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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-8387
2,300,000 SHARES
[LOGO] CHILDRENS COMPREHENSIVE SERVICES
COMMON STOCK
Of the 2,300,000 shares of Common Stock offered hereby, 1,500,000 are being
sold by Children's Comprehensive Services, Inc. (the "Company") and 800,000 are
being sold by one of the Company's shareholders (the "Selling Shareholder"). See
"Principal and Selling Shareholders." The Company will not receive any of the
proceeds from the sale of shares by the Selling Shareholder.
The Common Stock is quoted on the Nasdaq National Market under the symbol
"KIDS." On August 15, 1996, the last reported sale price of the Common Stock on
the Nasdaq National Market was $17.25 per share. See "Price Range of Common
Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Price to Underwriting Proceeds to Proceeds to
Public Discount (1) Company (2) Selling
Shareholder
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Per Share............... $16.00 $.90 $15.10 $15.10
Total (3)............... $36,800,000 $2,070,000 $22,650,000 $12,080,000
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting estimated offering expenses of $500,000, payable by the
Company.
(3) The Company, the Selling Shareholder and certain other shareholders of the
Company have granted to the Underwriters a 30-day option to purchase up to
345,000 additional shares of Common Stock solely to cover over-allotments,
if any. If the Underwriters exercise this option in full, the Price to
Public will total $42,320,000, the Underwriting Discount will total
$2,380,500, the Proceeds to Company will total $23,782,500 and the Proceeds
to Selling Shareholder and the other selling shareholders will total
$16,157,000. See "Principal and Selling Shareholders" and "Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein when, as and if delivered to and accepted by the Underwriters and subject
to their right to reject any order in whole or in part. It is expected that
delivery of the certificates representing the shares will be made against
payment therefor at the office of Montgomery Securities on or about August 21,
1996.
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MONTGOMERY SECURITIES
EQUITABLE SECURITIES CORPORATION
LEHMAN BROTHERS
August 15, 1996
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Omitted Graphic and Image Material
The following is a narrative description of graphic and image material
contained in the printed version of the prospectus which has been omitted from
the version filed electronically.
Inside front cover:
1. The heading "Education and Treatment Services for At Risk and Troubled
Youth."
2. Pictures depicting (i) a youth being comforted by a Company staff
member, (ii) a youth working at a computer and (iii) a youth
participating in an obstacle course at one of the Company's therapeutic
wilderness programs. The following caption accompanies the foregoing
pictures:
"Children's Comprehensive Services, Inc. is one of the largest
for-profit providers of education and treatment services for at risk
and troubled youth in the United States and, at June 30, 1996, served
approximately 1,700 youth through 39 programs.
3. A bar graph showing the continuum of programs provided by the
Company. The following caption accompanies the bar graph:
"The Company offers a comprehensive continuum of consistent, high
quality and cost-effective education and treatment programs, which
enables it to tailor its services to the specific needs of each locality,
client agency and youth population, and the unique needs of each youth.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS, IF ANY, MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE
SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information (including the consolidated financial statements and notes
thereto) included elsewhere in this Prospectus or incorporated by reference
herein, which should be read in its entirety. Unless the context indicates
otherwise, (i) references to programs and services provided by the Company
include programs and services provided by the Company directly and through its
management contract with Helicon, Incorporated ("Helicon"), a Section 501(c)(3)
not-for-profit corporation, (ii) all information gives effect to a one-for-two
reverse split of the Common Stock effective March 21, 1996 and (iii) all
information assumes no exercise of the Underwriters' over-allotment option. See
"Underwriting." The Company's fiscal year ends March 31. References to fiscal
years by date refer to the fiscal year ending March 31 of that year.
THE COMPANY
Children's Comprehensive Services, Inc. is one of the largest for-profit
providers of education and treatment 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
are emotionally disturbed, behaviorally disordered, developmentally delayed or
learning disabled. The Company has contracts to provide its education and
treatment services through the operation and management of specialized education
programs and both open and secure residential treatment centers for local, state
and federal governmental agencies in Alabama, California, Florida, Louisiana,
Tennessee and Texas. As of June 30, 1996, the Company was providing education
and treatment services, either directly or through its management contract with
Helicon, to approximately 1,700 youth through 39 different programs. Since
fiscal 1994, the Company has expanded its operations by broadening its program
offerings, increasing student capacity at existing programs and developing new
programs in response to privatization and other opportunities. During this
period, the number of youth served in the Company's programs increased from
approximately 1,100 as of March 31, 1994 to approximately 1,700 as of June 30,
1996.
The Company believes the market for the education and treatment of at risk
and troubled youth is a large and growing market. 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 and
exhibit such behavior as aggressive noncompliance with parents and authority
figures, chronic truancy, fighting, running away and alcohol or drug abuse. 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. Governmental agencies traditionally have provided
education and treatment 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 education and treatment
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. The Company believes these factors, together with pressures on
governmental agencies to control costs and improve the quality of services, will
further the growing trend throughout the United States toward privatization of
these services.
The Company provides education and treatment services in both
non-residential and residential settings, ranging from family preservation
programs to 24-hour secure facilities. The Company's non-residential programs
are designed to meet the special needs of at risk and troubled youth, while
enabling the youth to remain in his or her home and community. These programs
include educational day treatment programs, diversionary education programs,
family preservation programs, homebound education services and on-site education
programs in emergency shelters and diagnostic centers. The Company's residential
programs consist of pre-trial secure residential programs, therapeutic
wilderness programs, a residential psychiatric treatment program, behavioral and
emotional disorder treatment programs , diagnostic and evaluation services and
group homes. Residential services are typically utilized when structured
observation is necessary, when severe behavior management needs are present or
when containment and safety are required.
The Company's operating philosophy is to help at risk and troubled youth
reach their potential through the delivery of a comprehensive continuum of
consistent, high quality and cost-effective education and
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treatment services. The Company believes the breadth of services it offers
differentiates the Company from other providers, which are typically state and
local governmental agencies or local not-for-profit companies, that provide
fewer services. The Company strives to enhance the quality of its programs, its
program offerings and the quality of its highly trained staff to improve the
positive impact of its programs on the youth they serve. The Company intends to
focus on proven policies and procedures and efficient application of financial
resources in order to continue to provide an attractive, cost-effective
alternative to programs operated directly by governmental entities.
The Company's growth strategy is to expand its existing programs and
program offerings, expand its programs to additional geographic areas in the
United States and pursue strategic acquisitions. The Company intends to build
upon established relationships to expand the Company's current programs and
obtain contracts for additional programs in existing markets, and to develop new
programs in response to societal trends and the special needs of governmental
agencies. The Company also plans to expand its programs to additional geographic
areas. The Company has selectively targeted additional geographic areas, both
within the states in which the Company currently operates and in additional
states, for marketing over the next 12 to 18 months. Finally, because the market
for youth education and treatment services is highly fragmented, the Company
believes there are significant opportunities to enhance its market position
though strategic acquisitions that will enable the Company to expand its
operations into new geographic areas, add additional program types and establish
new relationships with local governmental entities.
The Company conducts a significant portion of its business through its
relationship with Helicon, a not-for-profit provider of youth education and
treatment services. As of June 30, 1996, the Company was providing consulting,
management and marketing services to Helicon at 12 programs. For these services,
the Company was entitled to receive a fee based upon the monthly gross revenues
from Helicon's programs. Helicon also leases certain facilities owned by the
Company. See "Risk Factors -- Relationship with Helicon."
The principal executive offices of the Company are located at 805 South
Church Street, Murfreesboro, Tennessee 37130, and its telephone number is (615)
896-3100. Unless the context indicates otherwise, references to the Company also
include its wholly-owned subsidiary, Children's Comprehensive Services of
California, Inc.
RECENTLY ANNOUNCED PROGRAMS
Bexar County, Texas. In July 1996, the Company entered into a contract to
operate a juvenile justice alternative school in Bexar County, Texas. Scheduled
to open in September 1996 for the 1996-1997 school year, the school will
accommodate up to 400 students who have been removed from the county's public
school system for various statutory offenses.
Eufaula, Alabama. In July 1996, the Company entered into a contract to
operate a medium-security residential youth center in Eufaula, Alabama. The
program, scheduled to open in August 1996, will serve 60 juvenile males who have
been committed to state custody.
Nueces County, Texas. In August 1996, the Company was selected to
negotiate a contract to operate a juvenile justice alternative school in Nueces
County, Texas. Scheduled to open in September 1996 for the 1996-1997 school
year, the school will accommodate up to 30 students who have been removed from
the county's public school system for various statutory offenses.
Joshua Tree, California. In August 1996, the Company entered into a
contract to develop and operate an educational day treatment program for the
Morongo Valley School District. Scheduled to open in September 1996, the program
will accommodate up to 25 students who are severely handicapped, medically
fragile, severely emotionally disturbed or learning disabled.
Highlands County, Florida. In August 1996, the Company was selected to
negotiate a contract to develop and operate a diversionary education program in
Highlands County, Florida. Scheduled to open in September 1996, the program will
accommodate up to 30 students who have been adjudicated delinquent or who
otherwise would be placed in residential programs.
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THE OFFERING
Common Stock offered by the Company.................... 1,500,000 shares
Common Stock offered by the Selling Shareholder........ 800,000 shares
Common Stock to be outstanding after the offering...... 7,001,244 shares(1)
Use of proceeds........................................ To repay indebtedness, finance
expansion of the Company's
programs, including possible
acquisitions, and for general
corporate purposes.
Nasdaq National Market symbol.......................... KIDS
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(1) Does not include 426,898 shares of Common Stock issuable upon the exercise
of (a) outstanding stock options to purchase 417,282 shares of Common Stock
under the Company's stock incentive plans and (b) an outstanding warrant to
purchase 9,616 shares of Common Stock. See "Description of Capital Stock."
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The discussion in this Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
significantly from those discussed in this Prospectus. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed in "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," as well as those discussed
elsewhere in this Prospectus.
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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA)
THREE MONTHS
ENDED
FISCAL YEAR ENDED MARCH 31, JUNE 30,
------------------------------- -----------------
1994 1995 1996 1995 1996
------- ------- ------- ------ ------
STATEMENTS OF OPERATIONS DATA:
Total revenues............................ $18,849 $20,942 $24,666 $5,624 $6,793
Operating expenses:
Employee compensation and benefits...... 11,619 12,676 15,010 3,415 4,063
Purchased services and other expenses... 3,601 3,886 4,590 1,086 1,182
Depreciation and amortization........... 1,277 1,080 1,025 264 191
Other operating expenses................ 193 184 139 25 25
------- ------- ------- ------ ------
Total operating expenses............. 16,690 17,826 20,764 4,790 5,461
------- ------- ------- ------ ------
Income from operations.................... 2,159 3,116 3,902 834 1,332
Interest expense, net..................... 1,397 1,187 833 238 168
Other (income) expense, net............... 455(1) (44) (2) -- -- --
------- ------- ------- ------ ------
Income before income taxes and
extraordinary item...................... 307 1,973 3,069 596 1,164
Provision for income taxes................ -- 69 491 89 311
------- ------- ------- ------ ------
Income before extraordinary item.......... 307 1,904 2,578 507 853
Extraordinary item........................ -- -- 54(3) -- --
------- ------- ------- ------ ------
Net income................................ $ 307 $ 1,904 $ 2,524 $ 507 $ 853
======= ======= ======= ====== ======
Net income per common share, fully
diluted................................. $ 0.08 $ 0.37 $ 0.44 $ 0.09 $ 0.15
Weighted average common shares
outstanding, fully diluted.............. 3,756 5,115 5,688 5,557 5,780
OTHER OPERATING DATA (AT PERIOD END)(4):
Number of programs........................ 29 34 37 35 39
Number of youth in programs:
Residential............................. 366 396 458 425 458
Non-residential......................... 755 1,255 1,354 1,298(5) 1,241(5)
------- ------- ------- ------ ------
Total................................ 1,121 1,651 1,812 1,723 1,699
JUNE 30, 1996
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ACTUAL AS ADJUSTED(6)
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BALANCE SHEET DATA:
Working capital................................................... $ 5,057 $ 20,707
Total assets...................................................... 22,582 37,906
Total long-term debt.............................................. 6,000 --
Total shareholders' equity........................................ 13,102 34,731
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(1) Amount consists of write-off of advances to Helicon of $1,024, net of other
income of $569. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus
and incorporated by reference herein.
(2) Amount consists of write-down of property of $122, net of other income of
$166. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Company's Consolidated Financial Statements
and Notes thereto included elsewhere in this Prospectus and incorporated by
reference herein.
(3) Amount represents loss on early extinguishment of debt, net of an income tax
benefit of $10. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus
and incorporated by reference herein.
(4) Other operating data includes data relating to programs operated by the
Company directly and through its management contract with Helicon.
(5) Program populations are generally seasonal in nature fluctuating with the
academic school year and are at their lowest during the summer school months
because schools are not in full session. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Seasonality and
Quarterly Financial Data."
(6) Adjusted to reflect the sale of the 1,500,000 shares of Common Stock offered
hereby by the Company and the application of the estimated net proceeds
therefrom, including the repayment of long-term debt. The Company intends to
repay in full the Company's long-term debt, together with an associated
prepayment penalty of approximately $500, in October 1996. See "Use of
Proceeds."
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RISK FACTORS
In addition to the other information contained or incorporated by reference
in this Prospectus, the following risk factors should be considered carefully in
evaluating an investment in the Common Stock offered hereby.
DEPENDENCE ON CERTAIN CUSTOMERS
During the fiscal year ended March 31, 1996, the Company earned
approximately 23% of its revenues under a contract with the Riverside County
Office of Education, Riverside, California, and approximately 15% of its
revenues under three contracts with the State of Tennessee. The existing
contracts with Riverside County and the State of Tennessee expired on June 30,
1996. As is customary, the Company historically has negotiated the renewal of
these contracts in July and August following the end of the fiscal year (June
30) of these governmental entities. The Company currently is negotiating the
renewal of the contract with Riverside County for a period of one year. The
Company has reached agreement regarding the renewal terms of each of the three
Tennessee contracts, two of which were renewed for a period of six months and
the other for a period of one year. The termination or non-renewal of any of
these contracts or the renewal of such contracts on less favorable terms would
have a material adverse effect on the Company, and it would be difficult for the
Company to replace the revenues from these contracts. There can be no assurance
that all of the contracts with Riverside County or the State of Tennessee will
be renewed for the current or any subsequent year on terms acceptable to the
Company. See "Business -- Major Customers."
DEPENDENCE ON GOVERNMENTAL AGENCIES
The Company conducts its business primarily under contracts with state and
local governments and governmental agencies, and virtually all of the Company's
revenues are attributable to such contracts. The Company's cash flow is subject
to the receipt of sufficient funding and timely payment by applicable
governmental entities. If the appropriate governmental agency does not receive
sufficient appropriations to cover its contractual obligations, a contract may
be terminated or the Company's compensation may be deferred or reduced. Numerous
state and local governments, including certain of those with which the Company
has contracts, have experienced fiscal difficulties. Any deferral or reduction
in payment could have a material adverse effect on the Company's cash flow. In
addition, the Company is dependent on governmental entities for referral of a
sufficient number of youth to fill the Company's programs. The failure of the
Company to receive a sufficient number of such referrals may have a material
adverse effect on the Company's financial condition and results of operations.
CONTRACT RENEWAL AND TERMINATION
The Company's contracts are typically subject to renewal annually. The
renewal and financial terms of each contract are dependent upon many factors,
including the quality and type of services provided, governmental budget
constraints, changes in government or agency personnel, and priorities or
philosophies of governments or agencies with respect to youth services.
Government and agency contracts generally are subject to audits, reviews and
investigations. These audits, reviews and investigations typically involve a
review of the contractor's performance under the contract, its pricing practices
and its compliance with applicable laws and regulations. In addition, some
contracts are subject to competitive bidding, and the Company's customers
generally may terminate their contracts with the Company for cause and upon
certain other specified conditions. Although the Company has not experienced any
such termination to date, there can be no assurance that the Company's customers
will not terminate their contracts with the Company in the future. The loss or
renewal on less favorable terms of certain of the Company's major contracts
would have a material adverse effect on the Company's financial condition and
results of operations.
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DEPENDENCE ON ADDITIONAL PROGRAMS FOR GROWTH
The Company's growth is dependent upon its ability to obtain contracts to
operate or manage additional youth education and treatment programs. The
Company's potential for growth will depend on a number of factors, including the
number of at risk and troubled youth requiring the Company's services, the
availability of sufficient funding, governmental and public acceptance of the
concept of privatization, the number of programs available for privatization and
the Company's ability to obtain awards for contracts, to integrate new programs
into its management structure on a profitable basis and to develop new types of
education and treatment services. There can be no assurance that the Company
will be able to obtain additional contracts to operate or manage additional or
new programs on favorable terms.
RISKS ASSOCIATED WITH EXPANSION
The Company intends to grow internally through obtaining contracts to
operate additional programs, as well as through possible strategic acquisitions.
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 initially staffs its programs
based on such intended population levels. Although the Company has no current
commitments or understandings with respect to the acquisition of any entity, the
Company has explored and continues to explore strategic acquisition
alternatives. There can be no assurance that the Company will be able to
identify, acquire or profitably operate acquired companies or successfully
integrate such operations into the Company without substantial costs, delays or
other problems. In addition, there can be no assurance that companies acquired
in the future will be profitable at the time of their acquisition or will
achieve levels of profitability that justify the investment therein.
Acquisitions may involve a number of special risks, including adverse short-term
effects on the Company's reported operating results, diversion of management's
attention, dependence on retaining, hiring and training key personnel, and risks
associated with unanticipated problems or legal liabilities, some or all of
which could have a material adverse effect on the Company's financial condition
and results of operations.
REGULATIONS
The industry in which the Company operates is subject to federal, state and
local regulations which are administered by various regulatory authorities and
accrediting bodies. Pursuant to the terms of the Company's contracts and state
laws and regulations, the Company is required to obtain licenses, certifications
and/or accreditations for its programs. The Company's contracts typically
include extensive reporting requirements and may require supervision and on-site
monitoring by representatives of contracting governmental agencies. State law
also typically requires teachers, counselors and other personnel to meet certain
training standards as well as certain credential and license requirements. In
addition, many state and local governments are required to enter into a
competitive bidding procedure before awarding contracts for products or
services. The failure to comply with any applicable laws, rules or regulations
and the loss of any required license, certification or accreditation could have
a material adverse effect on the Company's financial condition and results of
operations. Furthermore, the current and future operations of the Company may be
subject to additional regulations as a result of, among other factors, new
statutes and regulations and changes in the manner in which existing statutes
and regulations are or may be interpreted or applied. Any such additional
regulations could have a material adverse effect on the Company's financial
condition and results of operations.
ACCEPTANCE OF PRIVATIZED YOUTH EDUCATION AND TREATMENT PROGRAMS
Management of youth education schools and treatment centers by private
for-profit entities has not achieved complete acceptance by either governments
or the public. Additionally, some sectors of the federal government and some
state and local governments are legally unable to delegate their traditional
management responsibilities for education and treatment facilities to private
companies, or may be required or may elect to delegate such responsibilities to
not-for-profit entities. The Company believes the operation of education and
treatment services by private entities is not widely understood by the public,
and the industry has encountered resistance from certain groups that believe
youth education and treatment programs should be conducted by governmental
agencies. Such resistance may hinder public and government acceptance of
privatized youth
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education and treatment programs. In addition, changes in the government
leadership or dominant political parties in any of the markets in which the
Company operates could result in significant changes to previously established
views of privatization in such markets.
