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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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NUMBER 0-16162
CHILDREN'S COMPREHENSIVE SERVICES, INC.
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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
Common Stock Purchase Rights
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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, 2001 was $21,188,000.
The number of shares outstanding of the issuer's common stock, par value $ .01
per share, as of September 18, 2001 was 7,228,942.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business 3
Item 2. Properties 19
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 21
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 23
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 30
Item 8. Financial Statements and Supplementary Data 31
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 54
PART III
Item 10. Directors and Executive Officers of the Registrant 54
Item 11. Executive Compensation 58
Item 12. Security Ownership of Certain Beneficial Owners and
Management 62
Item 13. Certain Relationships and Related Transactions 64
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 65
Signatures 66
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PART I
ITEM 1. BUSINESS
GENERAL
Children's Comprehensive Services, Inc., a Tennessee corporation formed
in 1985, and subsidiaries (collectively, 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, Michigan, Montana, North Carolina, Ohio,
Pennsylvania, Tennessee, Texas and Utah. As of June 30, 2001, the Company was
providing education, treatment and juvenile justice services, either directly or
through its variable fee management contracts, to approximately 3,400 at-risk
youth. The Company also provides consulting, management and marketing services
for Helicon, Incorporated ("Helicon"), a not-for-profit corporation, which has
similar programs in California and Tennessee. In addition, the Company may
provide management services to community mental health centers, behavioral units
in medical facilities and third parties for fixed fees.
RECENT DEVELOPMENTS
On August 9, 2001, the Company announced that it had signed a
definitive merger agreement with KIDS Holdings, Inc. ("KIDS Holdings") and its
wholly-owned subsidiary, Ameris Acquisition, Inc. ("Ameris"), pursuant to which
KIDS Holdings would acquire all of the Company's outstanding common stock for
$6.00 per share. Under the terms of the merger agreement, Ameris will be merged
with the Company, with the Company being the surviving entity and becoming a
wholly-owned subsidiary of KIDS Holdings. The transaction remains subject to a
number of contingencies, including Ameris obtaining the required financing,
approval by the Company's shareholders, a lack of material adverse change in the
Company's business and other usual and customary closing conditions. Ameris has
obtained commitments for a majority of the financing required to close the
transaction, but a substantial amount of additional financing remains to be
secured. No assurance can be given that the required financing can be secured or
that the merger will be consummated.
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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 1999, there were 2.5 million
arrests of juveniles under 18 years of age, accounting for 16% of all violent
crime, 33% of all burglary arrests, 24% of all weapons arrests and 14% of murder
and aggravated assault arrests. Juveniles were involved in 13% of all drug
arrests and, in 1998, were involved in 27% of all serious violent crimes,
including sexual assaults, robberies and aggravated assaults. As stated in the
Federal Interagency Forum on Child and Family Statistics 2001 Report, violence
affects the quality of life of young people who experience, witness, or feel
threatened by it. In addition to the direct physical harm suffered by young
victims of serious violence, such violence can adversely affect victims' mental
health and development and increase the likelihood that they themselves will
commit acts of serious violence. Youth ages 12 to 17 are twice as likely as
adults to be victims of serious violent crimes, which include aggravated
assault, rape, robbery (stealing by force or threat of violence), and homicide.
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.
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 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. 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 pharmaceutical
treatment and therapy, the Company's goal is to minimize or eliminate the use of
pharmaceuticals whenever possible over the course of its involvement with the
youth. When pharmaceutical treatment is appropriate, pharmaceuticals 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 gender 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, 2001, the Company was providing services directly and
through management contracts to approximately 2,000 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 and on-site education programs in emergency shelters and
diagnostic centers.
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.
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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.
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.
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
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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 youth to allow for discharge to a less structured environment.
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. 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. 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 may 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 FY2001 Operations
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COMPANY PROGRAMS
Alabama Detention, therapeutic wilderness,
secure residential 145 September 1989
Arkansas Alternative education 220 June 1997
Acute and residential psychiatric treatment 74 June 1997
California Educational day treatment 864 January 1980
Florida Diversionary education, alternative education 86 September 1995
Residential treatment, secure residential 106 June 1997
Hawaii Educational day treatment 10 January 1999
Residential treatment 13 February 2000
Kentucky Behavioral day treatment, alternative education 50 June 1997
Acute psychiatric and residential treatment 66 June 1997
Louisiana Diversionary education and family preservation 37 November 1991
Michigan Secure residential 30 June 1997
Montana Alternative education, behavioral day treatment 149 June 1997
Acute psychiatric and residential psychiatric
treatment and detention 62 June 1997
North Carolina Behavioral day treatment 23 November 2000
Residential treatment 29 November 2000
Ohio Family preservation 24 September 2000
Secure residential treatment and residential treatment 37 March 1999
Pennsylvania Residential psychiatric treatment 72 November 1998
Tennessee Detention, residential treatment,
diagnostic and evaluation services,
residential psychiatric treatment 374 November 1985
Texas Alternative education, educational day treatment 455 September 1996
Acute and residential psychiatric treatment,
secure residential 218 October 1997
Utah Acute psychiatric and residential treatment 82 June 1997
HELICON PROGRAMS
Tennessee Family preservation, education day treatment,
diversionary education, on-site educational
services in emergency shelters and diagnostic
centers 324 July 1988
California Residential treatment, residential psychiatric
treatment, secure residential 161 June 1988
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 a 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, Mastery Achievement Program ("MAP"), which
the Company believes provides critical feedback to measure the quality of its
various programs. The Company has implemented MAP at each of 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 additional 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") and CARF accredited
programs.
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 services 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 requested on occasion 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,
2001, the Company was providing consulting, management and marketing services to
Helicon at ten programs. 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 $8,500,000, were forgiven by the
Company, based on the inability of Helicon to repay those amounts. The
$8,500,000 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 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. 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, 2001, 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, 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.
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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.
Annual Cost Reports. In order to receive reimbursement under some state Medicaid
programs, the Company is required to submit cost reports detailing the costs
incurred by its facilities in providing care to 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 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 FACILITY 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,
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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. Four 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 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 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 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 Medicaid
patients.
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") has issued
regulations creating certain "safe harbors." These "safe harbors" set out
requirements which, if met by an individual or entity, insulate that individual
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or entity from an enforcement action under the Anti-Kickback Statute. 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 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, and the OIG may modify the existing safe harbors. The Company is unable
to predict whether its relationship with physicians and other parties will
comply with any new or modified safe harbors.
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. The Centers for Medicare and Medicaid
Services ("CMMS"), formerly known as the Health Care Financing Administration,
issued Phase I of the final regulations implementing Stark II on January 4,
2001. Phase II of the regulations are expected to be issued in the near future.
The Company has attempted to tailor its financial relationships with
physicians in ways that will not 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) Phase II of 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 continue 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
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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 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. 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 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
$11,000 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
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.
Among other things, HIPAA (i) added several new offenses, (ii) expanded the
scope of certain existing laws by including private health insurance plans as
well as the Medicaid programs, (iii) increased penalties for certain existing
offenses, (iv) significantly increased 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,
and (v) imposed substantial protections on the privacy of certain individually
identifiable health information. Final regulations that were issued in early
2001 relating to the portion of HIPAA protecting the privacy of certain
individually identifiable health information become effective in 2003.
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The offenses created by HIPAA, and the substantial increase in funding
devoted to health care fraud and abuse enforcement which resulted from HIPAA,
increased 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 strengthened the ability of
enforcement agencies to effect more numerous and larger monetary settlements
with health care providers and businesses.
If the Company or any of its affiliates is convicted of a violation of,
or otherwise sanctioned as a result of the violation of, the above mentioned
laws, it, or any or all of its facilities, may be subject to exclusion from
participation in federal healthcare programs (including Medicare and Medicaid).
In the past, many entities found to be in violation of such laws have been able
to avoid exclusion by entering into a Corporate Integrity Agreement ("CIA") with
the OIG. In the event of a violation, there is no guarantee that a settlement
and CIA could be reached with the OIG.
Healthcare Reform Initiatives. The Bush Administration and Congress continue to
focus on health care. 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. In
addition, "Patients Bill of Rights" federal legislation has been introduced. 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 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.
The Company's residential treatment centers located in Charlotte, North
Carolina and Hilo, Hawaii are accredited by CARF, the Rehabilitation
Accreditation Commission ("CARF"). CARF is a private, not-for-profit
organization that promotes quality rehabilitation and behavioral health services
through a voluntary accreditation program using internationally recognized
standards. Accredited programs are required to maintain a commitment to
resident/client satisfaction, performance improvement and outcomes measurement.
Initially, a program is given a one-year accreditation until the program can
develop data to indicate continued compliance with the standards. A survey is
completed triennially thereafter. CARF accreditation is often recommended to
assure federal, state and local government funding. Failure to maintain
appropriate 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 Company without substantial capital investment or experience in
management of
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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, 2001, the Company had 2,240 full-time employees and 1,065
part-time employees. Of these 3,305 employees, 105 were corporate or regional
administrative staff and 3,200 were involved in program and facility operation
and management. Approximately 123 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. The
term of the contract expires in December 2003, with a portion expiring in July
2002. The Company is currently negotiating a contract with A.F.S.M.E., a union
chosen in October 2000 to represent approximately 82 of its Pennsylvania
employees. 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 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 possibility that the proposed merger of the Company with
Ameris may not be consummated;
- 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 2001;
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- 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,
particularly in times of economic slowdown or recession;
- decreases in the levels of 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 shareholder rights plan, 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, 2001:
Number of Number of
State Nature of Occupation Facilities Beds
---------------- -------------------- ---------- ---------
Non-Residential:
Arkansas Lease 5
California Own 5
California Lease 15
Florida Lease 1
Louisiana Lease 1
Montana Lease 1
Ohio Lease 1
Texas Lease 2
Texas Right to occupy (1) 1
Residential:
Alabama Right to occupy (1) 3 76
Alabama Own 1 80
Arkansas Own 1 77
Florida Own 1 32
Florida Lease 1 32
Florida Right to occupy (1) 1 80
Hawaii Lease 1 24
Kentucky Own 1 72
Michigan Own 1 30
Montana Own 1 93
North Carolina Own 1 48
Ohio Lease 1 86
Pennsylvania Lease 1 90
Tennessee Own 5 265
Tennessee Right to occupy (1) 1 10
Tennessee Lease 3 115
Texas Own 1 96
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,
Fountain, Florida and Charlotte, North Carolina 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.
