UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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
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Commission File Number 0-16162
CHILDREN'S COMPREHENSIVE SERVICES, INC.
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(Exact name of registrant as specified in its charter)
Tennessee 62-1240866
- ------------------------------------ -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3401 West End Ave., Suite 400, Nashville, Tennessee 37203
- --------------------------------------------------- -------------------
(Address of principal executive offices) Zip Code)
Registrant's telephone number, including area code: (615) 250-0000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the issuer's common stock, as of the latest
practicable date.
Common Stock, $.01 Par Value, outstanding at November 9, 2001 - 7,233,231
shares
INDEX
CHILDREN'S COMPREHENSIVE SERVICES, INC.
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets - September 30, 2001
and June 30, 2001............................................3
Consolidated Statements of Income --
Three months ended September 30, 2001 and 2000...............5
Consolidated Statements of Cash Flows --
Three months ended September 30, 2001 and 2000...............6
Notes to Consolidated Financial Statements --
September 30, 2001...........................................8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.....................................17
SIGNATURES....................................................................18
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
September 30, June 30,
2001 2001
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(dollars in thousands) (unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 807 $ 2,619
Accounts receivable, net of allowance for doubtful
accounts of $3,724 at September 30 and $3,737 at
June 30 27,419 25,942
Prepaid expenses 1,391 1,171
Deferred income taxes 1,424 1,424
Other current assets 1,206 1,311
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TOTAL CURRENT ASSETS 32,247 32,467
PROPERTY AND EQUIPMENT, net 45,880 46,628
COST IN EXCESS OF NET ASSETS ACQUIRED, net 11,305 11,540
DEFERRED INCOME TAXES 937 937
OTHER ASSETS AND DEFERRED CHARGES, net 402 458
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TOTAL ASSETS $90,771 $92,030
======= =======
3
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
September 30, June 30,
2001 2001
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(dollars in thousands) (unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,276 $ 4,067
Current portion - long-term debt and capital leases 8,272 8,160
Income taxes payable 259 446
Accrued employee compensation 5,098 4,476
Accrued other expenses 2,947 2,787
Other current liabilities 475 915
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TOTAL CURRENT LIABILITIES 20,327 20,851
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS 12,488 13,325
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TOTAL LIABILITIES 32,815 34,176
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SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00 per share-
10,000,000 shares authorized -- --
Common stock, par value $.01 per share-
50,000,000 shares authorized; issued and outstanding
7,233,231 shares at September 30 and 7,222,191 shares
at June 30 72 72
Additional paid-in capital 50,631 50,595
Retained earnings 7,253 7,187
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TOTAL SHAREHOLDERS' EQUITY 57,956 57,854
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $90,771 $92,030
======= =======
See notes to consolidated financial statements.
4
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
September 30,
--------------------
2001 2000
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(in thousands, except per share amounts)
Revenues:
Operating revenues $ 31,104 $29,685
Management fee income 804 782
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TOTAL REVENUES 31,908 30,467
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Operating expenses:
Employee compensation and benefits 20,815 19,285
Purchased services and other expenses 8,990 8,913
Depreciation and amortization 1,191 1,075
Merger expenses 178 --
Related party rent 41 29
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TOTAL OPERATING EXPENSES 31,215 29,302
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Income from operations 693 1,165
Other (income) expense:
Interest expense 448 598
Other (12) 37
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TOTAL OTHER (INCOME) EXPENSE, NET 436 635
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Income before income taxes 257 530
Provision for income taxes 191 233
-------- -------
NET INCOME $ 66 $ 297
======== =======
Earnings per common share:
Basic $ 0.01 $ 0.04
======== =======
Diluted $ 0.01 $ 0.04
======== =======
See notes to consolidated financial statements.
5
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
September 30,
-------------------
2001 2000
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(in thousands)
OPERATING ACTIVITIES
Net income $ 66 $ 297
Adjustments to reconcile net income
to net cash (used) provided by operating activities:
Depreciation 942 826
Amortization 249 249
Provision for bad debts 434 266
Other 39 104
Changes in operating assets and liabilities:
Accounts receivable (1,911) 2,164
Prepaid expenses (220) (478)
Other current assets 105 (214)
Accounts payable (791) 1,495
Accrued employee compensation 622 536
Accrued other expenses 160 490
Other current liabilities (440) (160)
Income taxes payable (187) (453)
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NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (932) 5,122
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INVESTING ACTIVITIES
Purchase of property and equipment (205) (8,372)
Proceeds from sale of property and equipment 11 55
Decrease in other assets 3 1
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NET CASH (USED) BY INVESTING ACTIVITIES $ (191) $(8,316)
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6
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
Three Months Ended
September 30,
-------------------
2001 2000
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(in thousands)
FINANCING ACTIVITIES
Principal payments on revolving lines of credit, long-
term borrowings and capital lease obligations $ (726) $(3,712)
Proceeds from revolving lines of credit and long-term borrowings -- 6,000
Proceeds from issuance of common stock, net 37 28
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NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (689) 2,316
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(DECREASE) IN CASH AND CASH EQUIVALENTS (1,812) (878)
Cash and cash equivalents at beginning of period 2,619 3,489
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 807 $ 2,611
======= =======
See notes to consolidated financial statements.
