 883 $ 1,753
======= ======= ======= =======
Earnings per common share:
Basic $ 0.08 $ 0.18 $ 0.12 $ 0.24
======= ======= ======= =======
Diluted $ 0.08 $ 0.18 $ 0.12 $ 0.24
======= ======= ======= =======
See notes to consolidated financial statements.
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
December 31,
-------------------
(in thousands) 2000 1999
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OPERATING ACTIVITIES
Net income $ 883 $ 1,753
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation 1,720 1,641
Amortization 505 479
Provision for bad debts 588 482
Other 162 30
Changes in operating assets and liabilities:
Accounts receivable 929 (6,263)
Prepaid expenses (104) (356)
Other current assets 151 163
Accounts payable 1,478 500
Accrued employee compensation 471 (1,992)
Accrued other expenses 299 191
Income taxes payable (431) (5)
Other liabilities (540) (643)
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NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 6,111 (4,020)
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INVESTING ACTIVITIES
Collection of note receivable -- 2,500
Purchase of property and equipment (9,821) (2,603)
Proceeds from sale of property and equipment 57 635
Decrease in other assets 1 26
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NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES $ (9,763) $ 558
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
Six Months Ended
December 31,
-------------------
(in thousands) 2000 1999
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FINANCING ACTIVITIES
Principal payments on revolving lines of credit, long-
term borrowings and capital lease obligations $ (9,928) $(4,202)
Proceeds from revolving lines of credit and long-term
borrowings 11,000 8,200
Common stock repurchased -- (622)
Proceeds from issuance of common stock, net 53 105
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NET CASH PROVIDED BY FINANCING ACTIVITIES 1,125 3,481
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INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,527) 19
Cash and cash equivalents at beginning of period 3,489 1,774
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 962 $ 1,793
======== =======
See notes to consolidated financial statements.
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
December 31, 2000
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (including normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three and six month periods ended December 31, 2000 are not necessarily
indicative of the results that may be expected for the fiscal year ending June
30, 2001. For further information, refer to the financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2000, the Company's prior fiscal year end.
Certain reclassifications have been made to the prior year financial statements
to conform to the fiscal 2001 presentation.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE B -- CONTINGENCIES
The Company is involved in various legal proceedings, none of which are expected
to have a material effect on the Company's financial position or results of
operations.
NOTE C -- ACCOUNTING PRONOUNCEMENTS
The Company adopted Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective July 1, 2000. SFAS No. 133, as
amended, requires all derivative financial instruments to be recorded on the
balance sheet at fair value. This results in the offsetting changes in fair
values or cash flows of both the hedge and the hedged item being recognized in
earnings in the same period. Changes in fair value of derivatives not meeting
SFAS No. 133's hedge criteria are included in income. The Company does not use
any derivatives and thus the adoption of SFAS No. 133 did not have any effect on
the Company's results of operations or financial position.
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NOTE D -- EARNINGS PER COMMON SHARE
The computation of basic earnings per common share is based on the weighted
average number of shares outstanding. Diluted earnings per common share includes
the effect of potential common shares, consisting of dilutive stock options and
warrants, and uses the treasury stock method in calculating dilution.
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
BASIC:
Average shares outstanding 7,194,810 7,271,166 7,189,533 7,276,859
=========== =========== =========== ===========
Net income $ 586,000 $ 1,292,000 $ 883,000 $ 1,753,000
=========== =========== =========== ===========
Per share amount $ 0.08 $ 0.18 $ 0.12 $ 0.24
=========== =========== =========== ===========
DILUTED:
Average shares outstanding 7,194,810 7,271,166 7,189,533 7,276,859
Net effect of dilutive stock
options and warrants 21,180 70,277 21,853 75,560
----------- ----------- ----------- -----------
TOTAL 7,215,990 7,341,443 7,211,386 7,352,419
=========== =========== =========== ===========
Net income $ 586,000 $ 1,292,000 $ 883,000 $ 1,753,000
=========== =========== =========== ===========
Per share amount $ 0.08 $ 0.18 $ 0.12 $ 0.24
=========== =========== =========== ===========
NOTE E -- HELICON
In September 2000, Helicon and the Company initiated the closure of the Helicon
Youth Center (the "HYC"). This action was taken because of difficulties
encountered in operating the program to the quality standards demanded by the
Company for the protection of both the program's youth and staff since Helicon
entered a settlement agreement with Community Care Licensing ("CCL"), a division
of California's Department of Social Services, in April 2000. Subsequent to
entering the settlement agreement, the HYC census had not reached expected
levels and the ongoing compliance efforts of CCL had created an environment in
which the programs at the HYC could not be operated effectively. Consequently,
closure of the facility was deemed to be in the best interest of the Company, as
well as the center's youth population and its staff. As a result of the closure,
the Company recorded a pretax nonrecurring charge in fiscal 2000 of $6,237,000
for an impairment reserve for the carrying value of the HYC facility. The HYC is
located on land that is owned by, and leased from, Riverside County, California.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and this Quarterly Report on Form 10-Q contain
forward-looking statements and should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere herein.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. There are a
number of important factors that could cause the Company's actual results to
differ materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth under "Business - Risk
Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 2000. The Company undertakes no obligation to publicly release any
revisions to any forward-looking statements contained herein to reflect events
or circumstances occurring after the date hereof or to reflect the occurrence of
unanticipated events.