The Company leases corporate office space in Nashville, Tennessee of
approximately 23,000 square feet. For the fiscal year ended June 30, 2001, the
Company's total rental expense for property was approximately $2,278,000. 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 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 believes
its facilities are suitable for its current operations and programs.
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ITEM 3. LEGAL PROCEEDINGS
On June 22, 2001, a purported class action was filed in the Circuit
Court, Davidson County, Tennessee, styled McLemore v. Children's Comprehensive
Services, Inc., et al., against the Company and each of the directors of the
Company. The suit alleges that the directors of the Company breached their
fiduciary duties to the shareholders of the Company by approving an exclusivity
agreement pursuant to which the Company agreed to negotiate exclusively with
Ameris Acquisition, Inc. for the period from June 14, 2001 through July 13,
2001. The lawsuit seeks class action certification, an order of the court
directing the directors of the Company to exercise their fiduciary duties to
obtain a transaction that is in the best interests of the Company's
shareholders, an award of attorney's fees and costs, and other relief. The
Company believes that the lawsuit is based upon erroneous assumptions by the
plaintiff, is without merit, and intends to vigorously defend its position.
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, 2001 High Low
--------------------------- ------ ------
Quarter Ended: June 30 $5.150 $3.010
March 31 4.063 2.281
December 31 4.344 2.000
September 30 3.750 2.375
Year Ended June 30, 2000 High Low
--------------------------- ------ ------
Quarter Ended: June 30 $4.563 $2.125
March 31 6.500 2.500
December 31 7.625 5.375
September 30 8.625 5.250
HOLDERS
As of September 18, 2001 the Company had approximately 229 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, 2001, 2000, 1999, 1998 and 1997 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.
Year Ended June 30,
---------------------------------------------------------------
2001 2000 1999 1998(1) 1997
-------- -------- -------- ------- -------
(In thousands of dollars, except per share data)
Statement of Operations Data:
Revenue:
Operating revenue $128,342 $123,435 $111,812 $90,266 $34,812
Management fee income 3,388 3,335 3,665 3,733 2,481
-------- -------- -------- ------- -------
Total revenue 131,730 126,770 115,477 93,999 37,293
-------- -------- -------- ------- -------
Operating expenses:
Employee compensation and benefits 80,217 76,672 70,875 55,367 22,656
Purchased services and other expenses 38,286 35,775 31,512 26,610 7,872
Depreciation and amortization 4,581 4,289 3,492 2,142 1,013
Loss on Helicon receivables and loan guarantee -- 2,368 -- -- --
Impairment loss on Helicon facility -- 6,237 -- -- --
Other operating expenses 149 115 115 115 101
-------- -------- -------- ------- -------
Total operating expenses 123,233 125,456 105,994 84,234 31,642
-------- -------- -------- ------- -------
Income from operations 8,497 1,314 9,483 9,765 5,651
Interest expense 2,362 2,181 1,697 972 359
Other (income) expense, net 380 17 (526) (2,517)(2) (990)
-------- -------- -------- ------- -------
Income (loss) before income taxes, extraordinary item and
cumulative effect of accounting change 5,755 (884) 8,312 11,310 6,282
Provision (benefit) for income taxes 2,641 (17) 3,284 4,357 (8)
-------- -------- -------- ------- -------
Income (loss) before extraordinary item and cumulative effect
of accounting change 3,114 (867) 5,028 6,953 6,290
Extraordinary item, net of tax -- -- -- -- 377
Cumulative effect of accounting change, net of tax -- -- 20(3) -- --
-------- -------- -------- ------- -------
Net income (loss) $ 3,114 $ (867) $ 5,008 $ 6,953 $ 5,913
======== ======== ======== ======= =======
Net income (loss) per share:
Diluted $ 0.43 $ (0.12) $ 0.66 $ 0.84 $ 0.81
Dividends declared per share -- -- -- -- --
Balance Sheet Data:
Working capital $ 11,616 $ 23,225 $ 17,782 $29,867 $23,853
Total assets 92,030 90,569 98,631 80,201 69,768
Long term debt and capital lease obligations 13,325 24,485 24,854 11,611 11,655
Shareholders' equity 57,854 54,647 56,230 57,832 49,695
(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.
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."
Forward-looking information provided by the Company pursuant to the safe harbor
established under the Private Securities Litigation Reform Act of 1995 should be
evaluated in the context of these 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
On August 9, 2001, the Company announced that it had signed a
definitive merger agreement with KIDS Holdings, Inc. ("KIDS Holdings") and its
wholly-owned subsidiary, Ameris Acquisition, Inc. ("Ameris"), pursuant to which
KIDS Holdings would acquire all of the Company's outstanding common stock for
$6.00 per share. Under the terms of the merger agreement, Ameris will be merged
with the Company, with the Company being the surviving entity and becoming a
wholly-owned subsidiary of KIDS Holdings. The transaction remains subject to a
number of contingencies, including Ameris obtaining the required financing,
approval by the Company's shareholders, a lack of material adverse change in the
Company's business and other usual and customary closing conditions. Ameris has
obtained commitments for a majority of the financing required to close the
transaction, but a substantial amount of additional financing remains to be
secured. No assurance can be given that the required financing can be secured or
that the merger will be consummated.
As of June 30, 2001, the Company was providing education, treatment and
juvenile justice services, either directly or through management contracts, to
approximately 3,400 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.
The Company opened, expanded or ceased operating the following programs
during fiscal 2001:
- Ceased management of its Tarrant County, Texas alternative education
program in July 2000;
- Closed the Helicon Youth Center and related school program in September
2000;
- Ceased management of its San Antonio, Texas secure residential facility
in September 2000;
- Ceased management of its El Paso, Texas residential treatment facility
in February 2001;
- Closed its Houston, Texas special education program in January 2001;
- Closed its New Orleans, Louisiana education programs effective June 30,
2001;
- Commenced operation of its Dallas County, Texas alternative education
program in August 2000;
- Increased the number of beds licensed at its Coatesville, Pennsylvania
facility from 60 to 90 in July 2000;
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- Commenced operation of its 80 bed secure residential facility in
Bristol, Florida in September 2000;
- Expanded the number of licensed beds at its Mansfield, Ohio facility
from 30 to 90 in November 2000;
- Commenced operation of a 48 bed residential treatment center and
aftercare program in Charlotte, North Carolina in October 2000; and
- Opened a 90 bed residential treatment program in Mountain City,
Tennessee in February 2001.
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 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. In addition, the
legislation placed funding in the hands of the school districts, thereby
creating the potential for the districts to undertake implementation of their
own programs. Several of the school districts with which the Company has
contracts have started programs which compete with services provided by the
Company. The Company continues to monitor the implementation of this
legislation.
The Company receives management fee income from third parties for
services provided in managing a unit or facility. Reimbursement for these
services is typically based on a fixed fee plus reimbursement of expenses. 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, 2001, the Company was providing consulting, management
and marketing services to Helicon at ten programs. Pursuant to the Helicon
Agreement, the Company is entitled to receive management fee income for these
services 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. 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"). 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."
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During fiscal 2000, 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. 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. Due primarily to the decline in census at the HYC, and at
certain related group homes, Helicon revenues generated by these programs were
significantly below expectations during 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 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 fiscal 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 into 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 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.
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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,
-----------------------------------
2001 2000 1999
------ ------ ------
Operating revenues 97.4% 97.4% 96.8%
Management fee income 2.6 2.6 3.2
------ ------ ------
Total revenues 100.0 100.0 100.0
------ ------ ------
Employee compensation and benefits 60.9 60.5 61.4
Purchased services and other expenses 29.0 28.2 27.3
Depreciation and amortization 3.5 3.4 3.0
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 93.5 99.0 91.8
------ ------ ------
Income from operations 6.5 1.0 8.2
Other (income) expense:
Interest expense 1.8 1.7 1.5
Other 0.3 -- (0.4)
Provision for (benefit from) income taxes 2.0 -- 2.8
------ ------ ------
Net income (loss) 2.4% (0.7)% 4.3%
====== ====== ======
FISCAL 2001 VERSUS FISCAL 2000
Total revenues for fiscal 2001 increased by $4,960,000, or 3.9%, to
$131,730,000, as compared to $126,770,000 for fiscal 2000. Operating revenues
for fiscal 2001 increased by $4,907,000, or 4.0%, to $128,342,000, as compared
to $123,435,000 for fiscal 2000. The increase in operating revenues results from
the opening of new programs (9%), principally in North Carolina, Texas and
Florida, and the increase in revenues at existing programs (6%). The increase in
revenues at existing programs includes cost report settlements and the filing of
cost reports that contributed $738,000 of the increase. Revenue increases were
offset by the termination of certain of the Company's contracts or programs,
primarily the Helicon Youth Center school program, Tarrant County, Texas school
program and San Antonio and El Paso, Texas residential facilities (10%) and
rents and management fees due from Helicon (1%).
Management fee income increased 1.6%, from $3,335,000 in fiscal 2000 to
$3,388,000 in fiscal 2001. Management fee income recognized under the Helicon
Agreement for fiscal 2001 decreased $19,000 to $868,000, as compared to $887,000
for fiscal 2000.
Employee compensation and benefits for fiscal 2001 increased
$3,545,000, or 4.6%, to $80,217,000, as compared to $76,672,000 for fiscal 2000.