7
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2001
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended September 30,
2001 are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 2002. For further information, refer to the
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 2001, the Company's prior
fiscal year end.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE B -- CONTINGENCIES
The Company is involved in various legal proceedings, none of which are expected
to have a material effect on the Company's financial position or results of
operations.
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.
8
NOTE C - ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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 D - PROPOSED MERGER
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, which remain in effect until January 15, 2002, 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.
9
NOTE E -- EARNINGS PER COMMON SHARE
The computation of basic earnings per common share is based on the weighted
average number of shares outstanding. Diluted earnings per common share includes
the effect of potential common shares, consisting of dilutive stock options and
warrants, and uses the treasury stock method in calculating dilution.
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended
September 30,
------------------------
2001 2000
--------- ----------
BASIC:
Average shares outstanding 7,228,220 7,184,256
========= ==========
Net income $ 66,000 $ 297,000
========= ==========
Per share amount $ 0.01 $ 0.04
========= ==========
DILUTED:
Average shares outstanding 7,228,220 7,184,256
Net effect of dilutive stock options and warrants 207,398 10,971
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TOTAL 7,435,618 7,195,227
========= ==========
Net income $ 66,000 $ 297,000
========= ==========
Per share amount $ 0.01 $ 0.04
========= ==========
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and this Quarterly Report on Form 10-Q contain
forward-looking statements and should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere herein.
For this purpose, any statements contained herein that are not statements solely
of historical fact may be deemed to be forward-looking statements. There are a
number of important factors that could cause the Company's actual results to
differ materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth under "Business - Risk
Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 2001. The Company undertakes no obligation to publicly release any
revisions to any forward-looking statements contained herein to reflect events
or circumstances occurring after the date hereof or to reflect the occurrence of
unanticipated events.
General
As of September 30, 2001, the Company was providing education, treatment and
juvenile justice services to approximately 3,100 at-risk and troubled youth
either directly or through management contracts. It currently offers these
services through the operation and management of non-residential specialized
education programs and day treatment programs and both open and secure
residential treatment centers in 14 states. Revenues are recognized as services
are rendered. The Company's non-residential programs, which historically have
generated higher operating margins than the Company's residential facilities,
generally receive revenues based on per diem rates. The Company's residential
facilities generally receive revenues under either fixed fee contracts, at per
diem rates or on a cost reimbursed basis.
Effective July 1998 the State of California implemented legislation which
eliminated reimbursement to school districts for excused student absences. The
legislation is designed to incentivize school districts that have high absentee
rates and to encourage improvement in school attendance throughout the state.
While written for public school districts, this legislation has had some impact
on the Company's California educational day treatment programs, which
historically have been compensated for excused student absences. Some of the
Company's contracts with school districts provide no compensation for excused
student absences, generally in exchange for a higher per diem rate. 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 that 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. Reimbursement for these services is typically based on a fixed fee
plus reimbursement of expenses or a percent of revenue. The Company also
recognizes management fee income from Helicon, Incorporated ("Helicon"), a
Section 501(c)(3) not-for-profit corporation, for consulting, management and
marketing services rendered pursuant to a Consulting and Marketing Agreement by
and between Helicon and the Company (the "Helicon Agreement"). See "Helicon."
11
Employee compensation and benefits include facility and program payrolls and
related taxes, as well as employee benefits, including insurance and worker's
compensation coverage. Employee compensation and benefits also includes general
and administrative payroll and related benefit costs.
Purchased services and other expenses include all expenses not otherwise
presented separately in the Company's consolidated statements of income.
Significant components of these expenses at the operating level include items
such as professional fees and contracted services, food, utilities, supplies,
rent and insurance. Significant components of these expenses at the
administrative level include legal, accounting, investor relations, marketing,
consulting and travel expense.
Other (income) expense includes income and expense items classified as
non-operating, including interest income and gains and losses on disposition of
fixed assets.
The Company's quarterly results may fluctuate significantly as a result of a
variety of factors, including the timing of the opening of new programs. When
the Company opens a new program, the program may be unprofitable until the
program population, and net revenues contributed by the program, approach
intended levels, primarily because the Company staffs its programs in advance of
achieving such levels. The Company's quarterly results may also be impacted by
seasonality, as revenues generated by youth education and treatment services are
generally seasonal in nature, fluctuating with the academic school year.