OPPOSITION TO PROGRAM LOCATION AND ADVERSE PUBLICITY
The Company's success in obtaining new contracts may depend, in part, upon
its ability to locate facilities that can be leased or acquired on favorable
terms by the Company. Some locations may be in or near populous areas and,
therefore, may generate legal action or other forms of opposition from residents
in areas surrounding a proposed site. The Company's business also is subject to
public scrutiny and, consequently, could be significantly affected by negative
publicity, negative public reaction or governmental investigations with respect
to the Company's policies or operations or the actions of youth under its care.
The Company's reputation is very important to the retention and procurement of
government and governmental agency contracts. Negative publicity or a
governmental investigation with respect to the Company's policies or operations
or the actions of youth under its care could have a material adverse effect on
the Company's financial condition and results of operations.
POTENTIAL LEGAL LIABILITY
The Company's management of youth education and treatment programs exposes
it to potential third-party claims or litigation by participants or other
persons for wrongful death, personal injury or other damages resulting from
contact with Company facilities, programs, personnel or participants. In
addition, the Company's contracts and the laws of certain states generally
require the Company to maintain adequate insurance for its operations and to
indemnify the governmental agency against any damages to which the governmental
agency may be subject in connection with such claims or litigation. The Company
has, on occasion, been sued by third parties and maintains an insurance program
that provides coverage for certain liability risks faced by the Company,
including wrongful death, personal injury, bodily injury or property damage to a
third party where the Company is found to be negligent. There can be no
assurance, however, that the Company's insurance will be adequate to cover
potential third-party claims. See "Business -- Insurance" and "Business -- Legal
Proceedings."
RELATIONSHIP WITH HELICON
The Company conducts a significant portion of its business through its
relationship with Helicon. As of June 30, 1996, the Company was providing
consulting, management and marketing services to Helicon at 12 programs. The
Company also leases two facilities to Helicon for the operation of its programs
and has entered into an agreement to purchase certain additional real property
that is being leased by Helicon for certain of its Tennessee programs. Pursuant
to a Consulting and Marketing Agreement, effective as of August 1992, by and
between Helicon and the Company (the "Helicon Agreement"), the Company is
entitled to receive management fees 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. For each of the three fiscal years ended March
31, 1996, the Company did not recognize all the management fee income to which
it was entitled due to the inability of Helicon to pay these amounts, and there
can be no assurance that the Company will recognize any management fee income in
the future. As of June 30, 1996, unpaid management fees, lease payments and
advances, plus interest, due to the Company from Helicon totaled $6,653,000.
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 on September 1, 1999. The Company also has guaranteed Helicon's
obligations under a bank line of credit in the amount of $500,000. Because
Helicon provides services similar to those provided by the Company, Helicon's
business and operations are subject to certain of the same risks as the Company
including, without limitation, dependence on certain customers, dependence on
governmental agencies, contract renewal and termination and governmental and
other regulations. Any material loss of revenue by Helicon, the inability of
Helicon to pay future management fees or lease payments, the default by Helicon
under its line of credit or the loss or renewal on less favorable terms of the
Helicon Agreement would
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have a material adverse impact on the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business --
Relationship with Helicon."
DEPENDENCE ON AND COMPETITION FOR KEY PERSONNEL
The Company depends to a great extent on the efforts of each of its
executive officers and certain other key personnel to renew and obtain
contracts, operate and develop programs and administer the Company's business.
The Company does not generally have employment contracts with its officers or
employees and does not maintain life insurance with respect to any of such
persons. The loss of one or more of the Company's key personnel could have a
material adverse effect on the Company's business. See "Management."
The Company's ability to successfully expand its business and at the same
time maintain the quality of its services also will depend, in part, on its
ability to attract, train and retain additional qualified personnel. There is
significant competition for qualified teachers, counselors, program managers and
other key personnel, and there can be no assurance that the Company will be
successful in recruiting, training or retaining employees to enable the Company
to successfully expand its business and maintain the quality of its services.
LIMITED HISTORY OF PROFITABILITY
Prior to fiscal 1994, the Company experienced significant net losses and
negative or limited cash flow from operations. Although the Company has reported
net income for each quarter since the fiscal year ended March 31, 1993, there
can be no assurance that the Company will continue to be profitable or that it
will generate sufficient cash from operations to fund its business. The
Company's ability to continue to operate profitably will depend upon, among
other things, the successful continuation of its contracts and programs. In
addition, because the Company's operating revenues are generated under the terms
of contracts that generally provide for hourly, daily or fixed rates that are
negotiated periodically, the Company's ability to estimate and control its costs
with respect to these contracts is critical to profitability.
COMPETITION
The youth education and treatment 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 and governmental
agencies that are responsible for 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 the reputation of its
personnel. The business in which the Company engages is one that other entities
may easily enter without substantial capital investment or experience in
management of youth education or treatment programs. Many of the Company's
competitors have greater resources than the Company. 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 education and
treatment 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.
DISCRETIONARY USE OF PROCEEDS
Of the net proceeds of approximately $22.2 million expected to be received
by the Company in this offering, the Company anticipates using approximately
$6.7 million to repay certain indebtedness and an associated prepayment penalty
to one of the Company's lenders. The remaining net proceeds, estimated at
approximately $15.5 million, will be used for the expansion of the Company's
programs and program offerings, both internally and through possible future
strategic acquisitions, and for general corporate purposes, including working
capital. Accordingly, the Company will have broad discretion as to the
application of such proceeds. See "Use of Proceeds" and "Business -- Growth
Strategy."
10
11
SEASONALITY AND QUARTERLY FLUCTUATIONS
Revenues from providing youth education services are generally seasonal in
nature, fluctuating with the academic school year. Revenues are at their lowest
during the summer school months and at their peak during the fall, winter and
spring months when school is in full session. Additionally, spring vacation
generally affects one of two quarters (either the quarter ending March 31 or the
quarter ending June 30), depending on when the Easter holiday falls. The
Company's quarterly results of operations 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 initially staffs its
programs based on such intended population levels. As a result, the Company's
results of operations for any given quarter can be materially adversely affected
by the timing of the opening of one or more programs in any such quarter.
Because of the seasonality of the Company's business and the significant
quarterly fluctuations in the Company's revenues and operating results, results
for any particular quarter may not be indicative of future results or results
for the full fiscal year. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Seasonality and Quarterly Financial
Data."
CONCENTRATION OF VOTING CONTROL
Upon completion of this offering, T. Rowe Price Strategic Partners Fund II,
L.P. ("Strategic Partners") and the directors and executive officers of the
Company will, collectively, own beneficially or control approximately 26.5% of
the outstanding shares of Common Stock (22.6% assuming exercise in full of the
Underwriters' over-allotment option). Accordingly, these persons collectively
will have substantial influence over the affairs of the Company, including the
ability to influence the election of directors and other matters requiring
shareholder approval.
VOLATILITY OF MARKET PRICE
From time to time after this offering, there may be significant volatility
in the market price of the Common Stock. The Company believes that the current
market price of the Common Stock reflects expectations that the Company will be
able to continue to operate its programs profitably and to develop additional
and new programs at a significant rate and operate them profitably. If the
Company is unable to operate its programs profitably or develop programs at a
pace that reflects the expectations of the market, investors could sell shares
of Common Stock at or after the time that it becomes apparent that such
expectations may not be realized, resulting in a decrease in the market price of
the Common Stock. In addition to the operating results of the Company, changes
in earnings estimated by analysts, changes in general conditions in the economy
or the financial markets or other developments affecting the Company or the
private youth services industry could cause the market price of the Common Stock
to fluctuate substantially. In recent years, the stock market has experienced
extreme price and volume fluctuations. This volatility has had a significant
effect on the market prices of securities issued by many companies for reasons
unrelated to their operating performance. See "Price Range of Common Stock."
SHARES ELIGIBLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock or the availability of such shares for future sale will
have on the market price of the Common Stock prevailing from time to time. Sales
of substantial amounts of Common Stock or the perception that such sales may
occur could adversely affect prevailing market prices for the Common Stock. An
aggregate of 5,501,244 shares of Common Stock are currently outstanding,
excluding 426,898 shares subject to outstanding stock options and a warrant.
Upon completion of this offering, approximately 5,295,647 shares of Common Stock
will be freely transferable and approximately 1,705,597 shares will be
transferable pursuant to Rule 144 under the Securities Act of 1933, as amended
(the "Securities Act"). The Company, the directors and executive officers of the
Company and the Selling Shareholder have agreed not to sell any shares of Common
Stock for 120 days after the date of this Prospectus (with certain limited
exceptions) without the prior written consent of Montgomery Securities.
Following this offering, beneficial holders of 1,643,438 shares of Common Stock
will have contractual rights with respect to the registration of such shares.
See "Description of Capital Stock -- Registration Rights" and "Underwriting."
11
12
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Restated Charter, as amended (the
"Restated Charter"), and Bylaws (the "Bylaws") may be deemed to have
anti-takeover effects and may discourage, delay or prevent a takeover attempt
that a shareholder might consider in its best interest. The Bylaws establish
certain advance notice procedures for nominations of candidates for election as
directors and for shareholder proposals to be considered at shareholders'
meetings. In addition, pursuant to the Restated Charter, the Board of Directors,
without further action of the shareholders, is permitted to issue and fix the
terms of preferred stock which may have rights senior to those of the Common
Stock. As a Tennessee corporation, the Company also is subject to the provisions
of the Tennessee Business Combination Act and the Tennessee Greenmail Act, each
of which may be deemed to have anti-takeover effects and may discourage, delay
or prevent a takeover attempt that might be considered in the best interest of
the Company's shareholders. See "Description of Capital Stock." The Company's
credit agreements with certain lenders also contain provisions that may
discourage proposals or bids to acquire the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
RISKS ASSOCIATED WITH FORWARD LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), which are intended to be
covered by the safe harbors created thereby. Those statements include, but may
not be limited to, the discussions of the Company's expectations concerning its
future profitability, the discussion of the Company's relationships with Helicon
and certain of the Company's major customers and the Company's operating and
growth strategy, including possible strategic acquisitions. Investors are
cautioned that all forward-looking statements involve risks and uncertainties
including, without limitation, the factors set forth under the caption "Risk
Factors" in this Prospectus. Although the Company believes that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of the assumptions could be inaccurate, and therefore, there can be no assurance
that the forward-looking statements included in this Prospectus will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
12
13
USE OF PROCEEDS
The net proceeds from the sale of the 1,500,000 shares of Common Stock
offered hereby by the Company are estimated to be approximately $22.2 million
(approximately $23.3 million if the Underwriters' over-allotment option is
exercised in full), after deducting the underwriting discount and estimated
offering expenses payable by the Company. The Company will not receive any
proceeds from the sale of shares of Common Stock by the Selling Shareholder.
The Company intends to use approximately $6.7 million of the net proceeds
to repay all of the Company's indebtedness to National Health Investors, Inc.
("NHI") pursuant to a Loan Agreement, dated September 23, 1994, by and between
the Company and NHI (the "NHI Agreement"). The indebtedness to NHI bears
interest at a rate of 11.5% per annum and matures on September 23, 1999. The
Company anticipates repaying the outstanding indebtedness of $6.2 million, plus
a prepayment penalty of approximately $500,000, to NHI in October 1996. Pursuant
to the terms of the NHI Agreement, the Company plans to repay the NHI
indebtedness in October 1996 to take advantage of a reduction in the prepayment
penalty effective October 1, 1996. As a result of the repayment of this debt,
the Company expects to incur a pre-tax extraordinary charge of approximately
$620,000 during the quarter ending December 31, 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The remaining net proceeds, estimated at $15.5 million, will be used for
the expansion of the Company's programs and program offerings, both internally
and through possible future strategic acquisitions, and for general corporate
purposes, including working capital. See "Risk Factors -- Discretionary Use of
Proceeds" and "Business -- Growth Strategy." The Company engages from time to
time in discussions regarding possible acquisitions; however, the Company
presently has no agreements, arrangements or commitments with respect to any
such acquisition. Pending such uses, the net proceeds will be invested in
investment grade interest-bearing securities.
13
14
PRICE RANGE OF COMMON STOCK
The Common Stock is quoted on the Nasdaq National Market under the symbol
"KIDS." The following table sets forth, for the periods indicated, the high and
low closing sale prices for the Common Stock as reported on the Nasdaq National
Market.
HIGH LOW
----- -----
FISCAL 1995
First Quarter............................................................ $ 4 1/4 $ 3 1/4
Second Quarter........................................................... 6 5/8 3 7/8
Third Quarter............................................................ 6 1/4 2 1/2
Fourth Quarter........................................................... 6 1/4 3 3/4
FISCAL 1996
First Quarter............................................................ $ 5 1/2 $ 4 1/2
Second Quarter........................................................... 7 1/2 4 1/2
Third Quarter............................................................ 8 5 3/4
Fourth Quarter........................................................... 11 7/8 6 7/8
FISCAL 1997
First Quarter............................................................ $ 25 7/8 $ 10
Second Quarter (through August 15, 1996)................................. 25 1/4 17 1/4
On August 15, 1996, the last reported sale price of the Common Stock as
reported on the Nasdaq National Market was $17.25 per share. As of August 15,
1996, there were 326 shareholders of record of the Common Stock.
DIVIDEND POLICY
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
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. In
addition, the Company's current revolving credit agreement prohibits the Company
from declaring or paying any cash dividends on its Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
14
15
CAPITALIZATION
The following table sets forth the total capitalization of the Company as
of June 30, 1996, on an actual basis and as adjusted to give effect to the sale
of the 1,500,000 shares of Common Stock offered hereby by the Company and the
application of the net proceeds therefrom as described under "Use of Proceeds."
AS OF JUNE 30, 1996
---------------------------
ACTUAL AS ADJUSTED(1)
-------- --------------
(DOLLARS IN THOUSANDS)
Long-term debt................................................... $ 6,000 $ --
Shareholders' equity:
Preferred Stock, $1.00 par value per share; 10,000,000 shares
authorized, no shares outstanding........................... -- --
Common Stock, $.01 par value per share; 10,000,000 shares
authorized, 5,494,785 shares issued and outstanding, actual;
50,000,000 shares authorized, 6,994,785 shares issued and
outstanding, as adjusted(2)................................. 55 70
Additional paid-in capital..................................... 25,638 47,773
Accumulated deficit............................................ (12,591) (13,112)
------- -------
Total shareholders' equity....................................... 13,102 34,731
------- -------
Total capitalization............................................. $ 19,102 $ 34,731
======= =======
- ---------------
(1) The Company intends to repay in full the Company's long-term debt in October
1996. See "Use of Proceeds."
(2) Does not include 422,107 shares of Common Stock issuable as of June 30, 1996
upon the exercise of (a) outstanding stock options to purchase 412,491
shares of Common Stock under the Company's stock incentive plans and (b) an
outstanding warrant to purchase 9,616 shares of Common Stock. The number of
authorized shares, as adjusted, reflects an increase in the number of
authorized shares of Common Stock to 50,000,000 approved by the Company's
shareholders at the annual meeting of shareholders held August 14, 1996 (the
"Annual Meeting"). See "Description of Capital Stock."
15
16
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth for the periods indicated selected
consolidated financial data for the Company. The selected statement of
operations and balance sheet data presented below for the fiscal years ended
March 31, 1992, 1993, 1994, 1995 and 1996 have been derived from the Company's
consolidated financial statements that have been audited by Ernst & Young LLP,
independent auditors. The selected statement of operations and balance sheet
data presented below for the three months ended June 30, 1995 and 1996 have been
derived from the unaudited consolidated financial statements of the Company.
Operating results for the three months ended June 30, 1996 are not necessarily
indicative of the results that may be expected for fiscal 1997. This information
should be read in conjunction with the consolidated financial statements and the
notes thereto included elsewhere in this Prospectus and incorporated by
reference herein and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
THREE MONTHS
FISCAL YEAR ENDED MARCH 31, ENDED JUNE 30,
------------------------------------------------ -----------------
1992 1993 1994 1995 1996 1995 1996
------- -------- ------- ------- ------- ------- -------
STATEMENTS OF OPERATIONS DATA:
Revenues:
Operating revenues(1).................. $30,331 $ 24,541 $18,849 $20,575 $23,630 $ 5,518 $ 6,482
Management fee income.................. -- -- -- 367 1,036 106 311
------- -------- ------- ------- ------- ------ ------
Total revenues....................... 30,331 24,541 18,849 20,942 24,666 5,624 6,793
Operating expenses:
Employee compensation and benefits..... 21,000 16,605 11,619 12,676 15,010 3,415 4,063
Purchased services and other
expenses............................. 7,612 7,235 3,601 3,886 4,590 1,086 1,182
Depreciation and amortization.......... 1,820 2,072 1,277 1,080 1,025 264 191
Other operating expenses............... 607 595 193 184 139 25 25
------- -------- ------- ------- ------- ------ ------
Total operating expenses............. 31,039 26,507 16,690 17,826 20,764 4,790 5,461
------- -------- ------- ------- ------- ------ ------
Income (loss) from operations............ (708) (1,966) 2,159 3,116 3,902 834 1,332
Interest expense, net.................... 147 1,136 1,397 1,187 833 238 168
Other (income) expense, net.............. 2,508(2) 7,674(3) 455(4) (44)(5) -- -- --
------- -------- ------- ------- ------- ------ ------
Income (loss) before income taxes and
extraordinary item..................... (3,363) (10,776) 307 1,973 3,069 596 1,164
Provision for income taxes............... -- -- -- 69 491 89 311
------- -------- ------- ------- ------- ------ ------
Income (loss) before extraordinary
item................................... (3,363) (10,776) 307 1,904 2,578 507 853
Extraordinary item....................... -- -- -- -- 54(6) -- --
------- -------- ------- ------- ------- ------ ------
Net income (loss)........................ $(3,363) $(10,776) $ 307 $ 1,904 $ 2,524 $ 507 $ 853
======= ======== ======= ======= ======= ====== ======
Net income (loss) per share, fully
diluted................................ $ (1.10) $ (3.52) $ 0.08 $ 0.37 $ 0.44 $ 0.09 $ 0.15
Weighted average common shares
outstanding, fully diluted............. 3,059 3,069 3,756 5,115 5,688 5,557 5,780
BALANCE SHEET DATA (AT PERIOD END):
Working capital (deficit)................ $(7,233) $(11,279) $(9,847) $ 1,422 $ 3,904 $ 2,086 $ 5,057
Total assets............................. 30,606 21,330 20,146 19,449 22,122 19,476 22,582
Long-term debt and capital lease
obligations............................ 1,359 1,312 8 6,924 6,052 6,862 6,000
Shareholders' equity..................... 15,564 4,788 5,786 9,456 12,032 9,940 13,102
- ---------------
(1) The Company's exit from the adult corrections business in fiscal 1993 and
the transfer, effective January 1, 1993, of its California residential
treatment operations to Helicon are the principal reasons for the decline in
operating revenue for fiscal 1994 compared to fiscal 1993 and for fiscal
1993 compared to fiscal 1992.
(2) Amount consists of write-down of property of $328, other related party
expense of $154, litigation settlement of $1,000, write-off of deferred
financing and pre-opening costs of $808 and loss on disposition of property
of $218.
(3) Amount consists of write-off of advances to Helicon of $1,145, write-off of
costs in excess of net assets of purchased businesses of $5,188, write-off
of deferred merger costs of $567, provision for restructuring expenses of
$759 and loss on disposition of property of $15.
(4) Amount consists of write-off of advances to Helicon of $1,024, net of other
income of $569.
(5) Amount consists of write-down of property of $122, net of other income of
$166.
(6) Amount represents losses on early extinguishment of debt, net of an income
tax benefit of $10.