As a percentage of total revenues, employee compensation and benefits increased
to 60.9% for fiscal 2001 from 60.5% for fiscal 2000. The increase in employee
compensation and benefits over the prior year is primarily the result of the
Company's growth from new programs. The increase in employee compensation and
benefits as a percent of revenues over the prior year results primarily from the
opening of new programs combined with certain regional pay scale adjustments and
insurance costs.
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Purchased services and other expenses for fiscal 2001 increased
$2,511,000, or 7.0%, to $38,286,000, as compared to $35,775,000 for fiscal 2000.
As a percentage of total revenues, purchased services and other expenses
increased to 29.0% for fiscal 2001 from 28.2% for fiscal 2000. The increase in
purchased services and other expenses over the prior year results primarily from
the Company's growth from new programs, increases in insurance costs and
increased utilization of contracted services due to an increase in the use of
alternative residential arrangements resulting from an increase in the number of
youth served at certain locations. The increase in purchased services and other
expenses as a percent of revenues over the prior year results primarily from
increases in insurance costs and increased utilization of contracted services at
certain locations as described above.
Depreciation and amortization increased $292,000, or 6.8%, to
$4,581,000 for fiscal 2001 from $4,289,000 for fiscal 2000. 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 amortization associated with the Company's Charlotte, North
Carolina and Dallas, Texas properties, offset by the cessation of depreciation
on the HYC.
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 HYC facility following the closure of the facility. See
"Helicon" and Note E of notes to the consolidated financial statements.
Income from operations increased $7,183,000, to $8,497,000 for fiscal
2001 from $1,314,000 for fiscal 2000, and increased as a percentage of total
revenues to 6.5% for fiscal 2001 from 1.0% for fiscal 2000, as a result of the
factors described above.
Interest expense increased $181,000, or 8.3%, to $2,362,000 for fiscal
2001 from $2,181,000 for fiscal 2000. The increase in interest expense over the
prior fiscal year is attributable principally to an increase in the Company's
average debt outstanding, primarily resulting from capital expenditures in
Charlotte, North Carolina and Dallas, Texas, offset by a decrease in the
Company's effective interest rate.
Other income or expense increased from a net expense of $17,000 in fiscal
2000 to a net expense of $380,000 in fiscal 2001. The increase from the same
period in the prior year is attributable primarily to the write off of fixed
assets associated with facility closures.
Provision for (benefit from) income taxes for fiscal 2001 increased to
$2,641,000 from $(17,000) for fiscal 2000. The increase results primarily from
the increase in taxable income for fiscal 2001 versus fiscal 2000 combined with
an increase in the Company's effective tax rate due primarily to the effect of
non-deductible goodwill amortization associated with fiscal 1999 acquisitions.
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
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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 HYC 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.
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for fiscal 2001 was $11,041,000
on net income of $3,114,000, as compared to $1,251,000 for fiscal 2000 on a net
loss of $867,000. Working capital at June 30, 2001 was $11,616,000, as compared
to $23,225,000 at June 30, 2000. The decrease in working capital results
primarily from the classification as current of certain amounts due under the
Company's credit arrangements.
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Cash used by investing activities was $8,136,000 for fiscal 2001 as
compared to cash provided of $1,496,000 for fiscal 2000. The change in fiscal
2001 as compared to fiscal 2000 is due primarily to the sale of the assets of
the Company's Bay County, Florida facility and collection of a note receivable
in fiscal 2000 as compared with the acquisition of the Company's Charlotte,
North Carolina facility and investment in its Dallas, Texas facility in fiscal
2001. Cash used by financing activities was $3,775,000 for fiscal 2001 as
compared to cash used of $1,032,000 for fiscal 2000, due primarily to decreases
in the Company's net long-term borrowings in fiscal 2001 and in the Company's
repurchase of its Common Stock in fiscal 2000.
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 June 30, 2001, the outstanding balance under the revolving line of
credit, $6,000,000, was included in current liabilities.
The revolving line of credit matures in April 2002. The Company has
deferred any action regarding extension or renewal of the revolving line of
credit pending the final resolution of its proposed merger with KIDS Holdings
and Ameris. While the Company expects to be able to renegotiate the terms of the
revolving line of credit if required, there can be no assurance of its ability
to do so.
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. Repayment of
principal begins in January 2002, at which time increasing payments that
amortize the loan fully are due over the remaining four years of the agreement.
Principal payments of $1,675,000 are included in current liabilities at June 30,
2001.
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 Company has obtained the consent of the Lenders to enter into the
proposed merger with KIDS Holdings and Ameris. 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. 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, 2001, $426,000 was outstanding under the note and was included in current
liabilities.
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, 2001, there was $254,000 outstanding under Helicon's line of credit.
See--"Helicon" and Note E of notes to the consolidated financial statements.
Capital expenditures during fiscal 2002 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, possibly including
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the purchase of 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. Capital expenditures
associated with the opening of new programs and facilities are, however,
expected to be minimal, pending the resolution of the Company's proposed merger.
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
The Company adopted 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 has no
derivatives and, accordingly, adoption of SFAS No. 133 had no effect on the
Company's results of operations or financial position.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets" effective as of July 1,
2001 and for fiscal years beginning after December 15, 2001, respectively. SFAS
No. 141 eliminates the "pooling of interests" method of accounting for business
combinations. Under SFAS No. 142 goodwill and indefinite-lived intangible assets
will no longer be amortized but will be subject to annual impairment tests.
Other intangible assets will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and
other intangible assets beginning July 1, 2002. Application of the
non-amortization provisions of SFAS No. 142 is expected to result in an increase
in pre-tax income of approximately $900,000 per year. During 2002, the Company
will perform the first of the required impairment tests of goodwill as of July
1, 2002 and has not yet determined what the effect of these tests will be on the
results of operations and financial position of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
At June 30, 2001, 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 and cash flows and the fair values of 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, 2001 and 2000, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended June 30, 2001. 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, 2001 and
2000, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended June 30, 2001, 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 20, 2001
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
June 30,
------------------------
2001 2000
-------- --------
(dollars in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,619 $ 3,489
Accounts receivable, net of allowance for doubtful
accounts of $3,737 in 2001 and $3,913 in 2000 25,942 27,203
Prepaid expenses 1,171 1,120
Deferred income taxes 1,424 1,134
Other current assets 1,311 1,716
-------- --------
TOTAL CURRENT ASSETS 32,467 34,662
PROPERTY AND EQUIPMENT, net 46,628 42,448
COST IN EXCESS OF NET ASSETS ACQUIRED,
at cost, net of accumulated amortization of
$2,541 in 2001 and $1,602 in 2000 11,540 12,479
DEFERRED INCOME TAXES 937 246
OTHER ASSETS AND DEFERRED CHARGES, at cost,
net of accumulated amortization of $686 in 2001
and $459 in 2000 458 734
-------- --------
TOTAL ASSETS $ 92,030 $ 90,569
======== ========
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34
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
June 30,
------------------------
2001 2000
-------- --------
(dollars in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,067 $ 2,488
Current portion - long-term debt and capital leases 8,160 869
Income taxes payable 446 --
Accrued employee compensation 4,476 4,019
Accrued other expenses 2,787 2,702
Other current liabilities 915 1,359
-------- --------
TOTAL CURRENT LIABILITIES 20,851 11,437
LONG-TERM DEBT 13,325 24,426
OBLIGATION UNDER CAPITAL LEASES -- 59
-------- --------
TOTAL LIABILITIES 34,176 35,922
-------- --------
SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00 per
share--10,000,000 shares authorized -- --
Common stock, par value $ .01 per share
--50,000,000 shares authorized; issued
and outstanding 7,222,191 shares in 2001
and 7,184,141 shares in 2000 72 72
Additional paid-in capital 50,595 50,502
Retained earnings 7,187 4,073
-------- --------
TOTAL SHAREHOLDERS' EQUITY 57,854 54,647
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 92,030 $ 90,569
======== ========
See notes to consolidated financial statements.
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35
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended June 30,
-------------------------------------------
2001 2000 1999
--------- --------- ---------
(In thousands, except per share amounts)
Revenues:
Operating revenues $ 128,342 $ 123,435 $ 111,812
Management fee income 3,388 3,335 3,665
--------- --------- ---------
TOTAL REVENUES 131,730 126,770 115,477
--------- --------- ---------
Operating expenses:
Employee compensation and benefits 80,217 76,672 70,875
Purchased services and other expenses 38,286 35,775 31,512
Depreciation and amortization 4,581 4,289 3,492
Loss on Helicon receivables and loan guarantee -- 2,368 --
Impairment loss on Helicon facility -- 6,237 --
Related party rent 149 115 115
--------- --------- ---------
TOTAL OPERATING EXPENSES 123,233 125,456 105,994
--------- --------- ---------
Income from operations 8,497 1,314 9,483
Other (income) expense:
Interest expense 2,362 2,181 1,697
Other 380 17 (526)
--------- --------- ---------
TOTAL OTHER (INCOME) EXPENSE, NET 2,742 2,198 1,171
--------- --------- ---------
Income (loss) before income taxes and
cumulative effect of accounting change 5,755 (884) 8,312
Provision for (benefit from) income taxes 2,641 (17) 3,284
--------- --------- ---------
Income (loss) before cumulative effect of accounting change 3,114 (867) 5,028
Cumulative effect of accounting change,
net of income tax benefit of $12 -- -- 20
--------- --------- ---------
NET INCOME (LOSS) $ 3,114 $ (867) $ 5,008
========= ========= =========
Basic earnings (loss) per common share:
Before cumulative effect of accounting change $ 0.43 $ (0.12) $ 0.67
Cumulative effect of accounting change -- -- --
--------- --------- ---------
NET INCOME (LOSS) $ 0.43 $ (0.12) $ 0.67
========= ========= =========
Diluted earnings (loss) per common share:
Before cumulative effect of accounting change $ 0.43 $ (0.12) $ 0.66
Cumulative effect of accounting change -- -- --
--------- --------- ---------
NET INCOME (LOSS) $ 0.43 $ (0.12) $ 0.66
========= ========= =========
Weighted average shares outstanding:
Basic 7,200 7,226 7,450
Diluted 7,254 7,226 7,585
See notes to consolidated financial statements.