General
As of December 31, 2000, the Company was providing education, treatment and
juvenile justice services to approximately 3,500 at risk and troubled youth
either directly or through management contracts. It currently offers these
services through the operation and management of non-residential specialized
education programs and day treatment programs and both open and secure
residential treatment centers in 15 states. Revenues are recognized as services
are rendered. The Company's non-residential programs, which historically have
generated higher operating margins than the Company's residential facilities,
generally receive revenues based on per diem rates. The Company's residential
facilities generally receive revenues under either fixed fee contracts, at per
diem rates or on a cost reimbursed basis.
Effective July 1998 the State of California implemented legislation which
eliminated reimbursement to school districts for excused student absences. The
legislation was 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 impacted 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 rate. In addition, the legislation
provided funding in the form of block grants made directly to the school
districts, thereby creating the potential for the districts to undertake
implementation of their own programs. Several of the school districts with which
the Company has contracts have started programs which compete with services
provided by the Company. The Company continues to monitor the implementation of
this legislation.
The Company receives management fee income from third parties for services
provided in managing a unit or facility. Reimbursement for these services is
typically based on a fixed fee plus reimbursement of expenses. The Company also
recognizes management fee income from Helicon, Incorporated ("Helicon"), a
Section 501(c)(3) not-for-profit corporation, for consulting, management and
marketing services rendered pursuant to a Consulting and Marketing Agreement by
and between Helicon and the Company (the "Helicon Agreement"). See "Helicon."
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Employee compensation and benefits include facility and program payrolls and
related taxes, as well as employee benefits, including insurance and worker's
compensation coverage. Employee compensation and benefits also includes general
and administrative payroll and related benefit costs.
Purchased services and other expenses include all expenses not otherwise
presented separately in the Company's consolidated statements of income.
Significant components of these expenses at the operating level include items
such as professional fees and contracted services, food, utilities, supplies,
rent and insurance. Significant components of these expenses at the
administrative level include legal, accounting, investor relations, marketing,
consulting and travel expense.
Other (income) expense includes income and expense items classified as
non-operating, including interest income and gains and losses on disposition of
fixed assets.
The Company's quarterly results may fluctuate significantly as a result of a
variety of factors, including the timing of the opening of new programs. When
the Company opens a new program, the program may be unprofitable until the
program population, and net revenues contributed by the program, approach
intended levels, primarily because the Company staffs its programs in advance of
achieving such levels. The Company's quarterly results may also be impacted by
seasonality, as revenues generated by youth education and treatment services are
generally seasonal in nature, fluctuating with the academic school year.
Helicon
As of December 31, 2000, the Company was providing consulting, management and
marketing services to Helicon at 11 programs. Pursuant to the Helicon Agreement,
which expires September 1, 2004, the Company is entitled to receive for these
services management fee income in an amount equal to 6% of the monthly gross
revenues of Helicon's programs. The payment of these management fees, however,
is subordinated in right of payment to amounts payable by Helicon to fund its
programs. The Company also leases three facilities to Helicon for the operation
of certain of its programs. The Company is not currently receiving rent, nor
does it anticipate receiving any future rent payments, for one of these
facilities, the Helicon Youth Center (the "HYC"), and, in the fourth quarter of
fiscal 2000, recorded an impairment reserve for the carrying value of this
facility. Also during fiscal 2000, Helicon was unable to pay all management
fees, lease payments and advances due to the Company. Based on the current level
of operations being maintained by Helicon, the Company does not anticipate
collecting any of these amounts. The Company also has guaranteed Helicon's
obligations under a bank line of credit in the amount of $1,500,000 -- See
"Liquidity".