16
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
As of June 30, 1996, the Company was providing education and treatment
services to approximately 1,700 at risk and troubled youth pursuant to contracts
with governmental agencies, directly or through its management contract with
Helicon, to manage 39 programs in five states. Revenues under these contracts
are recognized as services are rendered. The Company's programs are delivered in
both non-residential and residential settings, with the majority of the
Company's revenues currently generated by non-residential programs. 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 or at per diem rates.
The Company receives management fee income from Helicon for consulting,
management and marketing services rendered pursuant to the Helicon Agreement. As
of June 30, 1996, the Company was providing consulting, management and marketing
services to Helicon at 12 programs. In addition, the Company leases two
facilities to Helicon for the operation of its programs and has entered into an
agreement to purchase certain additional real property that is being leased by
Helicon for certain of its Tennessee programs. Pursuant to the Helicon
Agreement, the Company is entitled to receive for these services management fee
income in an amount equal to 6% of the monthly gross revenues of Helicon's
programs. The payment of these management fees, however, is subordinated in
right of payment to amounts payable by Helicon to fund its programs. During the
three months ended June 30, 1996, the Company recognized all of the management
fee income to which it was entitled. However, for each of the fiscal years ended
March 31, 1996, 1995 and 1994, the Company did not recognize all of the
management fee income to which it was entitled due to the inability of Helicon
to pay these amounts, and there can be no assurance that the Company will
recognize any management fee income in the future. As of June 30, 1996, unpaid
management fees, lease payments and advances, plus interest, due to the Company
from Helicon totaled $6,653,000. Based on the current level of operations being
maintained by Helicon, the Company does not anticipate collecting any of this
amount. The Company has fully reserved this amount, and future payments received
from Helicon on these amounts, if any, will be recognized by the Company on the
cash basis. The Helicon Agreement expires September 1, 1999. The Company also
has guaranteed Helicon's obligations under a bank line of credit in the amount
of $500,000. See " -- Liquidity and Capital Resources."
Employee compensation and benefits include facility and program payrolls
and related taxes, as well as employee benefits, including insurance and
workers' compensation coverage. Employee compensation and benefits also includes
general and administrative payroll and related benefit costs, including salaries
and supplemental compensation of officers.
Purchased services and other expenses include all expenses not otherwise
presented separately in the Company's statements of income. 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 effective tax rate is less than the statutory rate because of
the utilization of tax net operating loss carryforwards for which no tax benefit
had previously been recognized. At March 31, 1996, the Company had net operating
loss carryforwards of $5,741,000, utilization of which is subject to annual
limitations pursuant to the provisions of Internal Revenue Code Section 382.
The Company intends to use a portion of the net proceeds from this offering
to repay all of the Company's outstanding indebtedness to NHI. Pursuant to the
terms of the NHI Agreement, the Company will incur a prepayment penalty equal to
8% of the amount of indebtedness prepaid. The Company plans to repay the NHI
indebtedness in October 1996 to take advantage of a reduction in the prepayment
penalty effective October 1, 1996. Accordingly, as a result of the repayment of
this debt, the Company expects to incur a pre-tax extraordinary charge of
approximately $620,000, which will have a negative impact on the Company's net
income for the quarter ending December 31, 1996. See "Use of Proceeds."
17
18
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 initially staffs its programs
based on such intended population levels. Since June 30, 1996, the Company has
executed, or has been selected to negotiate, contracts for five new programs
which will open during the quarter ending September 30, 1996. The Company
expects to incur operating losses at certain of these programs until such time
as the program populations approach intended levels. As a result, the Company's
results of operations will be adversely affected in the quarter ending September
30, 1996. See " -- Seasonality and Quarterly Results of Operations."
The following discussion should be read in conjunction with "Selected
Consolidated Financial Data" and the Company's Consolidated Financial Statements
and Notes thereto included elsewhere in this Prospectus and incorporated by
reference herein.
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
FISCAL YEAR ENDED MARCH 31, ENDED JUNE 30,
---------------------------- -----------------
1994 1995 1996 1995 1996
------ ------ ------ ------ ------
Operating revenues........................ 100.0% 98.2% 95.8% 98.1% 95.4%
Management fee income..................... -- 1.8 4.2 1.9 4.6
------ ------ ------ ------ ------
Total revenues.......................... 100.0% 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------ ------
Employee compensation and benefits........ 61.6% 60.5% 60.9% 60.7% 59.8%
Purchased services and other expenses..... 19.1% 18.6% 18.6% 19.3% 17.4%
Depreciation and amortization............. 6.8% 5.2% 4.2% 4.7% 2.8%
Related party rent........................ 0.5% 0.4% 0.4% 0.5% 0.4%
Provision for bad debts................... 0.5% 0.4% 0.2% -- --
------ ------ ------ ------ ------
Total operating expenses................ 88.5% 85.1% 84.3% 85.2% 80.4%
------ ------ ------ ------ ------
Income from operations.................... 11.5% 14.9% 15.7% 14.8% 19.6%
Interest expense, net..................... 7.5% 5.7% 3.5% 4.2% 2.4%
Write-off of advances to Helicon.......... 5.4% -- -- -- --
Write-down of property.................... -- 0.6% -- -- --
Other income.............................. 3.0% 0.8% -- -- --
Provision for income taxes................ -- 0.3% 2.0% 1.6% 4.6%
------ ------ ------ ------ ------
Net income.............................. 1.6% 9.1% 10.2% 9.0% 12.6%
====== ====== ====== ====== ======
Three Months Ended June 30, 1996 Versus the Three Months Ended June 30, 1995
Total revenues for the three months ended June 30, 1996 increased
$1,169,000, or 20.8%, to $6,793,000 as compared to $5,624,000 for the three
months ended June 30, 1995. Total operating revenues for the three months ended
June 30, 1996 increased by $964,000, or 17.5%, to $6,482,000 as compared to
$5,518,000 for the comparable period in the prior year. The increase in
operating revenues results primarily from the opening of three new programs
during fiscal 1996 which were in operation throughout the entire three months
ended June 30, 1996 and from significant increases in student enrollment at four
of the Company's programs.
Management fee income recognized under the Helicon Agreement for the three
months ended June 30, 1996 increased $205,000 to $311,000 as compared to
$106,000 for the comparable period in the prior year. Additional management fee
income of $217,000 for the three months ended June 30, 1995 was not recognized
by the Company due to the inability of Helicon to pay those amounts.
18
19
Employee compensation and benefits for the three months ended June 30, 1996
increased $648,000, or 19.0%, to $4,063,000 as compared to $3,415,000 for the
comparable period in the prior year. As a percentage of total revenues, employee
compensation and benefits decreased to 59.8% for the three months ended June 30,
1996 from 60.7% for the comparable period in the prior year. The increase in
employee compensation and benefits over the comparable period in the prior year
results primarily from the opening of three new programs during fiscal 1996
which were in operation throughout the entire three months ended June 30, 1996,
from significant expansion at two of the Company's programs and from an increase
in the amounts accrued under the Company's incentive compensation plans.
Purchased services and other expenses for the three months ended June 30,
1996 increased $96,000, or 8.8%, to $1,182,000 as compared to $1,086,000 for the
three months ended June 30, 1995. As a percentage of total revenues, purchased
services and other expenses decreased to 17.4% for the three months ended June
30, 1996 from 19.3% for the comparable period in the prior year. The increase in
purchased services and other expenses over the same period in the prior year is
attributable primarily to the opening of three new programs during fiscal 1996
which were in operation throughout the entire three months ended June 30, 1996
and from increases in consulting, audit and travel expenses, net of a reduction
in legal expense.
Depreciation and amortization for the three months ended June 30, 1996
decreased $73,000, or 27.7%, to $191,000 as compared to $264,000 for the
comparable period in the prior year. The decrease in depreciation and
amortization compared to the same period during the prior year is attributable
primarily to the reduction in amortization of non-competition agreements from
approximately $62,000 for the three months ended June 30, 1995 to $0 for the
three months ended June 30, 1996.
Income from operations for the three months ended June 30, 1996 increased
$498,000, or 59.7%, to $1,332,000 as compared to $834,000 for the comparable
period in the prior year, and increased as a percentage of total revenues to
19.6% for the three months ended June 30, 1996 from 14.8% for the three months
ended June 30, 1995 as a result of the factors described above.
Interest expense for the three months ended June 30, 1996 decreased
$40,000, or 16.7%, to $200,000 as compared to $240,000 for the comparable period
in the prior year. The decrease in interest expense is attributable primarily to
a reduction in the average balance of debt outstanding and to a decrease in the
amortization of deferred loan costs.
Interest income increased $30,000 to $32,000 for the three months ended
June 30, 1996 as compared to $2,000 for the comparable period in the prior year.
The increase in interest income over the comparable period in fiscal 1996 is
attributable primarily to the increase in cash available for investment.
Provision for income tax expense for the three months ended June 30, 1996
increased $222,000 to $311,000 as compared to $89,000 for the comparable period
in the prior year. The Company's effective tax rate is less than the statutory
tax rate because of the utilization of tax net operating loss carryforwards for
which no tax benefit had previously been recognized.
Fiscal 1996 Versus Fiscal 1995
Total revenues for fiscal 1996 increased $3,724,000, or 17.8%, to
$24,666,000 as compared to $20,942,000 for fiscal 1995. Total operating revenues
for fiscal 1996 increased by $3,055,000, or 14.8%, to $23,630,000 as compared to
$20,575,000 for fiscal 1995. The increase in operating revenues results
primarily from the opening of three new programs during fiscal 1996, from the
opening of two programs during fiscal 1995 which were in operation throughout
all of fiscal 1996, and from significant increases in student enrollment at four
of the Company's programs. Additionally, an increase in the per diem rate at the
Company's California campuses, effective in July 1995, generated approximately
8% of the increase in operating revenues.
Management fee income recognized under the Helicon Agreement for fiscal
1996 increased $669,000 to $1,036,000 as compared to $367,000 for fiscal 1995.
Additional management fee income of $217,000 for fiscal 1996 and $703,000 for
fiscal 1995 was not recognized by the Company due to the inability of Helicon to
pay these amounts.
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20
Employee compensation and benefits for fiscal 1996 increased $2,334,000, or
18.4%, to $15,010,000 as compared to $12,676,000 for fiscal 1995. As a
percentage of total revenues, employee compensation and benefits increased to
60.9% for fiscal 1996 from 60.5% for fiscal 1995. The increase in employee
compensation and benefits over the prior year resulted primarily from the
opening in fiscal 1996 of three new programs, from the impact of two programs
opened during fiscal 1995 which were in operation throughout all of fiscal 1996
and from increased staffing requirements at certain other programs. The Company
also increased corporate and regional personnel costs in fiscal 1996, primarily
for operations support, business development and quality assurance to support
the growth and expansion of the Company's operations.
Purchased services and other expenses for fiscal 1996 increased $704,000,
or 18.1%, to $4,590,000, as compared to $3,886,000 for fiscal 1995. As a
percentage of total revenues, purchased services and other expenses was 18.6%
for both fiscal 1996 and fiscal 1995. The increase in purchased services and
other expenses over the prior year results primarily from the opening of three
new programs, from the impact of two programs opened during fiscal 1995 which
were in operation throughout all of fiscal 1996, from significant expansion at
one of the Company's programs, and from increases in consulting, business
development, legal, investor relations and travel expense.
Depreciation and amortization decreased $55,000, or 5.1%, to $1,025,000 for
fiscal 1996 from $1,080,000 for fiscal 1995. Depreciation and amortization for
fiscal 1996 and 1995 includes amortization expense of $250,000 under the
Company's non-competition agreements. These agreements were completely amortized
at March 31, 1996.
Income from operations increased $786,000, or 25.2%, to $3,902,000 for
fiscal 1996 from $3,116,000 for fiscal 1995, and increased as a percent of total
revenues to 15.8% for fiscal 1996 from 14.9% for fiscal 1995, as a result of the
factors described above.
Interest expense decreased $319,000 to $869,000 for fiscal 1996 from
$1,188,000 for fiscal 1995. The decrease in interest expense is attributable
primarily to a reduction in the average balance of debt outstanding and to a
decrease in the amortization of deferred loan costs.
Other income during fiscal 1996 decreased to $0 from $166,000 for fiscal
1995. Other income for fiscal 1995 consisted primarily of $150,000 received by
the Company pursuant to a settlement of certain workers' compensation
litigation.
Provision for income tax expense increased $422,000 to $491,000 for fiscal
1996 from $69,000 for fiscal 1995. The Company's effective tax rate is
significantly less than the statutory tax rate because of the utilization of tax
net operating loss carryforwards for which no tax benefit had previously been
recognized. The increase in the Company's effective tax rate over the same
period in the prior year results from the presence of annual limitations on the
utilization of the net operating loss carryforwards pursuant to Internal Revenue
Code Section 382.
In fiscal 1996, the Company also incurred a loss on the early
extinguishment of debt of $64,000 before the related income tax benefit of
$10,000, resulting from the writeoff of deferred loan costs. See " -- Liquidity
and Capital Resources."
Fiscal 1995 Versus Fiscal 1994
Total revenues for fiscal 1995 increased $2,093,000, or 11.1%, to
$20,942,000 as compared to $18,849,000 for fiscal 1994. Total operating revenues
for fiscal 1995 increased $1,726,000, or 9.2%, to $20,575,000 as compared to
$18,849,000 for fiscal 1994. The increase in operating revenues resulted
primarily from additional revenues generated due to a significant increase in
student enrollment at one of the Company's programs, from the opening of five
new programs, and from the benefit of recognition of revenues of approximately
$857,000 generated by the Company's leases with Helicon, net of the impact
resulting from the transfer of certain of the Company's programs to Helicon and
from decreases in student enrollment at three of the Company's programs.
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Management fee income for fiscal 1995 increased to $367,000 from $0 for
fiscal 1994. Additional management fee income of $703,000 for fiscal 1995 and
$771,000 for fiscal 1994 was not recognized by the Company due to the inability
of Helicon to pay these amounts.
Employee compensation and benefits for fiscal 1995 increased $1,057,000, or
9.1%, to $12,676,000 as compared to $11,619,000 for fiscal 1994. As a percentage
of total revenues, employee compensation and benefits decreased to 60.5% for
fiscal 1995 from 61.6% for fiscal 1994. The increase in employee compensation
and benefits over the prior year resulted primarily from the opening of five new
programs and an increase in corporate compensation expense due to expansion of
the Company's business development efforts and increased staffing requirements
for Company operations, net of the reduction in compensation expense due to the
transfer of certain of the Company's operations to Helicon.
Purchased services and other expenses for fiscal 1995 increased $285,000,
or 7.9%, to $3,886,000, as compared to $3,601,000 for fiscal 1994. As a
percentage of total revenues, purchased services and other expenses decreased to
18.6% for fiscal 1995 from 19.1% for fiscal 1994. The increase in purchased
services and other expenses over the prior year is attributable primarily to the
opening of five new programs, net of a decrease in legal expense incurred by the
Company over the same period in the prior year in connection with the worker's
compensation litigation referred to below and the reduction in expenses due to
the transfer of certain of the Company's operations to Helicon.
Depreciation and amortization decreased $197,000, or 15.4%, to $1,080,000
for fiscal 1995 from $1,277,000 for fiscal 1994. This decrease is primarily the
result of the decrease in amortization of deferred pre-opening costs related to
the Company's Helicon Youth Center in Riverside, California and reduced
depreciation expense at the Company's corporate headquarters.
Income from operations increased $957,000, or 44.3%, to $3,116,000 for
fiscal 1995 from $2,159,000 for fiscal 1994, and increased as a percent of total
revenues to 14.9% for fiscal 1995 from 11.5% for fiscal 1994 as a result of the
factors described above.
Interest expense decreased $229,000 to $1,188,000 for fiscal 1995 from
$1,417,000 for fiscal 1994. The decrease in interest expense compared to the
prior year is attributed primarily to a reduction in the average balance of debt
outstanding.
Advances made to Helicon decreased to $0 during fiscal 1995 from $1,024,000
during fiscal 1994. Advances to Helicon in fiscal 1994 reflected the Company's
commitment to the operations of Helicon, as the majority of youth in Helicon
treatment programs were also involved in the Company's education programs. Due
to the level of operations maintained by Helicon, no advances were made during
fiscal 1995. Advances made during fiscal 1994, while due and payable to the
Company by Helicon, were charged to operations when made because of the absence
of any sustained operating history of Helicon and because of Helicon's inability
to repay the advances at that time.
Other income during fiscal 1995 decreased $403,000 to $166,000 as compared
to $569,000 for fiscal 1994. Other income for fiscal 1995 consisted primarily of
$150,000 received by the Company pursuant to a settlement of certain litigation
relating to an action filed by the Company following the fiscal 1993 alleged
misappropriation of Company funds by the Company's insurance broker who was
responsible for obtaining workers' compensation insurance for the Company's
California operations. Other income for fiscal 1994 consisted primarily of the
recovery of approximately $534,000 of insurance deposits previously deemed
uncollectible and written off during fiscal 1993.
Write-down of property of $122,000 in fiscal 1995 was due to the write-down
to net realizable value of idle property held for sale by the Company.
Provision for income tax expense increased to $69,000 for fiscal 1995 from
$0 for fiscal 1994. The Company's effective tax rate was significantly less than
the statutory tax rate because of the utilization of tax net operating loss
carryforwards for which no tax benefit had previously been recognized.
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SEASONALITY AND QUARTERLY FINANCIAL DATA
The Company has historically experienced and expects to continue to
experience seasonal fluctuations in its revenues. Revenues from providing youth
education services are generally seasonal in nature, fluctuating with the
academic school year. Revenues are at their lowest during the summer school
months and at their peak during the fall, winter and spring months when school
is in full session. Additionally, spring vacation generally affects one of two
quarters (either the quarter ending March 31 or the quarter ending June 30),
depending on when the Easter holiday falls. The Company's quarterly results also
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 initially staffs its programs based on such intended population levels.
As a result, the Company's results of operations for any given quarter can be
materially adversely affected by the timing of the opening of one or more
programs in any such quarter. Because of the seasonality of the Company's
business and the significant quarterly fluctuations in the Company's revenues
and operating results, results for any particular quarter may not be indicative
of future results or results for the full fiscal year.
The following table presents unaudited quarterly financial results for each
of the Company's last nine fiscal quarters. The unaudited information has been
prepared on the same basis as the audited consolidated financial statements
included elsewhere in this Prospectus and incorporated by reference herein and
includes all adjustments, consisting of only normal recurring adjustments, which
management considers necessary for a fair presentation of the financial data for
such periods. The operating results for any fiscal quarter are not necessarily
indicative of results of operations for any future period.
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
-------------------------- ---------------- ---------------- ----------------
1995 1996 1997 1995 1996 1995 1996 1995 1996
------ ------ ------ ------ ------ ------ ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total revenue............ $5,300 $5,624 $6,973 $4,609 $5,570 $5,076 $6,204 $5,957 $7,268
Income from operations... 886 834 1,332 507 653 668 993 1,055 1,422
Net earnings............. 497 507 853 220 302 528 668 659 1,047
Net earnings per common
share, fully diluted... 0.10 0.09 0.15 0.04 0.05 0.10 0.12 0.12 0.18
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities for the three months ended June 30,
1996 was $791,000 on net income of $853,000 as compared to $745,000 on net
income of $507,000 for the comparable period in the prior year. Cash provided by
operating activities for fiscal 1996 was $3,461,000 on net income of $2,524,000
as compared to $2,218,000 for fiscal 1995 on net income of $1,904,000. Working
capital at June 30, 1996 was $5,057,000, as compared to $3,904,000 at March 31,
1996 and $1,422,000 at March 31, 1995.