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36
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock,
$.01 par value Additional Total
-------------------------- Paid-In Retained Shareholders'
Shares Amount Capital Earnings Equity
---------- -------- ---------- -------- -------------
(dollars in thousands)
Balance at July 1, 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
Stock issued:
Pursuant to employee stock
purchase plan 38,050 -- 93 93
Net income for the year 3,114 3,114
---------- -------- -------- -------- --------
Balance at June 30, 2001 7,222,191 $ 72 $ 50,595 $ 7,187 $ 57,854
========== ======== ======== ======== ========
See notes to consolidated financial statements.
-36-
37
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended June 30,
----------------------------------------
2001 2000 1999
-------- -------- --------
(in thousands)
OPERATING ACTIVITIES
Net income (loss) $ 3,114 $ (867) $ 5,008
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Deferred income taxes (980) (2,078) (530)
Depreciation 3,582 3,310 2,783
Amortization 999 979 709
Amortization of deferred loan costs 167 159 114
Provision for bad debts 2,298 2,192 1,275
Loss on disposition of fixed assets 422 -- --
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 (1,037) (5,702) (6,064)
Prepaid expenses (51) (57) (367)
Other current assets 405 462 (403)
Accounts payable 1,579 (1,346) 1,057
Accrued employee compensation 456 (1,823) 188
Accrued other expenses 85 298 (83)
Income taxes payable 446 (702) 123
Other current liabilities (444) (679) 636
-------- -------- --------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 11,041 1,251 4,466
-------- -------- --------
INVESTING ACTIVITIES
Purchase of Ameris Health Systems, Inc. -- -- (12,499)
Purchase of Somerset, Inc. -- -- (8,175)
Sale of assets of CCS/Bay County -- 3,637 --
Collection (purchase) of note receivable -- 2,500 (2,500)
Purchase of property and equipment (11,507) (5,329) (4,293)
Proceeds from sale of property and
equipment 3,322 638 29
(Increase) decrease in other assets 49 50 (350)
-------- -------- --------
NET CASH (USED) PROVIDED BY
INVESTING ACTIVITIES $ (8,136) $ 1,496 $(27,788)
-------- -------- --------
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38
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year Ended June 30,
----------------------------------------
2001 2000 1999
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from revolving lines
of credit and long-term borrowings $ 18,000 $ 9,900 $ 36,071
Principal payments on revolving
lines of credit, long-term
borrowings and capital lease
obligations (21,868) (10,216) (24,432)
Repurchase of shares of common
stock -- (887) (7,112)
Proceeds from issuance of common
stock, net 93 171 570
Stock registration costs -- -- (68)
-------- -------- --------
NET CASH (USED) PROVIDED BY
FINANCING ACTIVITIES (3,775) (1,032) 5,029
-------- -------- --------
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (870) 1,715 (18,293)
Cash and cash equivalents at
beginning of year 3,489 1,774 20,067
-------- -------- --------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 2,619 $ 3,489 $ 1,774
======== ======== ========
SUPPLEMENTAL INFORMATION
Income taxes paid $ 3,143 $ 2,599 $ 3,426
Interest paid 2,420 1,966 1,363
See notes to consolidated financial statements.
-38-
39
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
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, Michigan, Montana, North
Carolina, 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 three 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 - Beginning in fiscal 1999, contract
pre-opening costs (incremental direct costs incurred to open facilities in new
market areas) have been accounted for under the provisions of Statement of
Position ("SOP") 98-5, "Reporting on Costs of Start-up Activities", under which
all pre-opening costs are expensed as incurred. 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.
Estimated settlements under third-party reimbursement agreements are
accrued in the period the related services are rendered. Final determination of
amounts earned under Medicare and Medicaid programs often occur in subsequent
years because of audits by the programs, rights of appeal and the application of
numerous technical provisions. Differences between original estimates and
subsequent revisions (including final settlements) are included in the
statements of operations in the period in which the revisions are made, and
resulted in an increase in revenue of $738,000 for fiscal 2001. Revisions in
fiscal 2000 and 1999 were immaterial to the statement of operations.
-39-
40
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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 2001, 2000 and 1999, the Company
had no items of other comprehensive income.
-40-
41
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Derivative Instruments and Hedging Activities -- The Company adopted
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 has no derivatives and, accordingly, adoption of SFAS No.
133 had no effect on the Company's results of operations or financial position.
New Pronouncements -- In June 2001, the FASB issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets"
effective as of July 1, 2001 and for fiscal years beginning after December 15,
2001, respectively. SFAS No. 141 eliminates the "pooling of interests" method of
accounting for business combinations. Under SFAS No. 142 goodwill and
indefinite-lived intangible assets will no longer be amortized but will be
subject to annual impairment tests. Other intangible assets will continue to be
amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and
other intangible assets beginning July 1, 2002. Application of the
non-amortization provisions of SFAS No. 142 is expected to result in an increase
in pre-tax income of approximately $900,000 per year. During 2002, the Company
will perform the first of the required impairment tests of goodwill as of July
1, 2002 and has not yet determined what the effect of these tests will be on the
results of operations and financial position of the Company.
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 $3,600,000. 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 $5,000,000.
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
$8,200,000 in cash and $2,400,000 in notes payable. This transaction has been
accounted for as a purchase. Pro forma results of operations for fiscal 1999 as
if the acquisition had occurred on the first day of that fiscal year would not
differ materially from reported amounts. Cost in excess of net assets acquired
of $7,500,000 is being amortized over fifteen years.
In September 1998, the Company acquired Ameris Health Systems, Inc.
("Ameris") for net consideration of approximately $12,500,000 in cash. Ameris,
through its wholly-owned subsidiary, American Clinical Schools, Inc., operated
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 $2,500,000 which was collected in fiscal
2000. Pro forma results of operations for fiscal 1999 as if the acquisition had
occurred on the first day of that fiscal year would not differ materially from
reported amounts. Cost in excess of net assets acquired of $5,400,000 is being
amortized over fifteen years.
-41-
42
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C--PROPERTY AND EQUIPMENT
Property and equipment consists of: June 30,
---------------------------------
2001 2000
------------ ------------
Land and improvements $ 5,050,000 $ 4,477,000
Buildings and improvements 51,835,000 45,858,000
Furniture and equipment 11,826,000 10,609,000
Construction in progress 41,000 61,000
------------ ------------
68,752,000 61,005,000
Less: Accumulated depreciation (15,887,000) (12,320,000)
Impairment reserve (Note E) (6,237,000) (6,237,000)
------------ ------------
$ 46,628,000 $ 42,448,000
============ ============
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, 2001 and 2000. The related
accumulated amortization balances totaled $196,000 and $147,000, respectively.
Future minimum payments, by fiscal year and in the aggregate, under the
capital leases are as follows:
Year ending June 30:
2002 $ 62,000
--------
Total minimum lease payments 62,000
Amount representing interest (3,000)
--------
Present value of minimum lease payments
(classifieds as current) $ 59,000
========
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 $868,000, $887,000 and $1,322,000 for the years
ended June 30, 2001, 2000 and 1999, respectively.
-42-
43
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E--HELICON INCORPORATED (continued)
The Company also leases real property to Helicon. Real estate and
improvements with a cost of $10,290,000 and a carrying value of $1,520,000
(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, 2001. 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, 2001 is as
follows:
Year ending June 30:
2002 $233,000
2003 165,000
2004 56,000
2005 and thereafter --
--------
Total $454,000
========
Lease income totaled $233,000, $535,000 and $953,000 for the years
ended June 30, 2001, 2000 and 1999, respectively.
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 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. 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
collectibility 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 during fiscal 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 operated 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 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.
-43-
44
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE E--HELICON INCORPORATED (continued)
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 $8,500,000, were forgiven by the
Company. The $8,500,000 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 April 2002. 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, 2001, the balance outstanding under Helicon's line of credit was
$254,000.
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 the
Credit 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 June 30, 2001, the outstanding balance under the revolving line of
credit was $6,000,000.
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 Company has obtained the consent of the Lenders to enter into the
proposed merger transaction with KIDS Holdings, Inc ("KIDS Holdings") and Ameris
Acquisition, Inc ("Ameris")(See Note N). 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. 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, 2001, $426,000 was outstanding under the note.
-44-
45
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F--LONG-TERM DEBT AND LINE OF CREDIT (continued)
Future principal maturities of long-term debt are as follows at June
30, 2001:
Year ending June 30:
2002 $ 8,101,000
2003 3,475,000
2004 3,750,000
2005 4,025,000
2006 and thereafter 2,075,000
------------
Total 21,426,000
Less current portion (8,101,000)
------------
Total long-term $ 13,325,000
============
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,
2001 and 2000 are as follows:
June 30,
----------------------------
2001 2000
---------- ----------
Deferred tax assets:
Net operating loss and credit
carryforwards $1,420,000 $ 805,000
Accrued expenses 1,515,000 1,231,000
Other 19,000 22,000
---------- ----------
Total deferred tax assets 2,954,000 2,058,000
Deferred tax liabilities:
Depreciation, amortization
and asset impairment 310,000 385,000
Other 283,000 293,000
---------- ----------
Total deferred tax liabilities 593,000 678,000
---------- ----------
Net deferred tax assets $2,361,000 $1,380,000
========== ==========
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, 2001. The
valuation allowance decreased $150,000 for the year ended June 30, 2000, to a
balance of $-0- at June 30, 2000.