Helicon
As of September 30, 2001, the Company was providing consulting, management and
marketing services to Helicon at 11 programs. Pursuant to the Helicon Agreement,
which expires September 1, 2004, the Company is entitled to receive for these
services management fee income in an amount equal to 6% of the monthly gross
revenues of Helicon's programs. The payment of these management fees, however,
is subordinated in right of payment to amounts payable by Helicon to fund its
programs. The Company also leases three facilities to Helicon for the operation
of certain of its programs. The Company is not currently receiving rent, nor
does it anticipate receiving any future rent payments, for one of these
facilities, the Helicon Youth Center (the "HYC"). During fiscal 2000, Helicon
was unable to pay all management fees, lease payments and advances due to the
Company. Additionally, during fiscal 2002, the Company recorded a provision for
bad debts in the amount of $206,000 related to amounts receivable from Helicon.
Based on the current level of operations being maintained by Helicon, the
Company does not anticipate collecting any of these amounts. The Company also
has guaranteed Helicon's obligations under a bank line of credit in the amount
of $1,500,000 -- See "Liquidity and Capital Resources".
In September 2000, Helicon and the Company initiated the closure of the HYC. As
a result of the closure, the Company recorded an impairment reserve in fiscal
2000 for the carrying value of the facility. The HYC is located on land that is
owned by, and leased from, Riverside County, California.
12
Proposed Merger
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, which remain in effect until January 15, 2002, 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.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
relationship to the Company's total revenues of certain items in the Company's
statements of income:
Three Months Ended
September 30,
------------------
2001 2000
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Operating revenues 97.5% 97.4%
Management fee income 2.5 2.6
------ ------
TOTAL REVENUES 100.0 100.0
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Employee compensation and benefits 65.2 63.3
Purchased services and other expenses 28.2 29.3
Depreciation and amortization 3.7 3.5
Merger expenses 0.6 --
Related party rent 0.1 0.1
------ ------
TOTAL OPERATING EXPENSES 97.8 96.2
------ ------
Income from operations 2.2 3.8
Other (income) expense:
Interest expense 1.4 2.0
Other -- 0.1
Provision for income taxes 0.6 0.7
------ ------
NET INCOME 0.2% 1.0%
====== ======
13
Three Months Ended September 30, 2001 versus September 30, 2000
Operating revenues for the three months ended September 30, 2001 increased
$1,419,000, or 4.8%, to $31,104,000, as compared to $29,685,000 for the three
months ended September 30, 2000. The increase in operating revenues consists of
approximately $2,700,000 due to the opening of new programs subsequent to the
first quarter of fiscal 2001 and approximately $1,100,000 due to same center
revenue increases, net of decreases of approximately $2,400,000 versus the same
quarter in the prior year due to the closure of certain of the Company's
locations, primarily in Texas and California.
Management fee income increased $22,000 for the three months ended September 30,
2001 to $804,000 from $782,000 for the three month period ended September 30,
2000. Management fee income recognized under the Helicon Agreement for the three
months ended September 30, 2001 increased $8,000 to $213,000 from $205,000 for
the three months ended September 30, 2000.
Total revenues for the three months ended September 30, 2001 increased
$1,441,000, or 4.7%, to $31,908,000 as compared to $30,467,000 for the three
months ended September 30, 2000 as a result of the factors described above.
Employee compensation and benefits for the three months ended September 30, 2001
increased $1,530,000, or 7.9%, to $20,815,000, as compared to $19,285,000 for
the three months ended September 30, 2000. As a percentage of total revenues,
employee compensation and benefits increased from 63.3% for the three months
ended September 30, 2000 to 65.2% for the three months ended September 30, 2001.
The increase in employee compensation and benefits over the same period in the
prior year results primarily from the Company's growth and certain regional pay
scale adjustments. The increase in employee compensation and benefits as a
percent of revenue over the same period in the prior year results primarily from
the Company's growth, certain regional pay scale adjustments and an increase in
workers compensation and health insurance premiums.
Purchased services and other expenses for the three months ended September 30,
2001 increased $77,000, or 0.9%, to $8,990,000, as compared to $8,913,000 for
the three months ended September 30, 2000. As a percentage of total revenues,
purchased services and other expenses decreased to 28.2% for the three months
ended September 30, 2001 from 29.3% for the three months ended September 30,
2000. The increase in purchased services and other expenses over the same period
in the prior year is attributed primarily to the Company's growth. The decrease
in purchased services and other expenses as a percent of revenue over the same
period in the prior year results primarily from decreases in employee
recruitment, rental expense and travel costs, offset by increases in bad debt
expense, utilities and insurance costs.
Depreciation and amortization for the three months ended September 30, 2001
increased $116,000 to $1,191,000 from $1,075,000 for the three months ended
September 30, 2000. The increase in depreciation and amortization compared to
the same period in the prior year is primarily attributable to depreciation and
amortization associated with the Company's Charlotte, North Carolina and Dallas,
Texas properties.