Cash used by investing activities was $70,000 for the three months ended
June 30, 1996 as compared to $46,000 for the comparable period in the prior
year, due primarily to an increase in cash outlays for the purchase of property
and equipment. Cash used by investing activities was $232,000 for fiscal 1996 as
compared to $577,000 for fiscal 1995. The reduction in fiscal 1996 as compared
to fiscal 1995 is due primarily to reductions in cash outlays for the purchase
of property and equipment and for the incurrence of deferred loan fees.
Cash of $170,000 was provided by financing activities for the three months
ended June 30, 1996 as compared to a use of $78,000 for the comparable period in
the prior year, due primarily to the receipt of proceeds of $217,000 from the
issuance of shares of Common Stock (through the exercise of stock options and
warrants) during the three months ended June 30, 1996. Cash used by financing
activities was $871,000 for fiscal 1996 as compared to $1,750,000 for fiscal
1995. The reduction in fiscal 1996 as compared to fiscal 1995 is due primarily
to the fact that in fiscal 1996 the Company utilized its positive cash flow to
increase cash balances, after having reduced outstanding debt balances as much
as practicable, whereas in fiscal 1995 the Company used its positive cash flow
primarily to reduce outstanding debt balances.
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In September 1994, the Company executed agreements with NHI and Strategic
Partners pursuant to which the Company refinanced all of its existing short-term
obligations through five-year term loans from NHI and Strategic Partners for
$6.5 million (at 11.5% per annum) and $1.0 million (at 12% per annum),
respectively. During fiscal 1996, the Company made unscheduled principal
payments of approximately $708,000 towards the Strategic Partners term loan,
resulting in the retirement of the outstanding obligation under that loan. The
Company wrote off deferred loan costs of approximately $64,000 in connection
with the early extinguishment of the Strategic Partners loan.
The agreement with NHI gives NHI a 25% interest in any increases in the
equity of the Company's operations at the Helicon Youth Center in Riverside,
California, and Grand Terrace School in Grand Terrace, California. Any amounts
due NHI under the provisions of the equity participation agreement, as
calculated pursuant to a formula based on the net operating income of such
facilities during the period of the loan, will not be payable until the
repayment of the NHI loan. As of June 30, 1996, there were no amounts due under
the equity participation agreement. The agreement with NHI also gives NHI a 5%
interest in any increases in gross revenues of the Company generated by the
Company's operations at the Helicon Youth Center and Grand Terrace School. As of
June 30, 1996, the amount due under the revenue participation agreement was
approximately $25,000. The agreement with NHI also requires the Company to
provide a debt service reserve equal to six months' payments of principal and
interest, an amount which totals approximately $460,000. This reserve was
established through the execution of an irrevocable letter of credit. Security
under the NHI agreement consists primarily of a first priority lien on
substantially all of the Company's real estate, improvements and equipment.
In September 1994, the Company also obtained a $2.5 million one-year
revolving line of credit from First American National Bank ("FANB"). This line
of credit, which was renewed in September 1995 for an additional term of one
year, bears interest at prime plus 3/4% (9% as of June 30, 1996) and is secured
primarily by a first priority lien on the Company's accounts and notes
receivable. In January 1996, the Company's line of credit was reduced to $2.0
million, in order to facilitate Helicon's obtaining a $500,000 line of credit
from FANB. As a further condition to Helicon's line of credit, which was
obtained in January 1996, the Company agreed to guarantee Helicon's performance
under such line of credit. No advances have been made under Helicon's line of
credit.
Availability under the Company's line of credit is limited to the lesser of
$2.0 million or eighty-five percent of eligible accounts receivable of the
Company. Additionally, availability under the line of credit has been reduced by
approximately $460,000 as the issuance of the letter of credit in favor of NHI
for the debt service reserve referred to above reduced the Company's available
credit by a like amount. As there were no borrowings outstanding under the line
of credit as of June 30, 1996, availability under the line of credit was
approximately $1,540,000.
The NHI Agreement and the FANB line of credit require the Company to comply
with certain restrictive covenants with respect to its business and operations
and to maintain certain financial ratios that become more stringent over time.
The restrictive covenants under these agreements prohibit the Company, without
the prior consent of its lenders, from entering into major corporate
transactions, such as a merger, tender offer or sale of its assets, incurring
additional indebtedness, and, under the FANB line of credit, declaring or paying
cash dividends.
In October 1996, the Company intends to use a portion of the net proceeds
from this offering to repay all of the Company's outstanding indebtedness to
NHI. See "Use of Proceeds." Following the repayment of this indebtedness, the
provisions of the NHI Agreement and the obligations under the NHI equity and
revenue participation agreements will terminate. The Company also intends to
pursue the negotiation of a new credit facility following this offering to
increase the amount of credit available to the Company. There can be no
assurance, however, that the Company will enter into an agreement for a new
credit facility.
Capital expenditures during fiscal 1997 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. In July 1996, the
Company entered into an agreement to purchase, for $690,000, real property being
leased by Helicon for certain of its Tennessee
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programs. Closing for this transaction is scheduled for January 1997. The
Company also may consider possible strategic acquisitions, including
acquisitions of existing programs and other companies engaged in the youth
services business. The Company, however, has no agreements, arrangements or
commitments with respect to any such acquisitions. See "Business -- Growth
Strategy."
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. The Company believes that operations, amounts available under
its line of credit and the net proceeds from this offering will provide
sufficient cash flow for the next twelve months and that long-term liquidity
requirements will be met from cash flow from operations and outside financing
sources.
INFLATION
Inflation has not had a significant impact on the Company's results of
operations since inception. Certain of the Company's existing contracts provide
for annual price increases based upon changes in the Consumer Price Index.
IMPACT OF ACCOUNTING CHANGES
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of."
This statement imposes stricter criteria for long-term assets by requiring that
such assets be probable of future recovery at each balance sheet date. The
Company adopted SFAS 121 effective April 1, 1996. Adoption of SFAS 121 had no
effect on the results of operations, financial condition or cash flows of the
Company.
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation." This statement requires new disclosures in the notes to the
financial statements about stock-based compensation plans based on the fair
value of equity instruments granted. Companies also may base the recognition of
compensation cost for instruments issued under stock-based compensation plans on
these fair values. The Company adopted SFAS 123 effective April 1, 1996, but
does not plan to change the method of accounting for these plans.
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BUSINESS
GENERAL
Children's Comprehensive Services, Inc. is one of the largest for-profit
providers of education and treatment 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
are emotionally disturbed, behaviorally disordered, developmentally delayed or
learning disabled. The Company has contracts to provide its education and
treatment services through the operation and management of specialized education
programs and both open and secure residential treatment centers for local and
state and federal governmental agencies in Alabama, California, Florida,
Louisiana, Tennessee and Texas. As of June 30, 1996, the Company was providing
education and treatment services, either directly or through its management
contract with Helicon, to approximately 1,700 youth through 39 different
programs. Since fiscal 1994, the Company has expanded its operations by
broadening its program offerings, increasing student capacity at existing
programs, and developing new programs in response to privatization and other
opportunities. During this period, the number of youth served in the Company's
programs increased from approximately 1,100 as of March 31, 1994 to
approximately 1,700 as of June 30, 1996.
THE MARKET FOR THE COMPANY'S SERVICES
The Company believes the market for the education and treatment of at risk
and troubled youth is a large and growing market. 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. Of
the 5.1 million children in special education programs during the 1992-93 school
year, 2.4 million were diagnosed as having specific learning disabilities and
over 400,000 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 1994, there were 2.7 million arrests of juveniles under 18 years
of age, accounting for 19% of all violent crime and 35% of all property crime
arrests. The Company believes that factors contributing to the increase in the
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. In addition, a recent census projection stated
that the number of youth in the United States is expected to increase by 21% to
nearly 21 million by the year 2005.
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 and treatment
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 education and treatment 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 and treatment services for at risk and troubled
youth, as governments of all types face continuing pressure to control costs and
improve the quality of services. Furthermore, the Company believes that, as
juvenile crime and the demand for special education services for at risk and
troubled youth continues to grow and receive increasing levels of attention from
lawmakers and the general public, government funding for juvenile services will
continue to increase. Although the number and scope of privatized services for
at risk and troubled youth has increased dramatically in recent years, the
Company estimates that only 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 education and treatment services for these youth will
continue to escalate and, increasingly, the private sector will be called upon
to meet the growing demands for these services.
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OPERATING STRATEGY
The Company's operating philosophy is to help at risk and troubled youth
reach their potential through the delivery of a comprehensive continuum of
consistent, high quality and cost-effective education and treatment services.
Comprehensive Continuum of Services. The Company offers a comprehensive
continuum of services to governmental entities ranging from non-restrictive
programs, such as family preservation and non-residential special education
programs, to secure residential and medium-security juvenile correctional
facilities. The Company believes its primary emphasis on education and
treatment, 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 youth 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 education and
treatment 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 provision of
youth education and treatment services.
Quality Management of Existing Programs. The Company strives to enhance
the quality of its programs, its program offerings and the quality of its highly
trained and dedicated staff to improve the positive impact that its education
and treatment programs have on the youth they serve. The Company has developed a
model of ongoing program evaluation and quality management which the Company
believes provides critical feedback to measure the qualitative performance of
its various programs. The Company believes its reputation for providing high
quality programs is an important competitive advantage which enables it to renew
existing contracts and expand services to its current clients, as well as
capitalize on privatization opportunities with additional governmental agencies.
Cost-Effective Solution. The Company believes that it is able to design,
develop and operate education and treatment facilities and programs at a lower
cost than governmental agencies that are responsible for performing such
services. The Company intends to focus on adherence to proven policies and
procedures and efficient application of financial resources in order to continue
to provide an attractive, cost-effective alternative to programs operated
directly by governmental entities.
GROWTH STRATEGY
The Company's growth strategy involves the expansion of its current
programs and the development of additional programs, expansion into new
geographic areas and possible strategic acquisitions.
Expansion of Current Programs and Development of Additional Programs. The
Company intends to build upon established relationships with governmental
contracting agencies and their administrative staffs to expand the Company's
current programs and to obtain contracts for additional programs in markets in
which the Company currently operates. The Company believes that once it has
established a relationship with a governmental agency and demonstrated expertise
and reliability, the Company will be better able to identify business
opportunities and obtain contracts for additional programs and services.
Furthermore, the Company believes that as its reputation with a governmental
entity is strengthened, the probability of such governmental entity utilizing
private services for new types of programs will increase. In addition to its
current continuum of programs, the Company also is prepared to develop new
programs in response to societal trends and the special needs of governmental
agencies.
Geographic Expansion in the United States. The Company plans to expand its
programs to additional geographic areas within the states in which the Company
currently operates and in additional states. The Company believes that the
public schools, correctional systems and youth services providers of many state
and local governments are overburdened and financially constrained and,
therefore, the private sector increasingly will be called upon to meet the
growing demands throughout the United States for education and treatment
services to at risk and troubled youth. The Company has selectively targeted
additional geographic areas for
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marketing efforts during the next 12 to 18 months based on probability of
success, geographic location, existing competition, potential profitability and
political acceptability.
Strategic Acquisitions. The market for youth education and treatment
services is highly fragmented. The Company believes this fragmented market
provides significant opportunities for the Company to enhance its market
position in existing and new markets through strategic acquisitions of
for-profit and not-for-profit companies in the youth education and treatment
services field. The Company intends to pursue acquisitions that will expand the
Company's operations into new geographic areas, add additional program types to
the Company's continuum of services and establish relationships with local
governmental entities. Although the Company currently has no agreement or
understanding with respect to any such acquisition, the Company continually
evaluates opportunities to expand its business through strategic acquisitions of
other companies that provide youth education and treatment services.
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 and communities. The Company's programs,
ranging from non-residential family preservation programs to 24-hour secure
facilities, are based predominantly on behavioral models designed to achieve
behavior modification through therapy. The Company's programs include
computer-based educational/vocational training and comprehensive programs for
behavior change, including individual, group and family counseling, social and
independent living skills training, empathy development, critical thinking and
problem solving, anger management, substance abuse treatment and relapse
prevention. These programs are designed to increase self-control and effective
problem-solving; to teach youth how to understand and consider other people's
values, behaviors and feelings; to show youth how to recognize how their
behavior affects other people and why others respond to them as they do; and to
teach them alternative, responsible, interpersonal behaviors. Although certain
youth in the Company's programs require both drug treatment and therapy, the
Company's goal is to minimize or eliminate the use of drugs whenever possible
over the course of its involvement with the youth. When drug treatment is
appropriate, drugs are prescribed by independent physicians and may be
administered by Company personnel. Management believes that the breadth of the
Company's services makes the Company attractive to local, state and federal
governmental agencies. As of June 30, 1996, the Company was providing services
to 1,241 youth in its 25 non-residential programs and 458 youth in its 14
residential programs.
Non-Residential Education and Treatment. 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 the youth to remain in his or
her home and community. As described below, non-residential services provided by
the Company include educational day treatment programs, diversionary education
programs, family preservation programs, homebound education programs and on-site
education programs in emergency shelters and diagnostic centers. Referral
sources for non-residential services include school districts, juvenile courts
and state youth services departments.
Educational Day Treatment Programs. The Company's educational day
treatment programs provide specialized educational services for youth with
clinically definable emotional disorders. 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.
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,
delinquent and status offending youth and youthful sex offenders. These
programs
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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 remotivate 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.
Homebound Education Programs. The Company's homebound education
programs provide educational services to students who are pregnant or have
medical problems that prevent them from attending school and suspended
special education students. Students in these programs receive focused
one-on-one instruction and continue with the curriculum of the school
normally attended by the student.
On-Site Education Programs in Shelters and Diagnostic Centers. The
Company's shelter education program provides on-site educational services
at multiple locations to at risk and troubled youth who have been removed
from their homes and are in residence at emergency shelters and diagnostic
centers. The objective of this program is to provide continuity in a
student's education in a safe and secure environment while the youth awaits
permanent placement.
Residential Education and Treatment. The Company's residential education
and treatment 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 pre-trial secure residential programs, therapeutic
wilderness programs, a residential psychiatric treatment program, residential
treatment programs, diagnostic and evaluation services and group homes. Referral
sources for these services include governmental departments of probation, mental
health, social services and youth corrections.
Pre-Trial Secure Residential Programs. The Company's pre-trial secure
residential 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 pre-trial secure residential 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.
Therapeutic Wilderness Programs. The Company's short-term therapeutic
wilderness programs are designed for relatively low-risk youth who have
failed or performed below expectations in community-based settings. These
programs include educational and counseling services, and a regimen of
structured physical activity, including drill and ceremony training and
work projects. The Company believes its wilderness programs are an
effective method to educate youth and teach the discipline and self-respect
necessary to prevent a youth from repeating or engaging in more serious
delinquent behavior.
Residential Psychiatric Treatment Program. The Company's residential
psychiatric treatment program provides medical and behavioral treatment to
behaviorally and emotionally disturbed youth who suffer from depression,
chemical dependency and other psychiatric disorders. The Company's
psychiatric treatment program is the only Company program based on a
medical model and is designed to achieve behavior modification through the
use of therapy and medical treatment, including pharmaceuticals. Medical
treatment services at this program are provided by independent physicians
who contract with the Company to provide such services. Services offered at
this program include therapy groups, drug
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education and 12-step recovery meetings. A primary goal of the Company's
residential psychiatric program is to develop positive support systems for
the adolescent to allow for discharge to a less structured environment. In
1996, this program received accreditation "With Highest Distinction" from
the Joint Commission on Accreditation of Healthcare Organizations, and is
also a CHAMPUS certified "Prime Provider."
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
youth 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 Programs. The Company's diagnostic
and evaluation services are designed to provide short-term evaluation and
assessment services in a staff secure setting to youth who are in state
custody.
Group Homes. The Company's group home programs provide shelter care,
transitional services and independent living programs for youth in a
family-like setting in residential neighborhoods. These programs focus on
teaching family living and social skills, and include both individual and
group counseling.
As of June 30, 1996, the Company was providing educational and treatment
services, directly or through management contracts with Helicon, to
approximately 1,700 youth through 39 programs. The table below sets forth
certain information regarding the Company's youth services programs in operation
as of June 30, 1996.
PROVIDER AVERAGE COMMENCEMENT
OF POPULATION FOR OF
LOCATION PROGRAM TYPE RECORD CAPACITY FISCAL 1996 OPERATIONS
- -------------------------------- ------------------------------------ -------- -------- -------------- ------------
NON-RESIDENTIAL PROGRAMS:
California:
Banning....................... Educational day treatment Company 60 23 1985
Barstow....................... Educational day treatment Company 40 16 1994
Beaumont...................... Educational day treatment Company 40 23 1985
Chula Vista................... Educational day treatment Company 79 36 1994
Desert Hot Springs............ Educational day treatment Company 15 8 1992
Grand Terrace................. Educational day treatment Company 179 156 1985
Mid-Valley.................... Educational day treatment Company 84 80 1988
Quail Valley.................. Educational day treatment Company 40 30 1990
Ramona........................ Educational day treatment Company 40 28 1990
Riverside..................... Educational day treatment Company 132 117 1992
Riverside..................... Educational day treatment Company 30 N/A 1996
San Bernardino................ Educational day treatment Company 60 31 1980
Steele Canyon................. Educational day treatment Company 36 31 1994
Victorville................... Educational day treatment Company 40 32 1987
Florida:
Jacksonville.................. Diversionary education Company 32 9 1995
Louisiana:
New Orleans................... Diversionary education Company 30 29 1991
New Orleans................... Family preservation Company N/A 4 1994
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PROVIDER AVERAGE COMMENCEMENT
OF POPULATION FOR OF
LOCATION PROGRAM TYPE RECORD CAPACITY FISCAL 1996 OPERATIONS
- -------------------------------- ------------------------------------ -------- -------- -------------- ------------
Tennessee:
Covington..................... Diversionary education Helicon 30 29 1994
Clarksville................... Diversionary education Helicon 40 40 1994
Murfreesboro.................. Family preservation Helicon N/A 18 1988
Murfreesboro.................. Educational day treatment Helicon 20 16 1990
Murfreesboro.................. Diversionary education Helicon 40 40 1994
Nashville..................... Diversionary education Helicon 40 40 1990
Nashville..................... Homebound education Company N/A 84 1991
Various....................... On-site education services in Helicon 403 359 1993
emergency shelters and diagnostic
centers
RESIDENTIAL PROGRAMS:
Alabama:
Eutaw......................... Therapeutic wilderness Company 20 15 1995
Jasper........................ Therapeutic wilderness Company 20 16 1994
Selma......................... Therapeutic wilderness Company 26 10 1996
Tuscaloosa.................... Pre-trial secure residential Company 27 24 1989
Tuscumbia..................... Pre-trial secure residential Company 25 19 1992
California:
Mid-Valley.................... Residential treatment Helicon 84 81 1988
Ramona........................ Residential psychiatric treatment Helicon 40 36 1984
Riverside..................... Residential treatment Helicon 120 115 1992
Riverside..................... Residential treatment Helicon 30 N/A 1996
Various....................... Group homes Helicon 36 20 1994
Tennessee:
Clarksville................... Diagnostic and evaluation services Company 25 25 1992
Johnson City.................. Pre-trial secure residential Company 12 9 1985
Murfreesboro.................. Residential treatment Company 34 34 1989
Newbern....................... Residential treatment Company 32 32 1990
Since June 30, 1996, the Company has entered into, or has been selected to
negotiate, contracts to operate the following programs:
Bexar County, Texas. In July 1996, the Company entered into a
contract to operate a juvenile justice alternative school in Bexar County,
Texas. Scheduled to open in September 1996 for the 1996-1997 school year,
the school will accommodate up to 400 students who have been removed from
the county's public school system for various statutory offenses.
Eufaula, Alabama. In July 1996, the Company entered into a contract
to operate a medium-security residential youth center in Eufaula, Alabama.