In September 2000, Helicon and the Company initiated the closure of the HYC.
This action was taken because of difficulties encountered in operating the
program to the quality standards demanded by the Company for the protection of
both the program's youth and staff since Helicon entered a settlement agreement
with Community Care Licensing ("CCL"), a division of California's Department of
Social Services, in April 2000. Subsequent to entering the settlement agreement,
the HYC census had not reached 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,
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closure of the facility was deemed to be in the best interest of the Company, as
well as the center's youth population and its staff. As a result of the closure,
the Company recorded a nonrecurring charge in fiscal 2000 for an impairment
reserve for the carrying value of the HYC facility. The HYC is located on land
that is owned by, and leased from, Riverside County, California. The Company has
entered into discussions with Riverside County that potentially may lead to the
recovery, through sale or sub-lease, of a portion of the Company's investment in
the HYC. No degree of certainty can be placed on the outcome of these
discussions.
Strategic Alternatives
In October 2000, the Company engaged McDonald Investments, Inc. as its exclusive
financial advisor to assist the Company's Board of Directors in evaluating
strategic alternatives that could enhance or maximize shareholder value. The
Company is currently in discussions with several potential financial and
strategic partners. Although these discussions are preliminary, management
expects, at the conclusion of this process, to be able to announce definitive
recommendations. Such recommendations could range from a continuation of the
Company's existing business strategy in which it expands its operations as an
independent publicly held company to a possible merger or sale of the Company in
whole or in part.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
relationship to the Company's total revenues of certain items in the Company's
statements of income:
Three Months Ended Six Months Ended
December 31, December 31,
------------------ ------------------
2000 1999 2000 1999
------ ------ ------ ------
Operating revenues 97.4% 97.0% 97.4% 97.0%
Management fee income 2.6 3.0 2.6 3.0
------ ------ ------ ------
TOTAL REVENUES 100.0 100.0 100.0 100.0
------ ------ ------ ------
Employee compensation and benefits 61.6 59.9 62.4 61.7
Purchased services and other expenses 29.5 27.7 29.4 27.9
Depreciation and amortization 3.6 3.3 3.6 3.5
Related party rent 0.1 0.1 0.1 0.1
------ ------ ------ ------
TOTAL OPERATING EXPENSES 94.8 91.0 95.5 93.2
------ ------ ------ ------
Income from operations 5.2 9.0 4.5 6.8
Other (income) expense:
Interest expense 1.9 1.8 1.9 1.7
Other -- 0.1 0.1 0.1
Provision for income taxes 1.5 3.0 1.1 2.1
------ ------ ------ ------
NET INCOME 1.8% 4.1% 1.4% 2.9%
====== ====== ====== ======
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Three Months Ended December 31, 2000 versus December 31, 1999
Operating revenues for the three months ended December 31, 2000 increased
$750,000, or 2.5%, to $31,315,000, as compared to $30,565,000 for the three
months ended December 31, 1999. The increase in operating revenues consists of
approximately $2,500,000 due to the opening of new programs, principally in
Texas, Florida and Hawaii, subsequent to the first two quarters of fiscal 2000
and approximately $1,900,000 due to same center revenue increases. The same
center revenue increases were net of a decrease in California revenues resulting
primarily from changes in funding methodologies at both the state and local
levels. Revenue increases were offset by decreases of approximately $3,700,000
versus the same period in the prior year principally due to the sale of the Bay
County, Florida facility, reductions as a result of the closure of the Helicon
Youth Center and the termination of the Company's contract to manage a secure
residential facility in San Antonio, Texas.
Management fee income decreased $108,000 for the three months ended December 31,
2000 to $849,000 from $957,000 for the three month period ended December 31,
1999. Management fee income recognized under the Helicon Agreement for the three
months ended December 31, 2000 decreased $110,000 to $214,000 from $324,000 for
the three months ended December 31, 1999.
Total revenues for the three months ended December 31, 2000 increased $642,000,
or 2.0%, to $32,164,000 as compared to $31,522,000 for the three months ended
December 31, 1999 as a result of the factors described above.