-45-
46
CHILDREN'S COMPREHENSIVE SERVICES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G--INCOME TAXES (continued)
Income tax expense (benefit) is allocated in the financial statements
as follows:
Year Ended June 30,
--------------------------------------------
2001 2000 1999
---------- -------- ----------
Income (loss) before cumulative effect of
accounting change $2,641,000 $(17,000) $3,284,000
Cumulative effect of accounting change -- -- (12,000)
---------- -------- ----------
Total $2,641,000 $(17,000) $3,272,000
========== ======== ==========
The provision for (benefit from) income taxes applicable to income
(loss) before cumulative effect of accounting change is as follows:
Year Ended June 30,
----------------------------------------------------
2001 2000 1999
------------ ------------ ------------
Current:
Federal $ 2,451,000 $ 1,137,000 $ 3,156,000
State 1,171,000 924,000 658,000
------------ ------------ ------------
3,622,000 2,061,000 3,814,000
------------ ------------ ------------
Deferred:
Federal (282,000) (1,092,000) (192,000)
State (699,000) (986,000) (338,000)
------------ ------------ ------------
(981,000) (2,078,000) (530,000)
------------ ------------ ------------
Provision for (benefit from)
income taxes $ 2,641,000 $ (17,000) $ 3,284,000
============ ============ ============
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 years ended June 30, 2001 and 2000 and
35% for the year ended June 30, 1999 to income tax expense (benefit) is as
follows:
Year Ended June 30,
-----------------------------------------------
2001 2000 1999
---------- ---------- -----------
Income tax expense (benefit) at
federal statutory rate $1,954,000 $ (301,000) $ 2,909,000
Change in valuation allowance -- (150,000) --
Reversal of previously recorded tax
accruals -- -- (263,000)
State income tax, net of federal
benefit 265,000 (41,000) 338,000
Goodwill amortization 331,000 306,000 212,000
Nondeductible expenses and other 91,000 169,000 88,000
---------- ---------- -----------
Provision for (benefit from) income
taxes $2,641,000 $ (17,000) $ 3,284,000
========== ========== ===========
At June 30, 2001, the Company had state tax net operating loss
carryforwards of $17,500,000 which expire from 2014 through 2020.
-46-
47
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H--SHAREHOLDERS' EQUITY
Warrants -- The Company had a warrant to purchase 3,858 shares of common stock
outstanding at July 1, 1998, at an exercise price of $5.20 per share. A warrant
to purchase 3,858 shares remains outstanding at June 30, 2001 and expires in
2004.
Stock Options -- The following table sets forth outstanding stock options under
the Company's stock option plans as of June 30, 2001, 2000 and 1999 for the
purchase of the Company's Common Stock:
Weighted
Average
Exercise
Options Shares Option Prices Price
---------------------------- ----------- ------------- --------
Outstanding at July 1, 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
Granted 416,550 2.85- 3.79 3.40
Exercised -- - -
Forfeited (102,737) 2.85-15.38 9.16
---------- ----------- ------
Outstanding at June 30, 2001 1,091,090 $2.85-18.00 $ 7.33
==========
Options exercisable and shares available for future grant are as
follows:
June 30,
----------------------------------------
2001 2000 1999
-------- -------- --------
Options exercisable 493,365 395,823 391,847
Shares available for grant 131,800 465,883 333,875
The following table summarizes information about stock options
outstanding at June 30, 2001:
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 2001 Life Price 2001 Price
---------------------------------------------------- ----------------------
$ 2.85- 4.00 651,175 9 $ 3.24 137,994 $ 3.12
4.01- 6.00 182,315 7 5.65 142,316 5.59
6.01-11.00 119,450 7 8.98 77,572 9.07
11.01-18.00 138,150 6 14.27 135,483 14.33
------------- --------- -------
$ 2.85-18.00 1,091,090 493,365
========= =======
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48
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H--SHAREHOLDERS' EQUITY (continued)
Options exercisable at June 30, 2001, 2000 and 1999 had weighted
average exercise prices of $7.85, $9.19 and $10.37, respectively.
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, 2001:
Warrant 3,858
1987 Employee Stock Option Plan 192,890
1989 Stock Option Plan for Non-Employee Directors 30,000
1997 Stock Incentive Plan 868,200
----------
Total common shares reserved 1,094,948
==========
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 SFAS No. 123. 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, 2001, 2000, and 1999, respectively:
risk-free interest rate of 4.66%, 6% and 7.5%; no annual dividend yield;
volatility factor of .783, 1.025 and .898 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,
----------------------------------------------
2001 2000 1999
---------- ---------- ----------
Pro forma net income (loss) $ 1,625 $ (3,569) $ 1,979
Pro forma earnings (loss) per share
Basic $ 0.23 $ (0.49) $ 0.27
Diluted 0.22 (0.49) 0.26
The weighted average fair value per share for options granted during
the years ended June 30, 2001, 2000 and 1999 totaled $3.40, $3.70 and $9.49,
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, as amended, 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 plan has been amended such
that the rights will not separate from the common stock and become exercisable
solely as a result of the execution of the merger agreement between the Company,
KIDS Holdings and Ameris. 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,
-----------------------------------------------
2001 2000 1999
---------- ----------- ----------
Numerator
Numerator for basic and
diluted earnings (loss) per share:
Income (loss) before
cumulative effect of
accounting change $3,114,000 $ (867,000) $5,028,000
Cumulative effect of accounting
change -- -- 20,000
---------- ----------- ----------
Net income (loss) $3,114,000 $ (867,000) $5,008,000
========== =========== ==========
Denominator
Denominator for basic earnings (loss)
per share:weighted-average shares 7,200,274 7,225,806 7,450,063
Effect of dilutive stock options
and warrants 53,825 -- 134,804
---------- ----------- ----------
Denominator for diluted earnings (loss)
per share:adjusted-weighted-average
shares 7,254,099 7,225,806 7,584,867
========== =========== ==========
Year Ended June 30,
----------------------------------
2001 2000 1999
------ ------ ------
Basic earnings (loss) per share:
Before cumulative effect of
accounting change $ 0.43 $(0.12) $ 0.67
Cumulative effect of accounting
change -- -- --
------ ------ ------
Net income (loss) $ 0.43 $(0.12) $ 0.67
====== ====== ======
Diluted earnings (loss) per share:
Before cumulative effect of
accounting change $ 0.43 $(0.12) $ 0.66
Cumulative effect of accounting
change -- -- --
------ ------ ------
Net income (loss) $ 0.43 $(0.12) $ 0.66
====== ====== ======
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 2001, 2000 and 1999 were 445,000,
777,000 and 914,000 shares, respectively.
-50-
51
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J--EMPLOYEE BENEFIT PLANS
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 $44,000, $42,000 and $45,000 for the years ended June 30, 2001, 2000,
and 1999, 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 2001,
2000 and 1999, 38,050 shares, 37,615 shares and 23,043 shares, respectively, of
the Company's Common Stock were purchased at prices ranging from $2.13 to $3.08,
$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, 2001:
Year ending June 30:
2002 $ 1,829,000
2003 1,590,000
2004 1,234,000
2005 889,000
2006 and thereafter 323,000
-----------
Total $ 5,865,000
===========
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, 2001, 2000 and 1999 was $3,250,000, $3,516,000 and
$3,040,000, respectively.
As of June 30, 2001, the Company has provided a letter of credit in the
amount of $970,000 to guarantee payment for future claims incurred under its
insurance program. The letter of credit reduces availability under the Company's
line of credit by the same amount.
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52
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE L--CONTINGENCIES
Shareholder Litigation -- On June 22, 2001, a purported class action was filed
in the Circuit Court, Davidson County, Tennessee against the Company and each of
the directors of the Company. The suit alleges that the directors of the Company
breached their fiduciary duties to the shareholders of the Company by approving
an exclusivity agreement pursuant to which the Company agreed to negotiate
exclusively with Ameris Acquisition, Inc. for the period from June 14, 2001
through July 13, 2001. The lawsuit seeks class action certification, an order of
the court directing the directors of the Company to exercise their fiduciary
duties to obtain a transaction that is in the best interests of the Company's
shareholders, an award of attorney's fees and costs, and other relief. The
Company believes that the lawsuit is based upon erroneous assumptions by the
plaintiff, is without merit, and intends to vigorously defend its position.
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.
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
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 $149,000 for the year ended
June 30, 2001 and $115,000 for each of the years ended June 30, 2000, and 1999,
respectively.
NOTE N--PROPOSED MERGER
On August 9, 2001, the Company subsequently announced that it had
signed a definitive merger agreement with KIDS Holdings and its wholly-owned
subsidiary, Ameris, pursuant to which KIDS Holdings would acquire all of the
Company's outstanding common stock for $6.00 per share. Under the terms of the
merger agreement, Ameris will be merged with the Company, with the Company being
the surviving entity and becoming a wholly-owned subsidiary of KIDS Holdings.
The transaction remains subject to a number of contingencies, including Ameris
obtaining the required financing, approval by the Company's shareholders, a lack
of material adverse change in the Company's business and other usual and
customary closing conditions. Ameris has obtained commitments for a majority of
the financing required to close the transaction, but a substantial amount of
additional financing remains to be secured. No assurance can be given that the
required financing can be secured or that the merger will be consummated.
-52-
53
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE O--QUARTERLY FINANCIAL INFORMATION (Unaudited)
The following table sets forth selected quarterly operating data.