The program, scheduled to open in August 1996, will serve 60 juvenile males
who have been committed to state custody.
Nueces County, Texas. In August 1996, the Company was selected to
negotiate a contract to operate a juvenile justice alternative school in
Nueces County, Texas. Scheduled to open in September 1996 for the 1996-1997
school year, the school will accommodate up to 30 students who have been
removed from the county's public school system for various statutory
offenses.
Joshua Tree, California. In August 1996, the Company entered into a
contract to develop and operate an educational day treatment program for
the Morongo Valley School District. Scheduled to
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open in September 1996, the program will accommodate up to 25 students who
are severely handicapped, medically fragile, severely emotionally disturbed
or learning disabled.
Highlands County, Florida. In August 1996, the Company was selected
to negotiate a contract to develop and operate a diversionary education
program in Highlands County, Florida. Scheduled to open in September 1996,
the program will accommodate up to 30 students who have been adjudicated
delinquent or who otherwise would be placed in residential programs.
OPERATIONAL PROCEDURES
The Company's programs are designed to provide consistent, high quality and
cost-effective education and treatment across a range of services to meet a wide
variety of needs for the various segments of the at risk and troubled youth
population. 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 education and treatment programs. The Company's direct care staff
includes teachers, counselors, mental health professionals, 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. The Company currently has approximately 77
employees with masters or doctorate degrees.
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, as well as tuition reimbursement benefits.
Quality Assessment. The Company has developed a model of ongoing program
evaluation and quality management which the Company believes provides critical
feedback to measure the quality of its various programs. The Company has
implemented its Periodic Service Review ("PSR") system at the majority of its
programs, and expects to complete implementation at the Company's remaining
programs during fiscal 1997. The PSR system 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 all staff so
that each team member is aware on a timely basis if program standards are being
met. The Company believes the PSR system is a vital management tool to evaluate
the quality of its programs, and 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 expand the scope of the PSR system, the Company is attempting to develop a
computer-based program which correlates client characteristics and program
achievements with recidivism data after youth are released from the Company's
various programs.
Security. The Company realizes that, in the operation of programs for at
risk and troubled youth, a primary mission is to protect 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.
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, as well as school
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districts and juvenile courts responsible for special programs for at risk and
troubled youth. Marketing efforts are conducted and coordinated by the Company's
Vice President of Business Development and other senior management personnel
with the aid, where appropriate, of certain independent consultants. In 1993 and
1994, the Company conducted an extensive survey of governmental agencies
responsible for services to at risk and troubled youth. Based on responses to
this survey, the Company determined to selectively focus its marketing efforts
on a number of additional geographic areas, both within states in which it
currently operates and in additional states, based on probability of success,
geographic location, existing competition, potential profitability and political
acceptability. The Company continues to evaluate these and other areas for their
market potential.
The Company generally pursues its business opportunities in one of two
ways. The Company follows either 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. 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. Most of
the Company's activities in the area of securing new business are in the form of
responding to RFPs. As part of the Company's process of responding to RFPs,
management meets with appropriate personnel from the agency making the request
to best determine the agency's distinct needs. If the project fits within the
Company's strategy, the Company will then submit a written response to the RFP.
A typical RFP requires bidders to provide detailed information, including the
service to be provided by the bidder, its experience and qualification and the
price at which the bidder is willing to provide the services. The Company has,
and intends in the future, to engage independent consultants to assist it in
responding to RFPs. Based on the proposals received in response to an RFP, the
agency will award a contract to the successful bidder. In addition to issuing
formal RFPs, local jurisdictions may issue an RFQ. In the RFQ process, the
requesting agency selects a firm believed to be most qualified to provide the
requested services and then negotiates the terms of the contract with that firm,
including the price at which its services are to be provided.
The Company also attends and promotes its services at key conferences
throughout the United States where potential government clients are present. Key
management staff are on occasion requested by governmental agencies to make
presentations at such conferences or to provide professional training.
RELATIONSHIP WITH HELICON
The Company conducts a significant portion of its business through its
relationship with Helicon, a Section 501(c)(3) not-for-profit corporation. As of
June 30, 1996, the Company was providing consulting, management and marketing
services to Helicon at 12 programs. The Company also leases two facilities to
Helicon for the operation of its programs and has entered into an agreement to
purchase certain additional real property that is being leased by Helicon for
certain of its Tennessee 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 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. During the three months ended June 30, 1996,
the Company recognized all of the management fee income to which it was
entitled. However, for each of the fiscal years ended March 31, 1996, 1995 and
1994, the Company did not recognize all the management fee income to which it
was entitled due to the inability of Helicon to pay these amounts, and there can
be no assurance that the Company will recognize any management fee income in the
future. As of June 30, 1996, unpaid management fees, lease payments and
advances, plus interest, due to the Company from Helicon totaled $6,653,000.
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, 1999. The Company also has guaranteed Helicon's obligations
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under a bank line of credit in the amount of $500,000. See "Risk
Factors -- Relationship with Helicon," "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" and Note D of Notes to
Consolidated Financial Statements.
MAJOR CUSTOMERS
During the fiscal year ended March 31, 1996, the Company earned
approximately 23% of its revenues under a contract with the Riverside County
Office of Education, Riverside, California, and approximately 15% of its
revenues under three contracts with the State of Tennessee. The Company's
contract with the Riverside County Office of Education requires that the Company
provide special education and related services, such as transportation,
counseling and language and speech therapy, to those individuals requiring such
services who are referred to one of the Company's schools by Riverside County.
The Company's contracts with the State of Tennessee require that the Company
provide education, treatment, assessment and evaluation services. The existing
contracts with Riverside County and the State of Tennessee expired June 30,
1996. As is customary, the Company historically has negotiated the renewal of
these contracts in July and August following the end of the fiscal year (June
30) of these governmental entities. The Company currently is negotiating the
renewal of the contract with Riverside County, and expects to renew this
contract during August 1996 for a period of one year. The Company has reached
agreement regarding the renewal terms of each of the three Tennessee contracts,
two of which were renewed for a period of six months and the other for a period
of one year. There can be no assurance that all of the contracts with Riverside
County or the State of Tennessee will be renewed for the current or any
subsequent year on terms acceptable to the Company. See "Risk Factors --
Dependence on Certain Customers," "Risk Factors -- Contract Renewal and
Termination" and Note M of Notes to Consolidated Financial Statements.
REGULATIONS
The industry in which the Company operates is subject to federal, state and
local regulations which are administered by various regulatory authorities and
accrediting bodies. Pursuant to the terms of the Company's contracts and state
laws and regulations, the Company is required to obtain licenses, certifications
and/or accreditations for its programs. The Company's contracts typically
include extensive reporting requirements and may require supervision and on-site
monitoring by representatives of contracting governmental agencies. State law
also typically requires teachers, counselors and other personnel to meet certain
training standards as well as certain credential and license requirements. In
addition, many state and local governments are required to enter into a
competitive bidding procedure before awarding contracts for products or
services. The failure to comply with any applicable laws, rules or regulations
and the loss of any required license, certification or accreditation could have
a material adverse effect on the Company's financial condition and results of
operations. Furthermore, the current and future operations of the Company may be
subject to additional regulations as a result of, among other factors, new
statutes and regulations and changes in the manner in which existing statutes
and regulations are or may be interpreted or applied. Any such additional
regulations could have a material adverse effect on the Company's financial
condition and results of operations.
COMPETITION
The youth education and treatment 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 and governmental
agencies that are responsible for 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 the reputation of its
personnel. The business in which the Company engages is one that other entities
may easily enter without substantial capital investment or experience in
management of education or treatment facilities. Many of the Company's
competitors have greater resources than the Company. 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 education and
treatment 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.
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EMPLOYEES
At June 30, 1996, the Company had 471 full-time employees and 214 part-time
employees, none of whom were represented by a union. Of these 685 employees, 43
were corporate or regional administrative staff and 642 were involved in program
and facility operation and management. Management believes that its relations
with its employees are good.
INSURANCE
The Company maintains an $11 million general liability insurance policy for
all of its operations. The Company also maintains insurance in amounts it deems
adequate to cover property and casualty risks, workers' compensation and
director and officer liability. 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 respect to these requirements.
LEGAL PROCEEDINGS
In October 1995, a civil action was filed in the Circuit Court of Colbert
County, Alabama, against the Company and certain of the Company's employees in
connection with the circumstances surrounding the alleged wrongful death of a
juvenile enrolled at the Company's wilderness program in Jasper, Alabama. The
Company's investigation indicated that the juvenile had physical impairments
prior to his enrollment in the wilderness program, which may have contributed to
his death. The complaint, among other things, alleged negligence and civil
rights violations on the part of the Company and certain of its employees, and
sought an unspecified amount of damages. In July 1996, the Company reached a
confidential settlement of this lawsuit which will not have an adverse effect on
the Company's financial condition or results of operations.
In December 1992, the Company received an audit report from the California
Department of Social Services alleging overpayments of approximately $315,000 at
its six-bed group homes for the years 1991 and 1992. The Company is contesting
this determination and filed a rate protest with the Department of Social
Services in February 1993. An informal hearing was concluded in October 1995,
and in April 1996, the Company filed a request for a formal hearing which was
held on August 6, 1996. A provision for liability of approximately $201,000 is
included in accrued other expenses at June 30, 1996.
The Company is involved in various other legal proceedings, none of which
are expected to have a material effect on the Company's financial condition or
results of operations.
PROPERTIES
Except for its non-residential office and educational treatment center in
Grand Terrace, California, its educational treatment centers in Victorville and
Riverside, California, and its residential treatment centers in Murfreesboro and
Newbern, Tennessee (which are owned by the Company), the Company leases
facilities for the operation of its programs on a short-term basis (generally
one to five years) in the particular locality where it conducts its programs.
For the fiscal year ended March 31, 1996, the Company's total rental expense was
approximately $445,000. In addition, the Company also has obtained a right to
occupy certain facilities rent-free during the effectiveness of the Company's
contracts to provide residential treatment programs in Alabama, Tennessee and
Texas. The Company owns real estate and improvements in Riverside and Ramona,
California which it leases to Helicon pursuant to lease agreements which expire
July 31, 2019 and December 31, 1997, respectively. In July 1996, the Company
entered into an agreement to purchase, for $690,000, real property being leased
by Helicon for certain of its Tennessee programs.
The Company also owns its corporate headquarters office building located in
Murfreesboro, Tennessee. This office building contains approximately 8,800
square feet of office space. The Company believes its facilities are suitable
for its current operations and programs. The Company believes that if any of its
leases are terminated or the Company needs additional space, it will be able to
obtain new or additional space on acceptable terms.
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MANAGEMENT
The following table sets forth certain information concerning the executive
officers and directors of the Company as of the date of this Prospectus.
NAME AGE POSITION
- ------------------------------------- --- -----------------------------------------------
William J Ballard.................... 54 Chairman, Chief Executive Officer and Director
Amy S. Harrison...................... 46 Vice Chairman, President and Director
Martha A. Petrey, Ph.D............... 53 Executive Vice President and Director
Stephen H. Norris.................... 51 Executive Vice President
Vicki M. Agee, Ph.D.................. 57 Vice President
Kathryn Behm Celauro................. 48 Vice President - Business Development
Mary P. Trainor...................... 50 Vice President
Vice President - Finance, Secretary and
Donald B. Whitfield.................. 44 Treasurer
Thomas B. Clark...................... 54 Director
Joseph A. Fernandez, Ed.D.(1)........ 60 Director
David L. Warnock(1).................. 38 Director
- ---------------
(1) Pursuant to a Stockholders' Agreement, dated September 20, 1993, between the
Company, Strategic Partners, Ms. Harrison and Dr. Petrey (the "Stockholders'
Agreement"), such persons agreed to vote their shares of Common Stock and
take such other actions within their power as may be required to cause
individuals designated by Strategic Partners to be elected to the Board of
Directors such that Strategic Partners has representation on the Board of
Directors approximately equal to its percentage ownership in the Company for
as long as Strategic Partners owns Common Stock with voting power equal to
at least 33% of the aggregate voting power of all outstanding Common Stock.
Mr. Warnock and Dr. Fernandez are the designated representatives of
Strategic Partners. Following this offering, the Stockholders' Agreement
will terminate; however, Mr. Warnock and Dr. Fernandez were reelected to the
Board of Directors at the Annual Meeting.
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, 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. Ms. Harrison founded a group of corporations
collectively known as Advocate Schools ("Advocate Schools") in 1977, and served
as an executive officer and a director of those corporations until their
acquisition by the Company in March 1988 and February 1990. Ms. Harrison also
currently serves as a consultant to the California State Department of Education
and has had numerous state and county appointments.
Dr. Petrey has served as 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 and February 1990. 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.
Mr. Norris has served as Executive Vice President of the Company since
April 1993. From June 1990 through March 1993, Mr. Norris served as President of
the Company. From December 1988 to May 1990, Mr. Norris served as Executive
Director of the Tennessee Business Roundtable, and from 1985 to 1988 Mr. Norris
served as Commissioner of the Tennessee Department of Correction.
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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 Vice President - Business Development 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 and was an Assistant Attorney General for the
State of Tennessee for four years.
Ms. Trainor has served as a Vice President of the Company since 1989. Ms.
Trainor served as Administrative Director of Advocate Schools from 1985 to 1988
and joined the Company as Director of Operations, Advocate Schools in March 1988
following the Company's acquisition of three of the four Advocate Schools
corporations.
Mr. Whitfield has served as Vice President - Finance, Secretary and
Treasurer of the Company since March 1993. Mr. Whitfield has been employed by
the Company since March 1988 in various capacities, including Controller,
Assistant Secretary and Assistant Treasurer. Mr. Whitfield is a certified public
accountant.
Mr. Clark is 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 headquartered in Nashville, Tennessee. 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 is President of Joseph A. Fernandez & Associates, Inc., an
education consulting firm. From June 1993 until June 1996, Dr. Fernandez served
as President and Chief Executive Officer of School Improvement Services, Inc., a
Winter Park, Florida organization which provides consulting services related to
school improvement at the state, district or school level. Prior to assuming
such position 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 received his
Doctor of Education from Nova University in 1985. In June 1996, the Company
entered into a one-year agreement with Joseph Fernandez & Associates, Inc.
("JFA"), of which Dr. Fernandez serves as President, for the provision of
certain marketing and consulting services to the Company. Pursuant to the
terms of this agreement, JFA will be paid a monthly fee of $4,167 and will
receive warrants for 20,000 shares of Common Stock for each new Company program
obtained as a result of services provided under the agreement that meet
specified annual operating income criteria.
Mr. Warnock is a partner in Cahill, Warnock & Company, an investment
management company, as well as a consultant to Strategic Partners, a principal
shareholder of the Company. See "Principal and Selling Shareholders." Until July
1995, Mr. Warnock served as President of T. Rowe Price Strategic Partners II,
L.P., the general partner of Strategic Partners, and as a Vice President of T.
Rowe Price Associates, Inc.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of the date hereof, and as adjusted to reflect
the sale of the Common Stock offered hereby, with respect to (i) the Selling
Shareholder; (ii) each person known by the Company to own beneficially more than
five percent of the Common Stock; (iii) each of the Company's directors; and
(iv) all directors and executive officers as a group.
SHARES BENEFICIALLY SHARES TO SHARES BENEFICIALLY
OWNED PRIOR TO THE BE SOLD IN OWNED AFTER THE
OFFERING(1) THE OFFERING OFFERING(1)
------------------- ------------ -------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
- ------------------------------------------- -------- ------- -------- -------
T. Rowe Price Strategic Partners Fund II,
L.P.(2).................................. 1,834,280 33.3% 800,000(3) 1,034,280 14.8%
William J Ballard(4)....................... 115,000 2.0 --(3) 115,000 1.6
Amy S. Harrison(5)(6)...................... 348,579 6.3 -- 348,579 4.9
Martha A. Petrey, Ph.D.(6)(7).............. 340,246 6.1 --(3) 340,246 4.8
Thomas B. Clark(8)......................... 7,250 * -- 7,250 *
Joseph A. Fernandez, Ed.D.(9).............. 19,336 * -- 19,336 *
David L. Warnock(10)....................... 6,500 * -- 6,500 *
All directors and executive officers as a
group (11 persons)(11)................... 893,685 15.5 --(3) 893,685 12.3
- ---------------
*Less than one percent.
(1) As used in this table, "beneficial ownership" means the sole or shared
power to vote or direct the voting or to dispose or direct the disposition
of any security. A person is deemed as of any date to have "beneficial
ownership" of any security that such person has a right to acquire within
60 days after such date. Any security that any person named above has the
right to acquire within 60 days is deemed to be outstanding for purposes of
calculating the ownership percentage of such person and all directors and
executive officers as a group, but is not deemed to be outstanding for
purposes of calculating the ownership percentage of any other person.
(2) In September 1993, the Company received $1,500,000 pursuant to a loan
agreement with Strategic Partners under a 12%, one-year term loan. This
loan had equity components through which Strategic Partners received shares
of Common Stock upon closing and a warrant to increase its ownership
position to up to one-third of the then total outstanding Common Stock. In
July 1994, Strategic Partners exercised its warrant for a total
consideration of $1,848,000. $500,000 of the proceeds from the warrant
exercised was used to reduce the balance outstanding under the term loan to
$1,000,000. In September 1994, Strategic Partners renewed the $1,000,000
balance outstanding under this loan for a term of five years. The balance
outstanding under this loan was repaid in full in September 1995. In
connection with the Strategic Partners loan agreement, the Company entered
into a Registration Rights Agreement pursuant to which the shares being
sold in this offering by Strategic Partners are being sold. See
"Description of Capital Stock -- Registration Rights." Strategic Partners'
address is 100 East Pratt Street, Baltimore, Maryland 21202.
(3) Strategic Partners, Mr. Ballard and Dr. Petrey have agreed to sell up to
200,000, 50,000 and 20,000 shares of Common Stock, respectively, pursuant
to the Underwriters' over-allotment option. See "Underwriting."
(4) Includes 114,000 shares subject to currently exercisable options.
(5) Includes 44,000 shares subject to currently exercisable options.
(6) Mr. Harrison and Dr. Petrey are former shareholders of Advocate Schools and
have been executive officers and directors of the Company since the
Company's acquisition of Advocate Schools. After acquiring Advocate
Schools, the Company continued payments under several real property leases
between Ms. Harrison, Dr. Petrey and Advocate Schools on real property
owned by Ms. Harrison and Dr. Petrey. These leases expired during fiscal
1994. However, the Company continues to lease certain of the subject
properties on a month-to-month basis under the same payment terms and
conditions as in the original leases. Payments to Ms. Harrison and Dr.
Petrey under these rental arrangements during fiscal 1996 totaled $101,000.
(7) Includes 35,667 shares subject to currently exercisable options.
(8) Includes 6,250 shares subject to currently exercisable options and 1,000
shares owned by Mr. Clark's spouse, as to which he disclaims beneficial
ownership.
(9) Includes 6,250 shares subject to currently exercisable options pursuant to
the Company's stock incentive plans and a warrant to purchase 9,616 shares
of Common Stock issued to School Improvement Services, Inc. Dr. Fernandez
is a principal shareholder and served as President and Chief Executive
Officer of School Improvement Services, Inc. from June 1993 until June
1996.
(10) Includes 6,250 shares subject to currently exercisable options. Does not
include 1,834,280 shares of Common Stock owned by Strategic Partners. Mr.
Warnock serves as a consultant to Strategic Partners and formerly was the
president of T. Rowe Price Strategic Partners II, L.P., the general partner
of Strategic Partners, and a Vice President of T. Rowe Price Associates,
Inc. In such capacity, Mr. Warnock may be deemed to share voting and
investment power with respect to such shares. Mr. Warnock disclaims
beneficial ownership of such shares.