Employee compensation and benefits for the three months ended December 31, 2000
increased $939,000, or 5.0%, to $19,827,000, as compared to $18,888,000 for the
three months ended December 31, 1999. As a percentage of total revenues,
employee compensation and benefits increased from 59.9% for the three months
ended December 31, 1999 to 61.6% for the three months ended December 31, 2000.
The increase in employee compensation and benefits over the same period in the
prior year results primarily from the Company's growth, certain regional pay
scale adjustments and health insurance costs.
Purchased services and other expenses for the three months ended December 31,
2000 increased $771,000, or 8.8%, to $9,490,000, as compared to $8,719,000 for
the three months ended December 31, 1999. As a percentage of total revenues,
purchased services and other expenses increased to 29.5% for the three months
ended December 31, 2000 from 27.7% for the three months ended December 31, 1999.
The increase in purchased services and other expenses over the same period in
the prior year is attributed primarily to the Company's growth. The increase in
purchased services and other expenses as a percent of revenue over the same
period in the prior year results primarily from an increase in insurance costs
and increased utilization of contracted services at certain locations.
Depreciation and amortization for the three months ended December 31, 2000
increased $109,000 to $1,150,000 from $1,041,000 for the three months ended
December 31, 1999. The increase in depreciation and amortization compared to the
same period in the prior year is primarily attributable
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to the depreciation of new capital expenditures, offset by the cessation of
depreciation on the Helicon Youth Center.
Income from operations for the three months ended December 31, 2000 decreased
$1,186,000, or 41.7%, to $1,659,000 as compared to $2,845,000 for the three
months ended December 31, 1999, and decreased as a percentage of total revenues
to 5.2% for the three months ended December 31, 2000 from 9.0% for the three
months ended December 31, 1999 as a result of the factors described above.
Interest expense for the three months ended December 31, 2000 increased $42,000
to $601,000 as compared to $559,000 for the three months ended December 31,
1999. The increase in interest expense over the same period in the prior year is
attributed primarily to an increase in interest rates.
Other (income) expense for the three months ended December 31, 2000 decreased to
expense of $11,000 as compared to expense of $59,000 for the three months ended
December 31, 1999.
The provision for income taxes for the three months ended December 31, 2000
decreased $474,000 to $461,000 from $935,000 for the three months ended December
31, 1999. The decrease in the provision compared to the same period in the prior
year results primarily from the decrease in the Company's taxable income.
Six months Ended December 31, 2000 versus December 31, 1999
Operating revenues for the six months ended December 31, 2000 increased
$1,512,000 or 2.5%, to $61,000,000 as compared to $59,488,000 for the six months
ended December 31, 1999. The increase in operating revenues consists of
approximately $3,900,000 due to the opening of new programs, principally in
Texas, Florida and Hawaii, subsequent to the first six months of fiscal 2000 and
approximately $4,500,000 due to same center revenue increases. The same center
revenue increases were net of a decrease in California revenues resulting
primarily from changes in funding methodologies at both the state and local
levels. Revenue increases were offset by decreases of approximately $6,900,000
versus the same period in the prior year due to the sale of the Bay County,
Florida facility, the termination of the Company's Eufaula, Alabama and San
Antonio, Texas secure residential facility contracts and reductions as a result
of the closure of the Helicon Youth Center.
Management fee income decreased $182,000 for the six months ended December 31,
2000 to $1,631,000 from $1,813,000 for the six month period ended December 31,
1999. Management fee income recognized under the Helicon Agreement for the six
months ended December 31, 2000 decreased $235,000 to $419,000 from $654,000 for
the three months ended December 31, 1999.
Total revenues for the six months ended December 31, 2000 increased $1,330,000,
or 2.2%, to $62,631,000 as compared to $61,301,000 for the six months ended
December 31, 1999 as a result of the factors described above.
Employee compensation and benefits for the six months ended December 31, 2000
increased $1,271,000, or 3.4%, to $39,112,000, as compared to $37,841,000 for
the six months ended
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December 31, 1999. As a percentage of total revenues, employee compensation and
benefits increased from 61.7% for the six months ended December 31, 1999 to
62.4% for the six months ended December 31, 2000. The increase in employee
compensation and benefits over the same period in the prior year results
primarily from the Company's growth, certain regional pay scale adjustments and
health insurance costs.
Purchased services and other expenses for the six months ended December 31, 2000
increased $1,251,000, or 7.3%, to $18,403,000, as compared to $17,152,000 for
the six months ended December 31, 1999. As a percentage of total revenues,
purchased services and other expenses increased to 29.4% for the six months
ended December 31, 2000 from 27.9% for the six months ended December 31, 1999.