2001 2000
------------------------------------- --------------------------------------
First Second Third Fourth First Second Third Fourth
------- ------- ------- ------- ------- ------- ------- --------
(in thousands except per share amounts)
Total revenues $30,467 $32,164 $33,862 $35,237 $29,779 $31,522 $33,024 $ 32,445
Income (loss) from operations 1,165 1,659 2,807 2,866 1,285 2,845 1,087 (3,903)
Net income (loss) 297 586 1,068 1,163 461 1,292 210 (2,830)
Income (loss) per share, diluted:
Net income (loss) $ 0.04 $ 0.08 $ 0.15 $ 0.16 $ 0.06 $ 0.18 $ 0.03 $ (0.39)
*******
-53-
54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
POSITION(S)
NAME AGE WITH COMPANY DIRECTOR SINCE
---------------------------- ----- ------------------------------- --------------
William J Ballard 59 Chairman, Chief Executive May 1993
Officer and Director
Amy S. Harrison 51 Vice Chairman, President, Chief May 1988
Operating Officer and Director
Martha A. Petrey, Ph.D. 58 Executive Vice President and May 1988
Director
Thomas B. Clark 59 Director September 1994
Joseph A. Fernandez, Ed.D. 65 Director September 1994
David L. Warnock 43 Director September 1994
Mr. Ballard has served as Chief Executive Officer of the Company since
March 1993, as a director since May 1993, and as Chairman of the Board since
September 1994. Mr. Ballard also served as President of the Company from March
1993 to February 1996. From May 1992 through March 1993, Mr. Ballard served as
Vice President of Cumberland Health Systems, Inc., in connection with its
proposed merger with the Company. From June 1990 through May 1992, Mr. Ballard
served as Vice President - Finance and Treasurer of the Company. Prior to such
time, Mr. Ballard served as President of Paladin Capital, Inc. from March 1988
through May 1990 and as president of Major Safe Co., Inc. from 1973 through
1987.
Ms. Harrison has served as Vice Chairman of the Company since May 1990,
as President since February 1996, as Chief Operating Officer since January 2000
and as a director of the Company since May 1988. From March 1988 through
September 1994, Ms. Harrison served as an Executive Vice President of the
Company. In 1977 Ms. Harrison founded a group of corporations collectively known
as Advocate Schools, and served as an executive officer and a director of those
corporations until their acquisition by the Company in March 1988. Ms. Harrison
has also served as a consultant to the California State Department of Education
and has had numerous state and county appointments.
Dr. Petrey has served as an Executive Vice President of the Company
since March 1988 and as a director since May 1988. Dr. Petrey served as an
executive officer and a director of Advocate Schools from 1980 until their
acquisition by the Company in March 1988. Dr. Petrey holds a Ph.D. in clinical
psychology from the University of South Carolina and is a licensed clinical
psychologist with experience in both public and private practice.
-54-
55
Mr. Clark is President of Pinkerton Consulting & Investigations
Division, a division of Pinkerton's, Inc., a security services firm. From
October 1994 until July 1997, Mr. Clark was an attorney-at-law in private
practice. From January 1994 until October 1994, he served as Executive Vice
President-Administration and General Counsel of Genesco Inc., a footwear and
apparel manufacturer and retailer. Prior to assuming that position, Mr. Clark
served as a partner in the law firm of Boult, Cummings, Conners & Berry in
Nashville, Tennessee from 1987 to 1994.
Dr. Fernandez, retired, served as President of Joseph A. Fernandez &
Associates, Inc., an education consulting firm, from 1993 until 1999. From June
1993 until June 1996, Dr. Fernandez also served as President and Chief Executive
Officer of School Improvement Services, Inc., a provider of consulting services
related to school improvement at the state, district or school level. From June
1993 until July 1994, Dr. Fernandez also served as the President of the Council
of Great City Schools, a Washington, D.C. based organization representing fifty
of the largest urban school districts in the United States. Prior to assuming
such positions in 1993, Dr. Fernandez served as Chancellor of the New York City
Public Schools from 1990 to 1993 and as Superintendent of the Dade County Public
Schools in Miami, Florida from 1987 to 1990. Dr. Fernandez serves as a director
of Touchstone Applied Science Associates, Inc., a provider of assessment and
instructional products to the education marketplace. Dr. Fernandez holds an
Ed.D. from Nova University.
Mr. Warnock has been a partner at Cahill, Warnock & Company, an
investment management company, since June 1995. Prior to joining Cahill, Warnock
& Company, Mr. Warnock served as President of T. Rowe Price Strategic Partners
II, L.P., the general partner of T. Rowe Price Strategic Partners Fund II, L.P.,
a principal shareholder of the Company, and as a Vice President of T. Rowe Price
Associates, Inc. See "Security Ownership of Certain Beneficial Owners and
Management - Certain Beneficial Owners." Mr. Warnock serves as a director on the
boards of Environmental Safeguards, Inc., a developer of environmental
remediation and recycling technologies, Concorde Career Colleges, Inc., an owner
and operator of proprietary, post-secondary institutions offering vocational
training, Blue Rhino Corporation, a national provider of propane grill cylinder
exchange and Touchstone Applied Science Associates, Inc., a provider of
assessment and instructional products to the education marketplace.
-55-
56
EXECUTIVE OFFICERS
The following are the current executive officers of the Company.
NAME AGE POSITION(S) WITH COMPANY
------------------------------ --- ---------------------------------------
William J Ballard 59 Chairman, Chief Executive Officer and
Director
Amy S. Harrison 51 Vice Chairman, President, Chief
Operating Officer and Director
Martha A. Petrey, Ph.D. 58 Executive Vice President and Director
Vicki M. Agee, Ph.D. 62 Vice President
Kathryn Behm Celauro 53 Vice President Customer Relations
Barbara J. Dalton 47 Vice President
John C. Edmunds 47 Vice President, Secretary and Treasurer
Elizabeth A. Guthrie 57 Vice President
Barbara M. Lonardi 47 Vice President Corporate Resources and
Compliance
Francis M. Sauvageau 41 Vice President Business Development
Donald B. Whitfield 49 Vice President Finance and Chief
Financial Officer
The following background information relates to those executive
officers who are not also directors. For information regarding the executive
officers who are also directors, see "Directors."
Dr. Agee has served as a Vice President of the Company since September
1995. From July 1991 through September 1995, Dr. Agee served as Senior Vice
President and Clinical Director for Youth Services International, Inc. Prior to
July 1991, Dr. Agee served as Director of Correctional Services for New Life
Youth Services, Inc. Dr. Agee holds a Ph.D. in clinical psychology from the
University of Texas and is a licensed clinical psychologist.
Ms. Celauro has served as a Vice President since November 1993. From
April 1993 through October 1993, Ms. Celauro served as a Vice President of
Cumberland Health Systems, Inc. From January 1987 through March 1993, Ms.
Celauro served in various capacities with the Company, including Senior Vice
President, Vice President and Secretary. From September 1985 to January 1987,
Ms. Celauro served as Commissioner of Revenue for the State of Tennessee. Prior
to that time, she served as legal counsel to the Commissioner of Finance and
Administration.
Ms. Dalton has served as a Vice President of the Company since
September 2000. From 1998 through August 2000 Ms. Dalton served as a Vice
President of Sunrise Assisted Living. In 1997, she served as a Vice President of
Gambro Healthcare. Prior to that time, she served as a Vice President of
Cardiovascular Ventures and as a Vice President of Community Psychiatric
Centers, healthcare related companies.
Mr. Edmunds has served as Vice President, Secretary and Treasurer of
the Company since November 1997. From June 1997 to November 1997, he served the
Company as a divisional Vice President and Controller. From January 1992 until
June 1997, he was employed by Vendell Healthcare, Inc., where he served as Vice
President, Secretary and Controller. Mr. Edmunds is a certified public
accountant.
-56-
57
Ms. Guthrie has served as a Vice President of the Company since
November 2000. From May 1996 through November 2000, Ms. Guthrie was Regional
Director of Operations for Joyner Sportsmedicine Institute, Inc., a physical
therapy company.
Ms. Lonardi has served as Vice President Corporate Resources and
Compliance since June 1997, and served as Regional Vice President of Human
Resources and Training for the Company from September 1996 through May 1997.
From 1992 to 1996 Ms. Lonardi served as an Assistant Administrator with First
Hospital Corporation, and from 1985 to 1992 Ms. Lonardi served as Director of
Personnel and Training for the Company.
Mr. Sauvageau has served as Vice President Business Development of the
Company since September 1998 and served as a divisional vice president from June
1997 to September 1998. Mr. Sauvageau was previously employed by Vendell
Healthcare, Inc., where he served as Vice President-Development from April 1997
to June 1997 and as a facility administrator from January 1996 to March 1997.
From 1994 to 1996 he was President of Pracmanix, a behavioral practice
management company.
Mr. Whitfield has served as Vice President Finance and Chief Financial
Officer of the Company since November 1997. From 1993 to 1997, he served as Vice
President Finance, Secretary and Treasurer of the Company. Mr. Whitfield has
been employed by the Company since March 1988 in various other capacities,
including Controller, Assistant Secretary and Assistant Treasurer. Mr. Whitfield
is a certified public accountant.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Pursuant to rules promulgated under the Securities Exchange Act of 1934, as
amended, the Company's directors, executive officers and any person holding more
than ten percent (10%) of the Common Stock are required to report their
ownership of the Common Stock and any changes in that ownership to the SEC.
These persons also are required by SEC regulations to furnish the Company with
copies of these reports. Specific due dates for these reports have been
established and the Company is required to report any failure to file by these
dates. Based solely on a review of the reports furnished to the Company and
written representations from the Company's directors and executive officers, the
Company believes that all of these filing requirements were satisfied by the
Company's directors, executive officers and ten percent (10%) holders during the
2001 fiscal year.
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58
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The table below shows information concerning the annual and long-term
compensation for services in all capacities to the Company for the past three
fiscal years for the Chief Executive Officer and the Company's other four most
highly compensated executive officers who were serving as executive officers at
June 30, 2001 (collectively, the "Named Officers").
Long-Term
Annual Compensation Compensation
-------------------------------- ------------
Awards
------------
Securities
Underlying
Name and Principal Position Year Salary ($) Bonus ($) Options(#)
--------------------------------- ---- ---------- --------- ------------
William J Ballard 2001 233,656 --- 137,500
Chairman, Chief Executive Officer 2000 225,000 28,125 ---
and Director 1999 221,707 25,000 150,000
Amy S. Harrison 2001 233,656 --- 137,500
Vice Chairman, President, Chief 2000 225,000 28,125 ---
Operating Officer and Director 1999 221,707 50,000 150,000
Martha A. Petrey, Ph.D. 2001 130,000 --- 5,000
Executive Vice President and 2000 130,000 11,375 5,000
Director 1999 130,000 33,750 10,000
Francis M. Sauvageau 2001 144,001 --- 5,000
Vice President 2000 129,800 11,366 5,000
1999 123,569 12,500 9,000
Barbara J. Dalton (1) 2001 123,058 --- 27,500
Vice President
------------------------------------
(1) Employment commenced September 2000.