(11) Does not include shares of Common Stock beneficially owned by Strategic
Partners. Includes an aggregate of 262,752 shares subject to currently
exercisable options and 9,616 shares subject to a currently exercisable
warrant.
37
38
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock currently consists of 50,000,000
shares of Common Stock, $.01 par value, and 10,000,000 shares of preferred
stock, $1.00 par value ("Preferred Stock"). Upon the completion of this
offering, 7,001,244 shares of Common Stock and no shares of Preferred Stock will
be outstanding. Pursuant to the Company's stock incentive plans, there are
417,282 shares of Common Stock reserved for issuance pursuant to outstanding
options and an additional 495,450 shares of Common Stock available for future
grants. In addition, 9,616 shares of Common Stock are issuable upon the exercise
of an outstanding warrant.
The following summary description is qualified in its entirety by reference
to the Company's Restated Charter and Bylaws and the other contracts, agreements
and documents describing the terms of the Company's securities.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
to be voted on by shareholders and are not entitled to cumulative voting in the
election of directors. Accordingly, holders of a majority of the shares of
Common Stock voting in the election of directors can elect all of the directors
standing for election. Holders of Common Stock are entitled to share ratably in
dividends, if any, as may be declared from time to time by the Board of
Directors in its discretion out of funds legally available therefor. In the
event of any voluntary or involuntary liquidation, dissolution or winding up of
the Company, holders of Common Stock are entitled to share ratably in any assets
remaining after satisfaction of all prior claims. The Restated Charter gives
holders of Common Stock no preemptive or other subscription or conversion
rights, and there are no redemption provisions with respect to such shares. All
outstanding shares of Common Stock are, and the shares offered hereby will be,
when issued and paid for, fully paid and nonassessable. The rights, preferences
and privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of holders of shares of any series of Preferred Stock
which the Company may designate and issue in the future.
PREFERRED STOCK
The Restated Charter authorizes 10,000,000 shares of Preferred Stock, none
of which is outstanding. The Board of Directors has the authority, without any
further vote or action by the shareholders, to issue Preferred Stock in one or
more series and to fix the number of shares, designations, relative rights
(including voting rights), preferences and limitations of such series to the
full extent now or hereafter permitted by Tennessee law. The Company has no
present intention to issue any series of Preferred Stock.
REGISTRATION RIGHTS
Following this offering, beneficial holders of an aggregate of 1,643,438
shares of Common Stock will have contractual rights with respect to the
registration of shares of Common Stock ("Registrable Shares") under the
Securities Act. The Company has granted two demand registration rights which may
be exercised by Strategic Partners with respect to shares of Common Stock held
by it. In addition, Strategic Partners, Amy S. Harrison and Martha A. Petrey
have incidental registration rights which provide that, in the event the Company
proposes to register any of its securities under the Securities Act for its own
account, holders of Registrable Shares may require the Company to include all or
a portion of the Registrable Shares in the registration, provided, among other
conditions, that the managing underwriter (if any) of any such offering has the
right, subject to certain conditions, to limit the number of Registrable Shares
included in the registration. In general, all fees, costs and expenses of such
registrations (other than the underwriting commissions, dealers' fees, brokers'
fees and concessions applicable to Common Stock) will be borne by the Company.
In connection with this offering, Strategic Partners and Dr. Petrey have
exercised their incidental registration rights with respect to 1,020,000
Registrable Shares. Ms. Harrison has waived her registration rights with respect
to this offering.
38
39
CERTAIN PROVISIONS OF THE RESTATED CHARTER, BYLAWS, AND TENNESSEE LAW
Certain provisions of the Restated Charter, Bylaws, and Tennessee statutory
law described in this section may delay or make more difficult acquisitions or
changes of control of the Company that are not approved by the Board of
Directors. Such provisions have been implemented to enable the Company to
develop its business in a manner that will foster its long-term growth without
the disruption of the threat of a takeover not deemed by the Board of Directors
to be in the best interests of the Company and its shareholders.
Advance Notice for Shareholder Proposals or Making Nominations at
Meetings. The Bylaws establish an advance notice procedure for shareholder
proposals to be brought before a meeting of shareholders of the Company and for
nominations by shareholders of candidates for election as directors at an annual
meeting or a special meeting at which directors are to be elected. Subject to
any other applicable requirements, only such business may be conducted at a
meeting of shareholders as has been brought before the meeting by, or at the
direction of, the Board of Directors, or by a shareholder who has given to the
Secretary of the Company timely written notice in proper form, of the
shareholder's intention to bring that business before the meeting. The presiding
officer at such meeting has the authority to make such determinations. Only
persons who are selected and recommended by the Board of Directors, or the
committee of the Board of Directors designated to make nominations, or who are
nominated by a shareholder who has given timely written notice, in proper form,
to the Secretary prior to a meeting at which directors are to be elected will be
eligible for election as directors of the Company.
To be timely, notice of nominations or other business to be brought before
any meeting must be received by the Secretary of the Company not less than fifty
(50) days nor more than seventy-five (75) days prior to the meeting. The notice
of any shareholder proposal or nomination for election as director must set
forth various information required under the Bylaws. The person submitting the
notice of nomination and any person acting in concert with such person must
provide, among other things, the name and address under which they appear on the
Company's books (if they so appear) and the class and number of shares of the
Company's capital stock that are beneficially owned by them.
Amendment of the Bylaws and Restated Charter. The Bylaws provide that a
majority of the members of the Board of Directors or the holders of a majority
of the voting power of all shares of the Company's capital stock represented at
a regular or special meeting have the power to amend, alter, change, or repeal
the Bylaws.
Except as may be set forth in resolutions providing for any class or series
of Preferred Stock, any proposal to amend, alter, change, or repeal the Restated
Charter requires approval by the affirmative vote of both a majority of the
members of the Board of Directors then in office and the holders of a majority
of the voting power of all of the shares of the Company's capital stock entitled
to vote on the amendments, with shareholders entitled to dissenters' rights as a
result of the amendment voting together as a single class.
Anti-Takeover Legislation. The Tennessee Business Combination Act (the
"Combination Act") provides, among other things, that any corporation to which
the Combination Act applies, including the Company, shall not engage in any
"business combination" with an "interested shareholder" for a period of five
years following the date that such shareholder became an interested shareholder
unless prior to such date the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
shareholder becoming an interested shareholder.
The Combination Act defines "business combination," generally, to mean any:
(i) merger or consolidation; (ii) share exchange; (iii) sale, lease, exchange,
mortgage, pledge, or other transfer (in one transaction or a series of
transactions) of assets representing 10% or more of (A) the market value of
consolidated assets, (B) the market value of the corporation's outstanding
shares or (C) the corporation's consolidated net income; (iv) issuance or
transfer of shares from the corporation to the interested shareholder; (v) plan
of liquidation; (vi) transaction in which the interested shareholder's
proportionate share of the outstanding shares of any class of securities is
increased; or (vii) financing arrangements pursuant to which the interested
shareholder, directly or indirectly, receives a benefit except proportionately
as a shareholder.
39
40
The Combination Act defines "interested shareholder," generally, to mean
any person who is the beneficial owner, either directly or indirectly, of 10% or
more of any class or series of the outstanding voting stock, or any affiliate or
associate of the corporation who has been the beneficial owner, either directly
or indirectly, of 10% or more of the voting power of any class or series of the
corporation's stock at any time within the five year period preceding the date
in question. Consummation of a business combination that is subject to the
five-year moratorium is permitted after such period if the transaction (i)
complies with all applicable charter and bylaw requirements and applicable
Tennessee law and (ii) is approved by at least two-thirds of the outstanding
voting stock not beneficially owned by the interested shareholder, or when the
transaction meets certain fair price criteria. The fair price criteria include,
among others, the requirement that the per share consideration received in any
such business combination by each of the shareholders is equal to the highest of
(i) the highest per share price paid by the interested shareholder during the
preceding five-year period for shares of the same class or series plus interest
thereon from such date at a treasury bill rate less the aggregate amount of any
cash dividends paid and the market value of any dividends paid other than in
cash since such earliest date, up to the amount of such interest, (ii) the
highest preferential amount, if any, such class or series is entitled to receive
on liquidation, or (iii) the market value of the shares on either the date the
business combination is announced or the date when the interested shareholder
reaches the 10% threshold, whichever is higher, plus interest thereon less
dividends as noted above.
The Tennessee Control Share Acquisition Act (the "Acquisition Act")
prohibits certain shareholders from exercising in excess of 20% of the voting
power in a corporation acquired in a "control share acquisition," as defined in
the Acquisition Act, unless such voting rights have been previously approved by
the disinterested shareholders of the corporation. The Company has not elected
to make the Acquisition Act applicable to the Company. No assurance can be given
that such election, which must be expressed in a charter or bylaw amendment,
will or will not be made in the future.
The Tennessee Greenmail Act (the "Greenmail Act") prohibits the Company
from purchasing or agreeing to purchase any of its securities, at a price in
excess of fair market value, from a holder of 3% or more of any class of such
securities who has beneficially owned such securities for less than two years,
unless such purchase has been approved by the affirmative vote of a majority of
the outstanding shares of each class of voting stock issued by the Company or
the Company makes an offer of at least equal value per share to all holders of
shares of such class.
The effect of the Combination Act, the Acquisition Act, and the Greenmail
Act may be to render more difficult a change of control of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is SunTrust Bank,
Atlanta.
40
41
UNDERWRITING
The Underwriters named below have severally agreed, subject to the terms
and conditions set forth in the Underwriting Agreement, to purchase from the
Company and the Selling Shareholder the number of shares of Common Stock
indicated below opposite their respective names at the public offering price
less the underwriting discount set forth on the cover page of this Prospectus.
The Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent and that the Underwriters are committed
to purchase all of the shares if they purchase any.
UNDERWRITERS NUMBER OF SHARES
--------------------------------------------------------------------- ----------------
Montgomery Securities................................................ 766,667
Equitable Securities Corporation..................................... 766,667
Lehman Brothers Inc.................................................. 766,666
---------
Total........................................................... 2,300,000
=========
The Underwriters have advised the Company and the Selling Shareholder that
the Underwriters propose initially to offer the Common Stock to the public on
the terms set forth on the cover page of this Prospectus. The Underwriters may
allow to selected dealers a concession of not more than $.52 per share; and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $.10 per share to certain other dealers. After the public offering, the
offering price and other selling terms may be changed by the Underwriters. The
Common Stock is offered subject to receipt and acceptance by the Underwriters,
and to certain other conditions, including the right to reject orders in whole
or in part.
The Company, the Selling Shareholder and certain other shareholders of the
Company have granted an option to the Underwriters, exercisable during the
30-day period after the date of this Prospectus, to purchase up to a maximum of
345,000 additional shares of Common Stock to cover over-allotments, if any, at
the same price per share as the initial shares to be purchased by the
Underwriters. In the event the Underwriters exercise the over-allotment option
for less than 345,000 shares, the Underwriters will purchase the first 70,000 of
such shares from Mr. Ballard and Dr. Petrey, the next 200,000 of such shares
from the Selling Shareholder and the balance of such shares from the Company.
See "Principal and Selling Shareholders." To the extent that the Underwriters
exercise this option, the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may purchase such
shares only to cover over-allotments made in connection with this offering.
The Underwriting Agreement provides that the Company, the Selling
Shareholder and the other selling shareholders will indemnify the Underwriters
against certain liabilities, including civil liabilities under the Securities
Act, or will contribute to payments the Underwriters may be required to make in
respect thereof.
The Selling Shareholder and each of the Company's directors and executive
officers have agreed, subject to certain limited exceptions, not to offer, sell
or otherwise dispose, directly or indirectly, of any shares of Common Stock for
a period of 120 days after the date of this Prospectus, without the prior
written consent of Montgomery Securities, as representative of the Underwriters.
The Company has agreed not to offer, sell or otherwise dispose of, directly or
indirectly, any shares of Common Stock for a period of 120 days after the date
of this Prospectus, without the prior written consent of Montgomery Securities,
as representative of the Underwriters, except that the Company, without such
consent, may grant options or issue Common Stock upon exercise of new or
outstanding options pursuant to the Company's stock incentive plans.
Certain of the Underwriters and selling group members (if any) that
currently act as market makers for the Common Stock may engage in "passive
market making" in the Common Stock on Nasdaq in accordance with Rule 10b-6A
under the Exchange Act. Rule 10b-6A permits, upon the satisfaction of certain
conditions, underwriters and selling group members participating in a
distribution that are also Nasdaq market makers in the security being
distributed to engage in limited market making transactions during the period
when Rule 10b-6 under the Exchange Act would otherwise prohibit such activity.
Rule 10b-6A prohibits underwriters and selling group members engaged in passive
market making generally from entering a bid or effecting a purchase at a price
that exceeds the highest bid for those securities displayed on Nasdaq by a
41
42
market maker that is not participating in the distribution. Under Rule 10b-6A,
each underwriter or selling group member engaged in passive market making is
subject to a daily net purchase limitation equal to 30% of such entity's average
daily trading volume during the two full consecutive calendar months immediately
preceding the date of the filing of the registration statement under the
Securities Act pertaining to the security to be distributed. Passive market
making may stabilize the market price of the Common Stock at a level above that
which might otherwise prevail and, if commenced, may be discontinued at any
time.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Bass, Berry & Sims PLC, Nashville, Tennessee. Certain
legal matters in connection with this offering will be passed upon for the
Underwriters by Hale and Dorr, Washington, D.C.
EXPERTS
The consolidated financial statements of the Company as of March 31, 1995
and 1996, and for each of the three years in the period ended March 31, 1996,
appearing in this Prospectus and the Registration Statement of which this
Prospectus is a part have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere or
incorporated by reference herein and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-2 under the Securities Act with
respect to the shares of Common Stock offered by this Prospectus. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. Certain items are omitted in
accordance with the rules and regulations of the Commission. Statements
contained in this Prospectus concerning the provisions or contents of any
contract or other document referred to herein are not necessarily complete. With
respect to each such contract or other document filed as an exhibit to the
Registration Statement, reference is made to such exhibit for a more complete
description, and each such statement is deemed to be qualified in all respects
by such reference.
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports, proxy statements, and other
information with the Commission. The Registration Statement (with exhibits), as
well as such reports, proxy statements, and other information may be inspected
and copied at prescribed rates at the public reference facilities maintained by
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Regional Offices located at
Seven World Trade Center, 13th Floor, New York, New York 10048, and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission maintains a
web site that contains reports, proxy statements and other information regarding
registrants, including the Company, that file such information electronically
with the Commission. The address of the Commission's web site is
http://www.sec.gov.
42
43
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents previously filed with the Commission by the Company
are incorporated herein by reference:
(1) Annual Report on Form 10-K for the fiscal year ended March 31, 1996;
and
(2) Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.
All reports and other documents filed by the Company pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus
and prior to the termination of this offering shall be deemed to be incorporated
by reference in this Prospectus and to be a part hereof from the filing date of
such documents. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein,
or in any other subsequently filed document that also is incorporated or is
deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus. Subject
to the foregoing, all information appearing in this Prospectus is qualified in
its entirety by the information appearing in the documents incorporated herein
by reference.
The Company will provide, without charge, to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon the written or oral
request of such person, a copy of any document described herein (not including
exhibits to those documents unless such exhibits are specifically incorporated
by reference into this Prospectus). Requests for such documents should be
directed to Donald B. Whitfield, Children's Comprehensive Services, Inc., 805
South Church Street, Murfreesboro, Tennessee 37130, telephone number (615)
896-3100.
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44
CHILDREN'S COMPREHENSIVE SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE NO.
--------
Consolidated Unaudited Financial Statements:
Consolidated Balance Sheets at June 30, 1996 and March 31, 1996 (unaudited)...... F-2
Consolidated Statements of Income for the three months ended June 30, 1996 and
1995 (unaudited).............................................................. F-3
Consolidated Statements of Cash Flows for the three months ended June 30, 1996
and 1995 (unaudited).......................................................... F-4
Notes to Consolidated Unaudited Financial Statements............................. F-5
Report of Independent Auditors..................................................... F-6
Consolidated Financial Statements:
Consolidated Balance Sheets at March 31, 1996 and 1995........................... F-7
Consolidated Statements of Income for the years ended March 31, 1996, 1995 and
1994.......................................................................... F-8
Consolidated Statements of Shareholders' Equity for the years ended March 31,
1996, 1995 and 1994........................................................... F-9
Consolidated Statements of Cash Flows for the years ended March 31, 1996, 1995
and 1994...................................................................... F-10
Notes to Consolidated Financial Statements....................................... F-11
F-1
45
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, MARCH 31,
1996 1996
------------ ------------
ASSETS
CURRENT ASSETS
Cash.......................................................... $ 3,318,000 $ 2,427,000
Accounts receivable, net of allowance for doubtful accounts of
$143,000 at June 30 and $146,000 at March 31............... 4,025,000 4,468,000
Prepaid expenses.............................................. 300,000 303,000
Other current assets.......................................... 404,000 254,000
------------ ------------
TOTAL CURRENT ASSETS.................................. 8,047,000 7,452,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation of
$4,994,000 at June 30 and $4,803,000 at March 31.............. 14,183,000 14,306,000
NOTE RECEIVABLE................................................. 217,000 217,000
OTHER ASSETS AND DEFERRED CHARGES, at cost, net of accumulated
amortization of $346,000 at June 30 and $332,000 at March
31............................................................ 135,000 147,000
------------ ------------
TOTAL ASSETS.......................................... $ 22,582,000 $ 22,122,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.............................................. $ 540,000 $ 658,000
Current maturities -- long-term debt.......................... 206,000 201,000
Accrued employee compensation................................. 997,000 1,570,000
Accrued other expenses........................................ 595,000 648,000
Deferred revenue.............................................. 160,000 160,000
Income taxes payable.......................................... 492,000 311,000
------------ ------------
TOTAL CURRENT LIABILITIES............................. 2,990,000 3,548,000
DEFERRED TAXES PAYABLE.......................................... 125,000 125,000
LONG-TERM DEBT.................................................. 6,000,000 6,052,000
OTHER LIABILITIES............................................... 365,000 365,000
------------ ------------
TOTAL LIABILITIES..................................... 9,480,000 10,090,000
------------ ------------
SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00 per share -- 10,000,000
shares authorized.......................................... 0 0
Common stock, par value $ .01 per share -- 10,000,000 shares
authorized; issued and outstanding 5,494,785 shares at June
30 and 5,378,726 shares at March 31........................ 55,000 54,000
Additional paid-in capital.................................... 25,638,000 25,422,000
Accumulated (deficit)......................................... (12,591,000) (13,444,000)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY............................ 13,102,000 12,032,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............ $ 22,582,000 $ 22,122,000
============ ============
See notes to consolidated unaudited financial statements.
F-2
46
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
-------------------------
1996 1995
---------- ----------
Revenues:
Operating revenues................................................ $6,482,000 $5,518,000
Management fee income............................................. 311,000 106,000
---------- ----------
TOTAL REVENUES............................................ 6,793,000 5,624,000
---------- ----------
Operating expenses:
Employee compensation and benefits................................ 4,063,000 3,415,000
Purchased services and other expenses............................. 1,182,000 1,086,000
Depreciation and amortization..................................... 191,000 264,000
Related party rent................................................ 25,000 25,000
---------- ----------
TOTAL OPERATING EXPENSES.................................. 5,461,000 4,790,000
---------- ----------
Income from operations.............................................. 1,332,000 834,000
Other (income) expense:
Interest:
Banks and other................................................ 200,000 211,000
Related parties................................................ 0 29,000
Interest income................................................... (32,000) (2,000)
---------- ----------
TOTAL OTHER (INCOME) EXPENSE, NET......................... 168,000 238,000
---------- ----------
Income before income taxes.......................................... 1,164,000 596,000
Provision for income taxes.......................................... 311,000 89,000
---------- ----------
NET INCOME................................................ $ 853,000 $ 507,000
---------- ----------
Net income per common share:
Primary........................................................... $ .15 $ .09
========== ==========
Fully diluted..................................................... $ .15 $ .09
========== ==========
See notes to consolidated unaudited financial statements.