The increase in purchased services and other expenses over the same period in
the prior year is attributed primarily to the Company's growth, an increase in
insurance costs and increased utilization of contracted services at certain
locations. The increase in purchased services and other expenses as a percent of
revenue over the same period in the prior year results primarily from an
increase in insurance costs and increased utilization of contracted services at
certain locations.
Depreciation and amortization for the six months ended December 31, 2000
increased $105,000 to $2,225,000 from $2,120,000 for the six months ended
December 31, 1999. The increase in depreciation and amortization compared to the
same period in the prior year is primarily attributable to depreciation of new
capital expenditures, offset by the cessation of depreciation on the Helicon
Youth Center.
Income from operations for the six months ended December 31, 2000 decreased
$1,306,000, or 31.6%, to $2,824,000 as compared to $4,130,000 for the six months
ended December 31, 1999, and decreased as a percentage of total revenues to 4.5%
for the six months ended December 31, 2000 from 6.8% for the six months ended
December 31, 1999, as a result of the factors described above.
Interest expense for the six months ended December 31, 2000 increased $141,000
to $1,199,000 as compared to $1,058,000 for the six months ended December 31,
1999. The increase in interest expense over the same period in the prior year is
attributed to increases in both interest rates and outstanding borrowings. The
increase in borrowing results primarily from the Company's purchase of property
in North Carolina.
Other (income) expense for the six months ended December 31, 2000 decreased to
expense of $48,000 versus expense of $50,000 for the six months ended December
31, 1999.
Provision for income tax expense for the six months ended December 31, 2000
decreased $575,000 to $694,000 from $1,269,000 for the six months ended December
31, 1999. The decrease results from the decrease in the Company's taxable
income.
Liquidity and Capital Resources
Cash provided by operating activities for the six months ended December 31, 2000
was $6,111,000 on net income of $883,000 as compared to cash used of $4,020,000
on net income of $1,753,000 for
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the six months ended December 31, 1999. A decrease in accounts receivable
combined with an increase in accounts payable were primary factors contributing
to the provision of cash by operating activities during the fiscal 2001 period.
The decrease in accounts receivable is the result of a number of factors
including maturation of the conversion by the Company to a centralized billing
office from local facility billing offices. The increase in accounts payable is
primarily the result of differences in normal payment cycles. Working capital at
December 31, 2000 was $20,986,000, as compared to $23,225,000 at June 30, 2000.
Cash used by investing activities was $9,763,000 for the six months ended
December 31, 2000 as compared to cash provided by investing activities of
$558,000 for the six months ended December 31, 1999. The change was due
primarily to capital expenditures associated with the opening of programs in
Charlotte, North Carolina and Dallas, Texas during the first six months of
fiscal 2001 versus the collection of a note receivable during the first six
months of fiscal 2000. Capital expenditures for the fiscal 2001 period include
approximately $6,500,000 used to acquire and improve a site in Charlotte, North
Carolina. The Company has placed a portion of the property, which is not
expected to be used by the Company, for sale. Projected net proceeds of
$3,150,000 have been classified as property held for sale, and are included in
current assets, as the Company expects that a sale will be completed prior to
fiscal year end.
Cash of $1,125,000 was provided by financing activities for the six months ended
December 31, 2000, due primarily to net borrowings under the Company's credit
facility, principally for the purchase of the North Carolina property. Cash of
$3,481,000 was provided by financing activities for the six months ended
December 31, 1999, due primarily to borrowings under the Company's credit
facility, offset by funds used for the repurchase of shares of the Company's
Common Stock.
The Company has a credit agreement (the "Credit Agreement") with SunTrust Bank
and AmSouth Bank (jointly "the Lenders"). Under the terms of this agreement, as
amended, the Lenders have made available to the Company, for acquisition
financing and working capital requirements, a revolving line of credit for up to
$20,000,000, the term of which extends through April 30, 2002. 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 1.75% and 3.25% 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 0.75% and 2.25%, at the Company's
option. At December 31, 2000, the outstanding balance under the revolving line
of credit was $10,500,000.
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
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Company from declaring dividends in excess of 25% of the Company's net income
during any fiscal year and from repurchasing any shares of the Company's Common
Stock beyond those already repurchased pursuant to the Company's 1,000,000 share
buyback program. The revolving line of credit and term loan are secured
primarily by the Company's accounts receivable and equipment.