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OPTION GRANTS IN LAST FISCAL YEAR
The table below shows information concerning the grants of stock
options pursuant to the 1997 Stock Incentive Plan during the fiscal year ended
June 30, 2001 to the Named Officers. No stock appreciation rights have ever been
granted by the Company.
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation For
Individual Grants Option Term
----------------------------------------------------------------------------------- ----------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise
Options Employees or Base
Granted in Price Expiration
Name (#) Fiscal Year ($/Sh) Date 5%($) 10%($)
------------------------ ---------- ----------- ------- ----------- ------- --------
William J Ballard 125,000 33.0% 3.18 12/14/10 249,986 633,513
12,500 3.79 5/22/11 29,794 75,504
Amy S. Harrison 125,000 33.0% 3.18 12/14/10 249,986 633,513
12,500 3.79 5/22/11 29,794 75,504
Martha A. Petrey, Ph.D. 5,000 1.2% 3.79 5/22/11 11,918 30,201
Francis M. Sauvageau 5,000 1.2% 3.79 5/22/11 11,918 30,201
Barbara J. Dalton 20,000 6.6% 3.588 11/14/10 45,129 114,367
7,500 3.79 5/22/11 17,876 45,302
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AGGREGATED OPTION EXERCISES
IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The table below provides information as to the number of shares
acquired during the fiscal year ended June 30, 2001 upon the exercise of
outstanding options and the value realized upon exercise. Also reported are the
number of shares covered by both exercisable and unexercisable stock options as
of June 30, 2001 and the values for the "in-the-money" options, which represent
the spread between the exercise price of any such existing stock options and the
fiscal year-end price of the Common Stock of $5.00.
Number of Securities Value of
Underlying Unexercised
Unexercised In-the Money
Options at Options at
Fiscal Year-End Fiscal Year-End
Shares -------------------- ----------------
Acquired (#) ($)
Name on Value ---- ---
Exercise Realized Exercisable (E)/ Exercisable (E)/
(#) ($) Unexercisable (U) Unexercisable (U)
------------------------ --------- ---------- --------------------- ------------------
William J Ballard - - 48,667 E 35,000 E
145,833 U 242,625 U
Amy S. Harrison - - 48,667 E 35,000 E
145,833 U 242,625 U
Martha A. Petrey, Ph.D. - - 41,833 E 26,326 E
11,667 U 13,199 U
Francis M. Sauvageau - - 8,667 E 3,576 E
11,333 U 13,199 U
Barbara J. Dalton - - - E - E
27,500 U 37,515 U
----------------------------
The Company has no long-term incentive plans or defined benefit or
actuarial plans covering any employees of the Company as is defined in SEC
regulations.
DIRECTOR COMPENSATION
The Company's non-employee directors receive an annual retainer of
$12,000 and reimbursement for expenses. In addition, under the provisions of the
Company's 1997 Stock Incentive Plan, the Company's non-employee directors each
receive an automatic annual stock option grant to purchase 5,000 shares of
Common Stock with an exercise price equal to the fair market value of the Common
Stock on the date of grant. The Board of Directors may, in the future, adjust
the compensation of directors as it deems advisable and consistent with the best
interests of the Company and its shareholders and the financial abilities of the
Company.
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EMPLOYMENT CONTRACTS
The Company's Chief Executive Officer, William J Ballard, has a four
year employment agreement, effective August 1998, with the Company which
provides for an annual base salary of $235,000 for fiscal 2001. His salary level
is reviewed annually. The agreement renews for successive one year terms on the
anniversary date subject to prior written notice of cancellation. The agreement
also provides for a severance arrangement in the amount of two years'
compensation plus certain other benefits in the event of termination. Mr.
Ballard is also eligible for an incentive bonus based on the attainment of
certain personal goals and the Company's operating performance in fiscal 2001.
The Company's President and Chief Operating Officer, Amy S. Harrison,
has a four year employment agreement, effective August 1998, with the Company
which provides for an annual base salary of $235,000 for fiscal 2001. Her salary
level is reviewed annually. The agreement renews for successive one year terms
on the anniversary date subject to prior written notice of cancellation. The
agreement also provides for a severance arrangement in the amount of two years'
compensation plus certain other benefits in the event of termination. Ms.
Harrison is also eligible for an incentive bonus based on the attainment of
certain personal goals and the Company's operating performance in fiscal 2001.
SALARY CONTINUATION AGREEMENTS
The Company has salary continuation agreements with Martha A. Petrey,
Ph.D., Barbara J. Dalton, Elizabeth A. Guthrie, Barbara M. Lonardi, Francis M.
Sauvageau and Donald B. Whitfield. Pursuant to these agreements, upon the
"constructive termination" of the employee's employment by the Company or the
termination of the employee's employment with the Company without cause within
two years of the effective date of a change in control of the Company, the
employee is entitled to a severance payment equal to the sum of the employee's
annual salary at the time of termination and the average cash bonus paid to such
employee during the three years prior to the termination of the employee's
employment. The severance payment is payable one-half within 15 days of the
effective date of the termination of the employee's employment and one-half in
six equal monthly payments beginning on the first day of the sixth month
immediately following termination of the employee's employment. The monthly
severance payments are subject to reduction if the employee finds other
employment during the period he or she is receiving severance payments.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Messrs. Clark and
Warnock and Dr. Fernandez. None of the members of the Compensation Committee
were officers or employees of the Company or its subsidiaries during the last
fiscal year or prior thereto.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information as of September 26,
2001 with respect to those persons known to the Company to be the beneficial
owners of more than five percent (5%) of the Common Stock. Unless otherwise
noted, the Company has been advised that all of the shares listed below are
beneficially owned, and the sole investment and voting power is held, by the
person or entity named.
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP CLASS
---------------------------------------- ----------------- ----------
T. Rowe Price Associates, Inc. (1) 718,414 9.94%
100 East Pratt Street
Baltimore, Maryland 21202
Fleet Boston Financial Corporation (2) 718,400 9.94%
One Federal Street
Boston, Massachusetts 02110
Dimensional Fund Advisors, Inc. (3) 600,650 8.31%
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
Century Management (4) 372,400 5.15%
1301 Capitol of Texas Highway
Suite B228
Austin, Texas 78746
Amy S. Harrison (5) 373,246 5.13%
11980 S. Mt. Vernon
Grand Terrace, California 92324
(1) Based on information included in a Form 13G filed with the Securities
and Exchange Commission (the "SEC ") on February 8, 2001. Beneficial
Owner has sole voting power with respect to 18,414 shares and sole
dispositive power with respect to 718,414 shares.
(2) Based on information included in a Form 13G filed with the SEC on
February 14, 2001. Beneficial Owner has sole voting power with respect
to 474,300 shares, sole dispositive power with respect to 715,900
shares and shared dispositive power with respect to 2,500 shares.
(3) Based on information included in a Form 13G filed with the SEC on
February 2, 2001.
(4) Based on information included in a Form 13F filed with the SEC on June
1, 2001.
(5) Includes 48,667 shares issuable upon exercise of outstanding stock
options granted to Ms. Harrison. The shares issuable to Ms. Harrison
upon the exercise of these options are deemed to be outstanding for the
purpose of computing the percentage of outstanding Common Stock
beneficially owned by her, but are not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person.
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SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information as of September 26,
2001 with respect to the Common Stock beneficially owned by each director, each
of the executive officers named in the Summary Compensation Table, and by all
directors and executive officers as a group. Unless otherwise noted, the Company
has been advised that all of the shares listed below are beneficially owned, and
the sole investment and voting power is held, by the person named.
AMOUNT AND NATURE OF BENEFICIAL PERCENT OF
NAME OF BENEFICIAL OWNER OWNERSHIP(1) CLASS
----------------------------------------------------- ------------------------------- -----------
Amy S. Harrison(2)(3) 373,246 5.13%
Martha A. Petrey, Ph.D.(2)(3) 348,079 4.79%
William J Ballard(2)(3) 93,892 1.29%
Thomas B. Clark(2) 31,000 (4) *
Joseph A. Fernandez, Ed.D.(2) 37,328 (5) *
David L. Warnock(2) 61,904 *
Francis M. Sauvageau (3) 10,729 *
Barbara J. Dalton (3) 6,667 *
All Executive Officers and Directors as a Group (14
persons) 1,100,706 14.51%
* Less than one percent
(1) Pursuant to rules of the Securities and Exchange Commission, the shares
indicated include the following shares issuable upon exercise of
outstanding stock options:
Amy S. Harrison 48,667
Martha A. Petrey, Ph.D. 43,500
William J Ballard 48,667
Thomas B. Clark 30,000
Joseph A. Fernandez, Ed.D. 30,000
David L. Warnock 30,000
Francis M. Sauvageau 10,667
Barbara J. Dalton 6,667
All Executive Officers and
Directors as a Group 352,335
The shares issuable to each of these persons and to all executive
officers and directors as a group upon the exercise of these options
are deemed to be outstanding for the purpose of computing the
percentage of outstanding Common Stock beneficially owned by that
person and for all executive officers and directors as a group, but are
not deemed to be outstanding for the purposes of computing the
percentage ownership of any other person.
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(2) Director.
(3) Named Officer.
(4) Includes 1,000 shares of Common Stock held by the spouse of Mr. Clark,
as to which Mr. Clark disclaims beneficial ownership. (5) The shares
indicated also include a warrant to purchase 3,858 shares of Common
Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
Amy S. Harrison and Martha A. Petrey, Ph.D., who serve as executive
officers and directors of the Company, lease four operating properties in
California to the Company. Payments to Ms. Harrison and Dr. Petrey under these
month-to-month rental arrangements totaled $149,000 for the fiscal year ended
June 30, 2001.