F-3
47
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
JUNE 30,
--------------------------
1996 1995
---------- -----------
OPERATING ACTIVITIES
Net income....................................................... $ 853,000 $ 507,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.................................................. 191,000 202,000
Amortization.................................................. 0 62,000
Amortization of deferred loan costs........................... 14,000 24,000
Changes in operating assets and liabilities:
Decrease in accounts receivable............................... 443,000 389,000
Decrease in prepaid expenses.................................. 3,000 13,000
(Increase) in other current assets............................ (150,000) (50,000)
(Decrease) in accounts payable................................ (118,000) (262,000)
(Decrease) in accrued employee compensation................... (573,000) (259,000)
Increase (decrease) in accrued expenses....................... (53,000) 65,000
Increase in income taxes payable.............................. 181,000 39,000
Increase in deferred revenue.................................. 0 15,000
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES................ 791,000 745,000
--------- ---------
INVESTING ACTIVITIES
Purchase of property and equipment............................... (68,000) (46,000)
(Increase) in other assets....................................... (2,000) 0
--------- ---------
NET CASH (USED) BY INVESTING ACTIVITIES.................. $ (70,000) $ (46,000)
--------- ---------
FINANCING ACTIVITIES
Proceeds from revolving lines of credit.......................... $ 0 $ 1,417,000
Principal payments on revolving lines of credit and long-term
borrowings.................................................... (47,000) (1,458,000)
Principal payments on long-term borrowings -- related parties.... 0 (14,000)
--------- ---------
Proceeds from issuance of Common Stock........................... 217,000 0
Stock issue/registration costs................................... 0 (23,000)
--------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES......... 170,000 (78,000)
INCREASE IN CASH AND CASH EQUIVALENTS.............................. 891,000 621,000
Cash and cash equivalents at beginning of period................. 2,427,000 69,000
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............... $3,318,000 $ 690,000
========= =========
See notes to consolidated unaudited financial statements.
F-4
48
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 1996
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 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. Certain reclassifications
have been made in the consolidated financial statements for the three month
period ended June 30, 1995, to conform to the presentation of the financial
statements for the three month period ended June 30, 1996. Operating results for
the three month period ended June 30, 1996 are not necessarily indicative of the
results that may be expected for the fiscal year ending March 31, 1997. For
further information, refer to the financial statements and footnotes thereto for
the fiscal year ended March 31, 1996.
NOTE B -- NET INCOME PER COMMON SHARE
The computation of net income per common share is based on the weighted
average number of shares outstanding and common stock equivalents, consisting of
dilutive stock options and warrants.
F-5
49
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Children's Comprehensive Services, Inc.
We have audited the accompanying consolidated balance sheets of Children's
Comprehensive Services, Inc. as of March 31, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
three years in the period ended March 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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. at March 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended March 31, 1996, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Nashville, Tennessee
May 15, 1996
F-6
50
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31,
-----------------------------
1996 1995
------------ ------------
ASSETS
CURRENT ASSETS
Cash.......................................................... $ 2,427,000 $ 69,000
Accounts receivable, net of allowance for doubtful accounts of
$146,000 in 1996 and $133,000 in 1995...................... 4,468,000 3,432,000
Prepaid expenses.............................................. 303,000 266,000
Other current assets.......................................... 254,000 134,000
----------- ------------
TOTAL CURRENT ASSETS.................................. 7,452,000 3,901,000
PROPERTY AND EQUIPMENT, net..................................... 14,306,000 14,866,000
PROPERTY HELD FOR SALE.......................................... -0- 165,000
NOTE RECEIVABLE................................................. 217,000 -0-
NON-COMPETITION AGREEMENTS, net of accumulated amortization of
$2,000,000 in 1996 and $1,750,000 in 1995..................... -0- 250,000
OTHER ASSETS AND DEFERRED CHARGES, at cost, net of accumulated
amortization of $332,000 in 1996 and $259,000 in 1995......... 147,000 267,000
----------- ------------
TOTAL ASSETS.......................................... $ 22,122,000 $ 19,449,000
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.............................................. $ 658,000 $ 658,000
Current maturities -- long term debt:
Related party.............................................. -0- 59,000
Other...................................................... 201,000 177,000
Income taxes payable.......................................... 311,000 69,000
Accrued employee compensation................................. 1,570,000 716,000
Accrued other expenses........................................ 648,000 673,000
Deferred revenue.............................................. 160,000 127,000
----------- ------------
TOTAL CURRENT LIABILITIES............................. 3,548,000 2,479,000
DEFERRED TAXES PAYABLE.......................................... 125,000 125,000
LONG TERM DEBT:
Related Party................................................. -0- 672,000
Other......................................................... 6,052,000 6,252,000
OTHER LIABILITIES............................................... 365,000 465,000
----------- ------------
TOTAL LIABILITIES..................................... 10,090,000 9,993,000
----------- ------------
SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00 per share -- 10,000,000
shares authorized.......................................... -0- -0-
Common stock, par value $.01 per share -- 10,000,000 shares
authorized; issued and outstanding 5,378,726 shares in 1996
and 5,355,891 shares in 1995............................... 54,000 54,000
Additional paid-in capital.................................... 25,422,000 25,370,000
Accumulated (deficit)......................................... (13,444,000) (15,968,000)
----------- ------------
TOTAL SHAREHOLDERS' EQUITY............................ 12,032,000 9,456,000
----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY.............................................. $ 22,122,000 $ 19,449,000
=========== ============
See notes to consolidated financial statements.
F-7
51
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED MARCH 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
Revenues:
Operating revenues................................ $23,630,000 $20,575,000 $18,849,000
Management fee income............................. 1,036,000 367,000 -0-
----------- ----------- -----------
TOTAL REVENUES............................ 24,666,000 20,942,000 18,849,000
----------- ----------- -----------
Operating expenses:
Employee compensation and benefits................ 15,010,000 12,676,000 11,619,000
Purchased services and other expenses............. 4,590,000 3,886,000 3,601,000
Depreciation and amortization..................... 1,025,000 1,080,000 1,277,000
Related party rent................................ 101,000 101,000 101,000
Provision for bad debts........................... 38,000 83,000 92,000
----------- ----------- -----------
TOTAL OPERATING EXPENSES.................. 20,764,000 17,826,000 16,690,000
----------- ----------- -----------
Income from operations.............................. 3,902,000 3,116,000 2,159,000
Other (income) expense:
Interest:
Banks and other................................ 820,000 968,000 1,138,000
Related parties................................ 49,000 220,000 279,000
Interest income................................... (36,000) (1,000) (20,000)
Write-off of advances to Helicon.................. -0- -0- 1,024,000
Write down of property............................ -0- 122,000 -0-
Other income...................................... -0- (166,000) (569,000)
----------- ----------- -----------
TOTAL OTHER (INCOME)
EXPENSE, NET............................ 833,000 1,143,000 1,852,000
----------- ----------- -----------
Income before income taxes and extraordinary item... 3,069,000 1,973,000 307,000
Provision for income taxes.......................... 491,000 69,000 -0-
----------- ----------- -----------
Income before extraordinary item.................... 2,578,000 1,904,000 307,000
Extraordinary item:
Loss on early extinguishment of debt, net of
income tax benefit of $10,000.................. 54,000 -0- -0-
----------- ----------- -----------
NET INCOME................................ $ 2,524,000 $ 1,904,000 $ 307,000
========== ========== ==========
Earnings per common share:
Income before extraordinary item.................. $ .46 $ .38 $ .10
Extraordinary item................................ (.01) -0- -0-
----------- ----------- -----------
NET INCOME................................ $ .45 $ .38 $ .10
========== ========== ==========
Earnings per common share -- assuming full dilution:
Income before extraordinary item.................. $ .45 $ .37 $ .08
Extraordinary item................................ (.01) -0- -0-
----------- ----------- -----------
NET INCOME................................ $ .44 $ .37 $ .08
========== ========== ==========
See notes to consolidated financial statements.
F-8
52
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK,
$.01 PAR VALUE ADDITIONAL TOTAL
--------------------- PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
--------- ------- ----------- ------------ -------------
Balance at April 1, 1993.... 3,069,241 $31,000 $22,936,000 $(18,179,000) $ 4,788,000
Stock issued:
Employee stock purchase
plan................. 59,580 -0- 33,000 33,000
Conversion of debt..... 385,290 4,000 474,000 478,000
Exercise of options.... 2,500 -0- 7,000 7,000
Refinancing............ 172,200 2,000 171,000 173,000
Net income for the year... 307,000 307,000
--------- ------- ----------- ------------ -----------
Balance at March 31, 1994... 3,688,811 37,000 23,621,000 (17,872,000) 5,786,000
Stock issued:
Exercise of warrant.... 1,662,080 17,000 1,831,000 1,848,000
Exercise of options.... 5,000 -0- 10,000 10,000
Stock registration
costs.................. (92,000) (92,000)
Net income for the year... 1,904,000 1,904,000
--------- ------- ----------- ------------ -----------
Balance at March 31, 1995... 5,355,891 54,000 25,370,000 (15,968,000) 9,456,000
Stock issued:
Exercise of options.... 22,875 63,000 63,000
Stock redeemed:
Fractional shares from
one for two reverse
split................ (40)
Warrant adjustment........ 16,000 16,000
Stock registration
costs.................. (27,000) (27,000)
Net income for the year... 2,524,000 2,524,000
--------- ------- ----------- ------------ -----------
5,378,726 $54,000 $25,422,000 $(13,444,000) $ 12,032,000
========= ======= =========== ============ ===========
See notes to consolidated financial statements.
F-9
53
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MARCH 31,
--------------------------------------------
1996 1995 1994
----------- ------------ -----------
OPERATING ACTIVITIES
Net income...................................................... $ 2,524,000 $ 1,904,000 $ 307,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.................................................. 775,000 830,000 858,000
Amortization.................................................. 250,000 250,000 419,000
Amortization of deferred loan costs........................... 74,000 163,000 220,000
Provision for bad debts....................................... 38,000 83,000 92,000
Write down of property........................................ -0- 122,000 -0-
Other......................................................... 19,000 (16,000) -0-
Loss on early extinguishment of debt.......................... 64,000 -0- -0-
Changes in operating assets and liabilities:
(Increase) in accounts receivable............................. (1,074,000) (289,000) (484,000)
(Increase) decrease in prepaid expenses....................... (37,000) 62,000 11,000
(Increase) in other current assets............................ (120,000) (51,000) (36,000)
(Decrease) in accounts payable................................ -0- (99,000) (727,000)
Increase (decrease) in accrued employee compensation.......... 854,000 (290,000) 202,000
(Decrease) in accrued restructuring expenses:
Related party............................................... -0- -0- (421,000)
Other....................................................... -0- -0- (141,000)
(Decrease) in accrued other expenses.......................... (25,000) (451,000) (288,000)
Increase in income taxes payable.............................. 242,000 69,000 -0-
Increase (decrease) in deferred revenue....................... (23,000) 31,000 6,000
Increase (decrease) in other liabilities...................... (100,000) (100,000) 65,000
----------- ---------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES................ 3,461,000 2,218,000 83,000
----------- ---------- -----------
INVESTING ACTIVITIES
Purchase of short-term investments -- restricted................ -0- -0- (3,196,000)
Purchase of long-term investments -- restricted................. -0- -0- (784,000)
Sale of short-term investments.................................. -0- -0- 29,000
Sale of short-term investments -- restricted.................... -0- -0- 3,196,000
Sale of long-term investments -- restricted..................... -0- -0- 1,563,000
Purchase of property and equipment.............................. (252,000) (359,000) (201,000)
Proceeds from sale of property and equipment.................... 38,000 15,000 15,000
(Increase) in other assets...................................... (18,000) (233,000) (243,000)
----------- ---------- -----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES......... (232,000) (577,000) 379,000
----------- ---------- -----------
FINANCING ACTIVITIES
Proceeds from revolving lines of credit and long-term
borrowings.................................................... 3,436,000 15,246,000 6,200,000
Proceeds from notes payable -- related parties.................. -0- -0- 1,500,000
Principal payments on revolving lines of credit, long-term
borrowings and capital lease obligations...................... (3,612,000) (16,265,000) (8,100,000)
Principal payments on notes payable and long-term
borrowings -- related parties................................. (731,000) (1,197,000) -0-
Principal payments on mortgage notes payable.................... -0- (1,300,000) -0-
Proceeds from issuance of Common Stock.......................... 63,000 1,858,000 40,000
Stock registration costs........................................ (27,000) (92,000) -0-
----------- ---------- -----------
NET CASH (USED) BY FINANCING ACTIVITIES.................. (871,000) (1,750,000) (360,000)
----------- ---------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................. 2,358,000 (109,000) 102,000
Cash and cash equivalents at beginning of year.................. 69,000 178,000 76,000
----------- ---------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR................. $ 2,427,000 $ 69,000 $ 178,000
=========== ========== ===========
SUPPLEMENTAL INFORMATION
Income taxes paid............................................... $ 239,000 $ -0- $ -0-
Interest paid................................................... 793,000 956,000 1,174,000
See notes to consolidated financial statements.
F-10
54
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation -- The consolidated financial statements include the
accounts of Children's Comprehensive Services, Inc. and its subsidiaries (the
"Company"). All significant intercompany transactions and balances have been
eliminated.
Business -- The Company provides a broad range of youth services, with
emphasis on education and treatment services for at risk and troubled youth,
primarily to 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 programs and both open and
secure residential treatment centers in Alabama, California, Florida, Louisiana
and Tennessee. The Company also provides consulting, management and marketing
services to a not-for-profit corporation which provides similar services.
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 -- Contract pre-opening costs
(incremental direct costs incurred to open facilities in new market areas) are
amortized using the straight-line method over the lesser of the initial contract
term or one year. Deferred loan costs are amortized using the straight-line
method over the life of the related loans. Amortization of deferred loan costs
is included in interest expense.
Non-Competition Agreements -- Non-competition agreements are amortized
using the straight-line method over eight years.
Cost in Excess of Net Assets of Purchased Businesses -- The cost in excess
of net assets of purchased businesses ("goodwill") is amortized using the
straight-line method over twenty-five years. The carrying value of goodwill is
regularly reviewed for indicators of impairment in value, including unexpected
or adverse changes in the following: (i) the economic, competitive or regulatory
environments in which the Company operates, (ii) profitability and (iii) cash
flows. If facts and circumstances suggest that goodwill is impaired, the Company
would assess the fair value of the underlying business and would reduce the
goodwill balance to an amount that results in the book value of the Company
approximating fair value. The Company would determine fair value based on
independent appraisals, earnings multiples, estimated net proceeds assuming
disposition of the business, and/or discounted cash flows at risk-adjusted
rates, as appropriate in the circumstances.
Revenue Recognition -- Revenues from youth education and treatment
contracts with governmental entities are recognized as services are rendered.
The receivables arising from such contracts are unsecured and generally are due
within thirty days.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles 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 in the
consolidated balance sheets for cash and cash equivalents approximate fair
value.
F-11
55
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Accounts Receivable and Accounts Payable -- The carrying amounts
reported in the consolidated balance sheets for accounts receivable and
accounts payable approximate fair value.
Long Term Debt -- The carrying amounts reported in the consolidated
balance sheets for long term debt approximate fair value.
Stock Based Compensation -- The Company grants stock options for a fixed
number of shares to employees 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 Opinion No. 25, Accounting for Stock
Issued to Employees, and, accordingly, recognizes no compensation expense for
the stock option grants.
Net Income (Loss) Per Common Share -- The computation of net income (loss)
per common share is based on the weighted average number of shares outstanding
and common stock equivalents, consisting of dilutive stock options and warrants.
Income Taxes -- Income taxes are accounted for under the provisions of
Financial Accounting Standards Board Statement 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.
Reclassifications -- Certain reclassifications have been made in the 1995
and 1994 financial statements to conform to the 1996 presentation.
NOTE B -- PROPERTY AND EQUIPMENT
Property and equipment consists of:
MARCH 31,
---------------------------
1996 1995
----------- -----------
Land and improvements............................. $ 1,491,000 $ 1,491,000
Buildings and improvements........................ 14,826,000 14,805,000
Furniture and equipment........................... 2,792,000 2,658,000
----------- -----------
19,109,000 18,954,000
Less accumulated depreciation..................... (4,803,000) (4,088,000)
----------- -----------
$14,306,000 $14,866,000
========== ==========
Depreciation expense totaled $775,000, $830,000, and $858,000 for the years
ended March 31, 1996, 1995 and 1994, respectively.
NOTE C -- PROPERTY HELD FOR SALE AND NOTE RECEIVABLE
Property held for sale at March 31, 1995 consisted of the estimated net
realizable value of an idle residential treatment center owned by the Company in
Ramona, California. The Company had determined, during fiscal 1995, that the
property had suffered a permanent impairment of value and had recorded a write
down of $122,000. On September 29, 1995, the Company sold this property for
$255,000, receiving a cash down payment of $38,000 and a note receivable of
$217,000. The note receivable bears interest at 7% per annum, and is due
September 29, 1998. The Company realized a gain of $67,000 on the sale of this
property. Of this amount, $10,000 was recognized as income during the year ended
March 31, 1996. The balance, $57,000, will be recognized as income upon
collection of the underlying note receivable.
F-12
56
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- HELICON INCORPORATED
Helicon, Incorporated ("Helicon"), a 501(c)(3) tax exempt company not
affiliated with the Company, operates youth treatment programs in California in
facilities owned by the Company and by Los Angeles County, California, and youth
education programs in Tennessee at various emergency shelters and diagnostic and
assessment centers throughout the state. 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. Management fee income totaled $1,036,000,
$367,000 and $-0- for the years ended March 31, 1996, 1995 and 1994,
respectively. Additional management fee income of $217,000, $703,000 and
$771,000 for the years ended March 31, 1996, 1995 and 1994, respectively, was
not recognized due to the inability of Helicon to pay these amounts.
The Company also leases real property to Helicon. Real estate and
improvements with a cost of $9,597,000 and a carrying value of $8,464,000 were
leased, under operating lease arrangements, to Helicon at March 31, 1996. Future
minimum rental payments due under these operating leases as of March 31, 1996
are as follows:
Year ending March 31:
1997........................................................ $ 857,000
1998........................................................ 823,000
1999........................................................ 720,000
2000........................................................ 720,000
2001........................................................ 720,000
2002 and thereafter......................................... 13,200,000
-----------
Total............................................... $17,040,000
==========
Lease income totaled $857,000 for each of the years ended March 31, 1996
and 1995. Lease income of $892,000 for the year ended March 31, 1994 was not
recognized due to the inability of Helicon to pay these amounts.
During fiscal 1994, the Company made advances to Helicon of $1,024,000 to
provide working capital for the start-up of operations. These advances were
expensed during fiscal 1994. During the period subsequent to March 31, 1994, no
additional advances have been made to Helicon.
Prior to fiscal 1995, Helicon was unable to pay either management fees or
lease payments. Additionally, as discussed above, the Company advanced Helicon
$1,024,000 during fiscal 1994. An additional $1,145,000 was advanced to Helicon
during fiscal 1993. At March 31, 1996, unpaid management fees, lease payments
and advances due the Company totaled $5,587,000. Additionally, interest due but
not recognized on these past due obligations totaled $944,000. The total amount
due from Helicon, $6,531,000, has been fully reserved by the Company. Based on
the current level of operations being maintained by Helicon, management does not
anticipate collecting any of these amounts. Future payments received from
Helicon on these amounts, if any, will be recognized by the Company on the cash
basis.