Pursuant to the Company's acquisition of Somerset, Inc. in December 1998, the
Company issued a note payable to the sellers totaling $2,375,000. This note
bears interest at 6%, will amortize fully over the three-year period ending
December 1, 2001, and is secured by the Company's real estate and improvements
purchased pursuant to the Somerset transaction. At December 31, 2000, $839,000
was outstanding under the note and was included in current liabilities.
Helicon has entered into a $1,500,000 line of credit with AmSouth Bank. As a
condition to this line of credit, the Company agreed to guarantee Helicon's
performance under such line of credit. At December 31, 2000, the outstanding
amount under Helicon's line of credit was $495,000.
Capital expenditures during the next twelve months are expected to include the
replacement of existing capital assets as necessary, as well as the costs
associated with the opening of new programs and facilities, including the
possible purchase of certain real estate and improvements. The Company may also
consider other strategic acquisitions, including acquisitions of existing
programs and other companies engaged in youth services or related businesses.
Current obligations, typically due within thirty days or less, are expected to
be funded with cash flows from operations and borrowings under the Company's
line of credit. Management believes that funds from operations and amounts
available under its line of credit will provide sufficient cash flow for the
foreseeable future.
Inflation
Inflation has not had a significant impact on the Company's results of
operations since inception. Certain of the Company's existing contracts provide
for annual price increases based upon changes in the Consumer Price Index.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
At December 31, 2000, the Company had only cash equivalents, invested in high
grade, very short term securities, which are not typically subject to material
market risk and are not held for trading purposes. The Company has outstanding
loans at both fixed and variable rates. For loans with fixed interest rates, a
hypothetical 10% change in interest rates would have no impact on the Company's
future earnings and cash flows related to these instruments. A hypothetical 10%
change in interest rates would have an immaterial impact on the fair values of
these instruments. For loans with variable interest rates, a hypothetical 10%
change in interest rates would have an immaterial impact on the Company's future
earnings, cash flows and fair values related to these instruments.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its Annual Meeting of Shareholders on November 15, 2000 (the
"Annual Meeting"). At the Annual Meeting, the shareholders of the Company voted
to elect six directors, William J Ballard, Amy S. Harrison, Martha A. Petrey,
Ph.D., Thomas B. Clark, Joseph A. Fernandez, Ed.D., and David L. Warnock for
one-year terms and until their successors are duly elected and qualified. The
following table sets forth the number of votes cast for, against or withheld,
with respect to each of the nominees for director:
Nominee For Against Withheld
------------------ --------- ------- --------
William J Ballard 5,685,246 435,213
Amy S. Harrison 5,684,924 435,535
Martha A. Petrey, Ph.D. 5,685,927 434,532
Thomas B. Clark 5,876,795 243,664
Joseph A. Fernandez, Ed.D. 5,875,695 244,764
David L. Warnock 5,876,573 243,886
The shareholders of the Company also voted to ratify the selection of Ernst &
Young LLP as the Company's independent auditors for the 2001 fiscal year. The
selection of the Company's auditors was ratified with 6,111,912 votes cast for
ratification, 4,582 votes cast against ratification and 3,965 votes withheld.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
(10.1) Sixth Amendment to Credit Agreement by and between the
Registrant and SunTrust Bank, Nashville, N.A. as agent and lender,
dated February 13, 2001
(10.2) Form of Indemnification Agreement
(10.3) Form of Salary Continuation Agreement between the Registrant and
Barbara J. Dalton, Elizabeth A. Guthrie, Barbara M. Lonardi, Martha A.
Petrey, Francis M. Sauvageau, and Donald B. Whitfield
(b) Reports on Form 8-K:
Form 8-K - Reporting date - October 26, 2000
Items reported - Item 9. Regulation FD Disclosure
The Company announced its plans to provide an online web simulcast and
rebroadcast of its 2001 first quarter earnings release conference call.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHILDREN'S COMPREHENSIVE SERVICES, INC.
(Registrant)
Date: February 14, 2001 /s/ WILLIAM J BALLARD
--------------------------------------------
William J Ballard
Chairman and Chief Executive Officer
Date: February 14, 2001 /s/ DONALD B. WHITFIELD
--------------------------------------------
Donald B. Whitfield
Vice President of Finance, Chief Financial
Officer (Principal Financial and Accounting
Officer)
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