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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, 2001 and 2000 33
Consolidated Statements of Operations for the Years Ended
June 30, 2001, 2000 and 1999 35
Consolidated Statements of Shareholders' Equity for
the Years Ended June 30, 2001, 2000 and 1999 36
Consolidated Statements of Cash Flows for the Years
Ended June 30, 2001, 2000 and 1999 37
Notes to Consolidated Financial Statements 39
(2) Financial Statement Schedules
Schedule II - Valuation and qualifying accounts 67
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
1987 Employee Stock Option Plan, as amended, (included herein as
Exhibit 10.4.)
1989 Stock Option Plan for Non-Employee Directors, (included herein as
Exhibit 10.5.)
1997 Stock Incentive Plan, (included herein as Exhibit 10.13.)
Warrant Agreement dated October 1, 1996, between the Registrant and
Joseph A. Fernandez, (included herein as Exhibit 10.7.)
Employment Agreement between the Registrant and William J Ballard,
(included herein as Exhibit 10.1.)
Employment Agreement between the Registrant and Amy S. Harrison,
(included herein as Exhibit 10.2.)
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, (included
herein as Exhibit 10.40.)
(b) Reports on Form 8-K
Form 8-K - Reporting date - April 27, 2001
Items reported - Item 9. Regulation FD Disclosure
The Company announced its plans to provide an online web simulcast and
rebroadcast of its 2001 third quarter earnings release conference call.
(c) Exhibits
The exhibits listed in the accompanying index to exhibits on page 68
are filed as part of this annual report on Form 10-K.
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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, 2001 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, 2001 /s/William J Ballard
-----------------------------------
William J Ballard
Chairman, Chief Executive Officer
and Director (Principal Executive
Officer)
Date: September 28, 2001 /s/Amy S. Harrison
-----------------------------------
Amy S. Harrison
Vice Chairman, President, Chief
Operating Officer and Director
Date: September 28, 2001 /s/Martha A. Petrey, Ph.D.
-----------------------------------
Martha A. Petrey, Ph.D.
Executive Vice President and
Director
Date: September 28, 2001 /s/Donald B. Whitfield
-----------------------------------
Donald B. Whitfield
Vice President - Finance and Chief
Financial Officer (Principal
Financial and Accounting Officer)
Date: September 28, 2001 /s/John C. Edmunds
-----------------------------------
John C. Edmunds
Vice President - Secretary and
Treasurer
Date: September 28, 2001 /s/Thomas B. Clark
-----------------------------------
Thomas B. Clark
Director
Date: September 28, 2001 /s/Joseph A. Fernandez, Ed.D.
-----------------------------------
Joseph A. Fernandez, Ed.D.
Director
Date: September 28, 2001 /s/David L. Warnock
-----------------------------------
David L. Warnock
Director
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SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
CHILDREN'S COMPREHENSIVE SERVICES, INC.
----------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C--ADDITIONS COL D. COL E.
----------------------------------------------------------------------------------------------------------------
(1)
Balance Charged to Charged to Balance
at Beginning Costs and Other Accounts- Deductions- at End
DESCRIPTION of Period Expenses Describe Describe of Period
----------------------------------------------------------------------------------------------------------------
Year ended June 30, 2001:
Deducted from asset accounts:
Allowance for doubtful
accounts $ 3,913,000 $2,298,000 $ -0- $2,474,000(1) $ 3,737,000
Property impairment reserve 6,237,000 -0- -0- -0- 6,237,000
----------- ---------- --------- ---------- -----------
Totals $10,150,000 $2,298,000 $ -0- $2,474,000 $ 9,974,000
=========== ========== ========= ========== ===========
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
=========== ========== ========= ========== ===========
(1) Uncollectible accounts written off against allowance account.
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INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
------ ----------------------
2.1 Agreement For Statutory Merger, dated August 8, 2001, between KIDS
Holdings, Inc., Ameris Acquisition, Inc., and Registrant. (22)
3.1 Restated Charter, as amended. (1)
3.2 Amended and Restated By-Laws. (20)
4.1 Specimen Stock Certificate. (5)
4.2 Shareholder Rights Agreement (11)
4.3 Amendment No. 1 to Shareholder Rights Agreement, dated August 8,
2001.(22)
10.1 Employment Agreement between the Registrant and William J Ballard,
effective as of August 19, 1998 (15)
10.2 Employment Agreement between the Registrant and Amy S. Harrison,
effective as of August 19, 1998 (15)
10.3 Registration Agreement between Registrant and Amy S. Harrison and
Martha A. Petrey. (2)
10.4 1987 Employee Stock Option Plan, as amended. (6)
10.5 1989 Stock Option Plan for Non-Employee Directors. (3)
10.6 Assignment and Sublease between Registrant and Helicon Incorporated.
(4)
10.7 Warrant Agreement dated October 1, 1996, between the Registrant and
Joseph A. Fernandez. (8)
10.8 Consulting and Marketing Agreement effective as of August 1, 1992,
dated September 22, 1994, by and between the Registrant and Helicon
Incorporated. (6)
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. (16)
10.10 Registration Rights Agreement, dated September 20, 1993, by and between
the Registrant and T. Rowe Price Strategic Partners Fund II, L.P. (7)
10.11 Guaranty and Suretyship Agreement dated January 29, 1996, by and
between First American National Bank, the Registrant and Helicon Inc.
(7)
10.12 Fifth Amendment to Guaranty and Suretyship Agreement dated January 31,
2001, by and between AmSouth Bank, successor by merger to First
American National Bank, the Registrant and Helicon Inc.
10.13 1997 Stock Incentive Plan. (8)
10.14 Lease Agreement dated September 26, 1989 between the Registrant and the
Equitable Life Assurance Society of the United States. (8)
10.15 First Amendment, dated February 21, 1990, to the lease between the
Registrant and the Equitable Life Assurance Society of the United
States. (8)
10.16 Second Amendment, dated March 1, 1993, to the lease between the
Registrant and the Equitable Life Assurance Society of the United
States. (8)
10.17 Third Amendment, dated October 26, 1993, to the lease between
Registrant and the Equitable Life Assurance Society of the United
States. (8)
10.18 Fourth Amendment, dated March 11, 1999, to the lease between Registrant
and the Equitable Life Assurance Society of the United States. (16)
10.19 Fifth Amendment, dated March 31, 1999, to the lease between Registrant
and the Equitable Life Assurance Society of the United States. (16)
10.20 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. (19)
10.21 Merger Agreement by and between Ventures Healthcare of Gainesville,
Inc. and the Registrant dated January 19, 1998 (9)
10.22 Agreement by and between Chad Youth Enhancement Center, Inc. and CLG
Management Company, LLC and the Registrant dated February 12, 1998 (9)
10.23 Agreement and Plan of Merger, dated as of September 9, 1998, between
the Registrant and Ameris Health Systems, Inc. (10)
10.24 Stock Purchase Agreement between the Registrant and William M. Bosic,
Donald J. Bosic, Joseph C. McCoy and Somerset, Inc. (12)
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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.
(12)
10.26 Agreement of Purchase and Sale and Joint Escrow Instructions between
the Registrant and BMB Enterprises. (12)
10.27 Asset Purchase Agreement between the Registrant and Behavioral Medicine
Professionals, Inc. (12)
10.28 Asset Purchase Agreement between the Registrant and B and B Leasing.
(12)
10.29 Noncompetition, Confidentiality and Nonsolicitation Agreement between
the Registrant and Joseph C. McCoy. (12)
10.30 Noncompetition, Confidentiality and Nonsolicitation Agreement between
the Registrant and Donald J. Bosic. (12)
10.31 Noncompetition, Confidentiality and Nonsolicitation Agreement between
the Registrant and William M. Bosic. (12)
10.32 Children's Comprehensive Services, Inc. Employee Stock Purchase Plan
(13)
10.33 Credit Agreement by and among the Company and SunTrust Bank, Nashville,
N.A. as agent and lender dated December 1, 1998 (14)
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 (15)
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
(15)
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 (17)
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 (18)
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 (18)
10.39 Sixth Amendment to Credit Agreement by and between the Registrant and
SunTrust Bank, Nashville, N.A. as agent and lender, dated February 13,
2001 (21)
10.40 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 (21)
10.41 Form of Indemnification Agreement (21)
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP.
(1) Incorporated herein by reference from Registrant's Registration
Statement on Form S-2, filed August 15, 1996 (Reg. No. 333-8387).
(8) (2) Incorporated herein by reference from Registrant's Form 8-K, dated
April 12, 1988, reporting the acquisition of Advocate Schools (File No.
0-16162).
(3) Incorporated herein by reference from Registrant's Registration
Statement on Form S-8, filed February 14, 1990 (Reg. No. 2-33-33499).
(4) 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).
(5) 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).
(6) 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).
(7) 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).
(8) 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).
(9) 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).
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70
(10) 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)
(11) 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).
(12) Incorporated herein by reference from Registrant's Form 8-K, dated
December 16, 1998, reporting the acquisition of Somerset, Inc. (File
No. 0-16162).
(13) Incorporated herein by reference from Registrant's Form S-8 dated
December 22, 1998 (File No. 0-16162).
(14) 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).
(15) 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).
(16) 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).
(17) 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).
(18) 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).
(19) Incorporated herein by reference from Registrant's Form 10-K for the
fiscal year ended June 30, 2000, dated September 28, 2000 (File No.
0-16162).
(20) Incorporated herein by reference from Registrant's Form 10-Q for the
period ended September 30, 2000, dated November 14, 2001 (File No.
0-16162).
(21) Incorporated herein by reference from Registrant's Form 10-Q for the
period ended December 31, 2000, dated February 14, 2001 (File No.
0-16162).
(22) Incorporated herein by reference from Registrant's Form 8-K, dated
August 10, 2001, reporting the merger agreement. (File No. 0-16162).
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