14
Merger expenses for the three months ended September 30, 2001 totaled $178,000,
or 0.6% of total revenues. These expenses were incurred pursuant to the
Company's proposed merger with KIDS Holdings and Ameris.
Income from operations for the three months ended September 30, 2001 decreased
$472,000, or 40.5%, to $693,000 as compared to $1,165,000 for the three months
ended September 30, 2000, and decreased as a percentage of total revenues to
2.2% for the three months ended September 30, 2001 from 3.8% for the three
months ended September 30, 2000 as a result of the factors described above.
Interest expense for the three months ended September 30, 2001 decreased
$150,000 to $448,000 as compared to $598,000 for the three months ended
September 30, 2000. The decrease in interest expense over the same period in the
prior year is attributed to decreases in both interest rates and outstanding
borrowings.
Other (income) expense for the three months ended September 30, 2001 changed
$49,000 to income of $12,000 as compared to expense of $37,000 for the three
months ended September 30, 2000.
The provision for income taxes for the three months ended September 30, 2001
decreased $42,000 to $191,000 from $233,000 for the three months ended September
30, 2000. The decrease in the provision compared to the same period in the prior
year results primarily from the decrease in the Company's taxable income. The
Company's effective tax rate increased versus the same period last year due to
the nondeductibility for income tax purposes of the Company's merger expenses.
Liquidity and Capital Resources
Cash used by operating activities for the three months ended September 30, 2001
was $932,000 on net income of $66,000 as compared to cash provided of $5,122,000
on net income of $297,000 for the three months ended September 30, 2000. Working
capital at September 30, 2001 was $11,920,000, as compared to $11,616,000 at
June 30, 2001.
Cash used by investing activities was $191,000 for the three months ended
September 30, 2001 as compared to cash used of $8,316,000 for the three months
ended September 30, 2000. The change was due primarily to capital expenditures
related to new programs, including the purchase of property in North Carolina
for approximately $6,600,000 in the first quarter of fiscal 2001, as compared to
a minimal level of capital expenditures in the current period.
Cash of $689,000 was used by financing activities for the three months ended
September 30, 2001 due primarily to repayment of borrowings. Cash of $2,316,000
was provided by financing activities for the three months ended September 30,
2000, primarily due to borrowings used to fund capital expenditures.
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
15
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 September 30,
2001, the outstanding balance under the revolving line of credit was $5,500,000.
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
$2,512,000 are included in current liabilities at September 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
transaction 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 its acquisition of Somerset Inc., 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
September 30, 2001, $215,000 was outstanding under the note.
Helicon has entered into a $1,500,000 line of credit with AmSouth Bank which
expires in April 2002. As a condition to this line of credit, the Company agreed
to guarantee Helicon's performance under such line of credit. At September 30,
2001, the outstanding amount under Helicon's line of credit was $613,000.
Capital expenditures during the next twelve months are expected to include the
replacement of existing capital assets as necessary, as well as the costs
associated with the opening of new programs and facilities, including the
possible purchase of certain real estate and improvements. The Company also may
consider other possible strategic acquisitions, including acquisitions of
existing programs
16
and other companies engaged in youth services or related businesses. 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 line
of credit. Management believes that operations, cash on hand and amounts
available under its line of credit 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 from 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At September 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. The Company has outstanding loans at both fixed and variable rates.
For loans with fixed interest rates, a hypothetical 10% change in interest rates
would have no impact on the Company's future earnings and cash flows related to
these instruments. A hypothetical 10% change in interest rates would have an
immaterial impact on the fair values of these instruments. For loans with
variable interest rates, a hypothetical 10% change in interest rates would have
an immaterial impact on the Company's future earnings, cash flows and fair
values related to these instruments.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K:
Form 8-K - Reporting date - August 10, 2001
Items reported - Item 5. Other Events
The Company announced that it had entered into an Agreement For
Statutory Merger, dated as of August 8, 2001, among the Company, KIDS
Holdings, Inc. and Ameris Acquisition, Inc.
Form 8-K - Reporting date - August 24, 2001
Items reported - Item 9. Regulation FD Disclosure
The Company announced its plans to provide an online web simulcast and
rebroadcast of its 2001 fourth quarter earnings release conference
call.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHILDREN'S COMPREHENSIVE SERVICES, INC.
---------------------------------------
(Registrant)
Date: November 14, 2001 /s/ WILLIAM J BALLARD
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William J Ballard
Chairman and Chief Executive Officer
Date: November 14, 2001 /s/ DONALD B. WHITFIELD
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Donald B. Whitfield
Vice President of Finance, Chief Financial
Officer (Principal Financial and Accounting
Officer)
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