In January 1996, Helicon obtained through First American National Bank
("FANB") a $500,000 revolving line of credit. This line of credit bears interest
at prime + 3/4% (9% at March 31, 1996) and matures in September 1996. The
Company facilitated Helicon in this process by agreeing to reduce its line of
credit with FANB from $2.5 million to $2.0 million and further by agreeing to
guarantee Helicon's performance under the line of credit. No advances have been
made under this line of credit.
F-13
57
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E -- LINE OF CREDIT
In September 1994, the Company obtained through FANB a $2.5 million
one-year revolving line of credit. This line of credit, which was renewed in
September 1995 for a term of one year, bears interest at prime + 3/4% (9% at
March 31, 1996) and is secured primarily by the Company's accounts and notes
receivable. In January 1996, the amount available under the line of credit was
reduced to $2,000,000. (See Note D.) There were no borrowings outstanding
against the line of credit at March 31, 1996 or 1995. Availability under the
line of credit at March 31, 1996 was approximately $1,540,000, as the issuance
of a letter of credit of approximately $460,000 (see Note F) reduced the
Company's available credit by such amount.
The agreement with FANB includes covenants which restrict the incurrence of
certain additional indebtedness, provides for the maintenance of specified
financial ratios and prohibits the payment of cash dividends.
NOTE F -- LONG TERM DEBT
In September 1994, the Company entered into agreements with National Health
Investors, Inc. ("NHI") and T. Rowe Price Strategic Partners Fund II, L.P.
("Strategic Partners"). The Company obtained five-year term loans from NHI and
Strategic Partners for $6.5 million (at 11.5% per annum) and $1.0 million (at
12% per annum), respectively. Proceeds from the NHI loan were used to repay all
the Company's short-term bank obligations, and the Strategic Partners agreement
was an extension of an existing loan with Strategic Partners. During fiscal
1996, the Company made unscheduled principal payments of approximately $708,000
towards the Strategic Partners loan, resulting in the retirement of the
remaining obligation under that loan. The Company wrote off deferred loan costs
of approximately $64,000 in connection with the early extinguishment of the
Strategic Partners loan.
The agreement with NHI gives NHI a 25% interest in any increases in the
equity of the Company's operations at Helicon Youth Center in Riverside,
California and Grand Terrace School in Grand Terrace, California, and any such
amount is payable to NHI upon repayment of its loan. At March 31, 1996 the
amount due under the equity participation agreement was $-0-. The agreement with
NHI also gives NHI a 5% interest in any increases in gross revenues generated by
the Company's operations at the Helicon Youth Center and Grand Terrace School.
At March 31, 1996, the amount due under the revenue participation agreement was
approximately $18,000.
The NHI agreement also requires the Company to provide a debt service
reserve equal to six months payments of principal and interest (approximately
$460,000). This reserve was established through the execution of an irrevocable
letter of credit with FANB. (See Note E). The NHI agreement is secured primarily
by substantially all of the Company's real estate, improvements and equipment.
The agreements include covenants which restrict the incurrence of certain
additional indebtedness and provide for the maintenance of specified financial
ratios.
Future principal maturities of long-term debt are as follows at March 31,
1996:
Year ending March 31:
1997........................................................... $ 201,000
1998........................................................... 225,000
1999........................................................... 253,000
2000........................................................... 5,574,000
----------
Total.................................................. 6,253,000
Less current portion........................................... (201,000)
----------
Total long-term........................................ $6,052,000
==========
F-14
58
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- INCOME TAXES
Effective April 1, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". Under SFAS
No. 109, 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 rates and laws that will be in effect
when the differences are expected to reverse.
As permitted by SFAS No. 109, the Company elected not to restate the
financial statements of any prior years. Adoption of SFAS No. 109 had no effect
on net income for fiscal 1994.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
MARCH 31,
---------------------------
1996 1995
----------- -----------
Deferred tax liabilities:
Depreciation and amortization........................... $ 251,000 $ -0-
Other................................................... 125,000 125,000
----------- -----------
Total deferred tax liabilities.................. 376,000 125,000
----------- -----------
Deferred tax assets:
Net operating losses and credit carryforwards........... 2,225,000 2,795,000
Depreciation and amortization........................... -0- 144,000
Accrued expenses........................................ 373,000 462,000
Other................................................... 44,000 114,000
----------- -----------
Total deferred tax assets....................... 2,642,000 3,515,000
Valuation allowance for deferred tax assets............. (2,391,000) (3,515,000)
----------- -----------
Net deferred tax assets................................. 251,000 -0-
----------- -----------
Net deferred tax liability.............................. $ 125,000 $ 125,000
=========== ===========
Management has evaluated the need for a valuation allowance for all or a
portion of the deferred tax assets. A valuation allowance of $2,391,000 has been
recorded for the excess of net operating loss carryforwards, credit
carryforwards, and future deductible temporary differences over future taxable
temporary differences. The valuation allowance decreased by $1,124,000 during
fiscal 1996.
Income tax expense (benefit) is allocated in the financial statements as
follows:
YEAR ENDED MARCH 31,
-----------------------------
1996 1995 1994
-------- ------- ----
Income before extraordinary item........................ $491,000 $69,000 $-0-
Extraordinary item...................................... (10,000) -0- -0-
-------- ------ ----
Total......................................... $481,000 $69,000 $-0-
======== ====== ====
The provision for income taxes is as follows:
YEAR ENDED MARCH 31,
-----------------------------
1996 1995 1994
-------- ------- ----
Current federal income tax.............................. $364,000 $36,000 $-0-
Current state income tax................................ 127,000 33,000 -0-
-------- ------ ----
$491,000 $69,000 $-0-
======== ====== ====
F-15
59
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- INCOME TAXES (CONTINUED)
The reconciliation of income tax attributable to income before extraordinary
item computed at the federal statutory tax rates to income tax expense is as
follows:
YEAR ENDED MARCH 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
Income tax expense at federal statutory
rate....................................... $1,043,000 $ 660,000 $ 191,000
Benefit of prior year losses realized........ (648,000) (620,000) (195,000)
State income tax, net of federal benefit..... 84,000 22,000 -0-
Nondeductible expenses....................... 12,000 7,000 4,000
---------- --------- ---------
Provision for income taxes......... $ 491,000 $ 69,000 $ -0-
========== ========= =========
At March 31, 1996, the Company had regular tax net operating loss
carryforwards of $5,741,000 which expire from 2001 through 2010. Utilization of
$740,000 of the net operating loss carryforwards is subject to an annual
limitation of $40,000 pursuant to Internal Revenue Code Section 382. Utilization
of $5,001,000 of the net operating loss carryforwards is subject to an annual
limitation of $1,463,000 pursuant to Internal Revenue Code Section 382.
NOTE H -- SHAREHOLDERS' EQUITY
Reverse Stock Split -- Effective March 21, 1996, the Company effected a 1
for 2 reverse stock split, whereby each two shares of the Company's $.01 par
value Common Stock were exchanged for one share of the Company's $.01 par value
Common Stock. The number of shares and per share amounts in the consolidated
financial statements have been retroactively adjusted to reflect the reverse
stock split.
Warrants -- The following table sets forth outstanding warrants as of March
31, 1996 for the purchase of the Company's Common Stock:
EXERCISE
DATE NUMBER OF EXERCISE PRICE
GRANTED SHARES EXPIRATION DATE PER SHARE
----------------------------- --------- ----------------------------- ---------
September 20, 1993........... 50,000 September 20, 2003........... $2.00
September 30, 1995........... 9,615 September 30, 2004........... $5.20
------
59,615
======
During fiscal 1995, the Company issued warrants to purchase 8,000 shares of
the Company's Common Stock to School Improvement Services, Inc. in conjunction
with a marketing and consulting agreement entered into between the Company and
School Improvement Services, Inc. Additionally, in the event the average closing
price of the Company's Common Stock during the period October 1, 1994 through
September 30, 1995 was less than $6.25 per share, then the number of shares
issuable under this warrant would be adjusted to equal the number of shares
obtained by dividing $50,000 by the average closing price of the Company's
Common Stock. Pursuant to this provision, during fiscal 1996 the number of
shares issuable under this warrant was adjusted to 9,615, and the purchase price
was reduced to $5.20. (See Note L). During fiscal 1994 the Company issued
warrants to purchase 50,000 shares of the Company's Common Stock to Signet
Bank/Virginia in conjunction with the renewal of the Company's bank notes
payable. This warrant replaced an existing warrant for 6,600 shares which had
previously been issued BVA Credit Corporation.
No warrants were exercised during fiscal 1996. During fiscal 1995,
Strategic Partners exercised a warrant and purchased 1,662,080 shares of the
Company's Common Stock for an aggregate purchase price of $1,848,000. During
fiscal 1995 warrants for the purchase of 90,000 shares of the Company's Common
Stock expired. Of the 59,615 shares under warrant at March 31, 1996, all were
exercisable.
F-16
60
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE H -- SHAREHOLDERS' EQUITY (CONTINUED)
Stock Options -- The following table sets forth outstanding stock options
under the Company's stock option plans as of March 31, 1996, 1995 and 1994 for
the purchase of the Company's Common Stock:
MARCH 31,
-------------------------------
1996 1995 1994
------- ------- -------
Outstanding at beginning of period.................... 395,175 266,425 231,425
Granted............................................... 89,250 138,750 65,000
Exercised............................................. (22,875) (5,000) (2,500)
Forfeited............................................. (47,500) (5,000) (27,500)
------- ------- -------
Outstanding at end of period.......................... 414,050 395,175 266,425
======= ======= =======
Exercisable........................................... 336,050 395,175 266,425
Option price range.................................... $ .62 $ .62 $ .62
to to to
$ 7.00 $ 8.00 $ 8.00
Options for 22,875 shares were exercised during fiscal 1996 at exercise
prices of $1.125, $3.00, $3.25 and $5.75 per share, options for 5,000 shares
were exercised during fiscal 1995 at exercise prices of $3.00 per share and
options for 2,500 shares were exercised during fiscal 1994 at exercise prices of
$3.00 per share. During fiscal 1996, fiscal 1995 and fiscal 1994 options for the
purchase of 47,500 shares, 5,000 shares and 27,500 shares of the Company's
Common Stock expired.
The following table summarizes common shares reserved at March 31, 1996:
Warrants.......................................................... 59,615
1987 Employee Stock Option Plan................................... 915,250
1989 Stock Option Plan for Non-Employee Directors................. 70,000
---------
Total common shares reserved............................ 1,044,865
=========
Employee Stock Purchase Plan -- The Company had an employee stock purchase
plan for full-time employees of the Company. The purchase price per share was
determined as the lesser of 85% of the closing market price of the Company's
Common Stock on (1) the first trading date of the Company's fiscal year, or (2)
the last trading date of the Company's fiscal year. Closing market price was
determined as the last reported trade of the Company's Common Stock on the
Nasdaq Stock Market. During fiscal 1994, employees purchased 59,580 shares of
the Company's Common Stock at purchase prices of $.54 and $.58 per share under
this plan. As of March 31, 1994, 99,508 shares had been issued under this plan;
no additional shares will be issued under this plan.
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.
NOTE I -- EMPLOYEE BENEFIT PLAN
In 1986, certain of the Company's California subsidiaries, collectively
known as Advocate Schools, adopted a Salary Reduction Plan under section 401(k)
of the Internal Revenue Code. Effective January 1, 1994 the plan was amended to
allow for the participation of all otherwise qualified Company employees. This
plan allows employees paid on a salary only basis to defer not less than 1% and
not more than 10% 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 contributions have been made under the
plan. Administrative costs
F-17
61
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I -- EMPLOYEE BENEFIT PLAN (CONTINUED)
under the plan totaled $17,000, $21,000, and $15,000 for the years ended March
31, 1996, 1995 and 1994, respectively.
NOTE J -- 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 March 31, 1996:
Year ending March 31:
1997............................................................ $297,000
1998............................................................ 181,000
1999............................................................ 105,000
2000............................................................ 68,000
2001 and thereafter............................................. 58,000
--------
Total................................................... $709,000
========
Certain of the leases have renewal options of up to 2 years. Total rental
expense for all operating leases and other rental arrangements for the years
ended March 31, 1996, 1995 and 1994 was $587,000, $448,000, and $482,000,
respectively.
NOTE K -- CONTINGENCIES
Alabama Wilderness Program Wrongful Death Litigation -- In October 1995, a
civil action was filed in the Circuit Court of Colbert County, Alabama, against
the Company and certain of the Company's employees in connection with the
circumstances surrounding the alleged wrongful death of a juvenile enrolled at
the Company's wilderness program in Jasper, Alabama. The Company's investigation
indicates that the juvenile had physical impairments prior to his enrollment in
the wilderness program, which may have contributed to his death. The complaint,
among other things, alleges negligence and civil rights violations on the part
of the Company and certain of its employees, and seeks an unspecified amount of
damages. The action has been removed from the Circuit Court of Colbert County to
the United States District Court for the Northern District of Alabama,
Northwestern Division. While management believes the allegations are without
merit and intends to defend the litigation vigorously, management is unable at
this time to estimate the effect of any settlement or adverse judgment on the
results of operations or financial condition of the Company. The Company has,
therefore, made no accrual for any such settlement, adverse judgment, or costs
of adjudication.
Workers' Compensation Insurance Litigation -- In March 1993, the Company,
along with Legion Insurance Company, filed an involuntary bankruptcy petition
against J.R. McVay & Company, Insurance Brokers, Inc. ("McVay") in the United
States Bankruptcy Court, Central District of California. McVay was the insurance
broker responsible for obtaining worker's compensation insurance for the
Company's California operations. The Company received relief from the automatic
stay in the bankruptcy action and in July 1993, filed an action in Riverside
Superior Court against McVay. The Company alleged that McVay was negligent and
acted fraudulently in obtaining worker's compensation insurance for the Company.
The Company believes that the problems that arose with McVay were also
caused, or at least exacerbated, by the fraud and negligence of the insurance
companies that issued California workers' compensation coverage to the Company,
the companies that financed the premiums for those coverages, and the bank that
allowed McVay to endorse fraudulent checks in excess of $2,000,000.
Consequently, in June 1993 the Company filed an action in Riverside Superior
Court against Transamerica Insurance Finance Corporation, Commonwealth Risk
Services-West, Commonwealth Risk Services, Inc., Robert McIntosh, Legion
Insurance Company, Cananwill, Inc. and Sanwa Bank of California. This action was
transferred to Los Angeles Superior Court in October 1993.
F-18
62
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- CONTINGENCIES (CONTINUED)
During October 1994, the Company reached a settlement with respect to this
litigation. Pursuant to the settlement, the Company received $150,000 in cash
and all parties to the litigation executed a mutual release of all claims
related to such litigation. Previously, during fiscal 1994, the Company
recovered approximately $534,000 of deposits previously written off. These
amounts are included in other income in the Company's Consolidated Statements of
Income for fiscal 1995 and 1994.
California Department of Social Services Audit -- In December 1992, the
Company received an audit report from the California Department of Social
Services alleging overpayments of approximately $315,000 at its 6-bed group
homes for the years 1991 and 1992. The Company is contesting this determination
and filed a rate protest with the Department of Social Services in February
1993. An informal hearing was concluded in October 1995, and in April 1996, the
Company filed a request for a formal hearing. The Department of Social Services
has established August 6, 1996 as the hearing date. A provision for liability of
approximately $201,000 is included in accrued other expenses at March 31, 1996
and 1995.
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.
NOTE L -- RELATED PARTY TRANSACTIONS
In September 1993, the Company received $1,500,000 from Strategic Partners
under a 12%, one year term loan. This note had equity components through which
Strategic Partners received 172,200 shares of the Company's Common Stock upon
closing and a warrant to increase its ownership position to up to one third of
the Company's total outstanding Common Stock. In July 1994, Strategic Partners
exercised its warrant and purchased 1,662,080 shares of the Company's Common
Stock for an aggregate purchase price of $1,848,000. A portion of the proceeds
from the warrant exercised, $500,000, was used to reduce the balance outstanding
under the term loan to $1,000,000. Subsequently, in September 1994, Strategic
Partners renewed the $1,000,000 balance outstanding under this loan for a term
of five years. During fiscal 1996, the Company made unscheduled principal
payments of approximately $708,000 that retired the outstanding balance under
this loan. The Company wrote off deferred loan costs of approximately $64,000 in
connection with the early extinguishment of the Strategic Partners loan.
During fiscal 1995 the Company entered into a one-year agreement with
School Improvement Services, Inc. for marketing and consulting services; Joseph
A. Fernandez, Ed.D., a director of the Company, is President and Chief Executive
Officer of School Improvement Services, Inc. Compensation under this agreement
consisted of a fee of $50,000 and warrants for 8,000 shares of the Company's
Common Stock, exercisable at $6.25 per share. Additionally, in the event the
average closing price of the Company's Common Stock during the period October 1,
1994 through September 30, 1995 was less than $6.25 per share, then the number
of shares issuable under this warrant would be adjusted to equal the number of
shares obtained by dividing $50,000 by the average closing price of the
Company's Common Stock. Pursuant to this provision, during fiscal 1996 the
number of shares issuable under this warrant was adjusted to 9,615, and the
purchase price was reduced to $5.20. This agreement was renewed during fiscal
1996 for the period of October 1, 1995 through June 30, 1996. Compensation under
this agreement during the renewal period consists of monthly payments of
approximately $4,000. Payments under this agreement during fiscal 1996 and 1995,
including reimbursable expenses, totaled $52,000 and $34,000, respectively.
In conjunction with its acquisition of Advocate Schools in 1988, the
Company agreed to continue payments under several real property leases between
Amy S. Harrison and/or Martha A. Petrey, Ph.D. and their former companies. Ms.
Harrison and Dr. Petrey are the former stockholders of the acquired companies
and are now officers and directors of the Company. These leases expired during
fiscal 1994. However, the Company continues to utilize certain of the subject
properties on a month-to-month basis under the same payment terms and conditions
as in the original leases. Payments under these leases or month-to-month rental
F-19
63
CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE L -- RELATED PARTY TRANSACTIONS (CONTINUED)
arrangements during the years ended March 31, 1996, 1995, and 1994 totaled
$101,000, $101,000, and $312,000, respectively. Fiscal 1994 payments included
$211,000 provided for in fiscal 1993 due to the Company's decision to close
seven 6-bed group homes as part of its fiscal 1993 restructuring.
NOTE M -- SIGNIFICANT CUSTOMERS
Virtually all of the Company's revenues are attributable to contracts with
state and local government and governmental agencies. Such contracts are
typically subject to renewal annually. Contract renewal is affected by the
quality and type of services provided by the Company.
The following summarizes those customers from which in excess of 10% of the
Company's youth services revenues were derived:
FOR THE YEAR
ENDED % OF OPERATING
MARCH 31: CUSTOMER REVENUE REVENUE
- ------------ ------------------------------------------- ---------- --------------
1996 Riverside County Office of Education....... $5,360,000 23%
State of Tennessee......................... 3,612,000 15
---------- --
$8,972,000 38%
========== ==
1995 Riverside County Office of Education....... $5,080,000 25%
State of Tennessee......................... 3,636,000 17
---------- --
$8,716,000 42%
========== ==
1994 Riverside County Office of Education....... $5,179,000 28%
State of Tennessee......................... 3,780,000 20
---------- --
$8,959,000 48%
========== ==
At March 31, 1996 and 1995, accounts receivable from the above customers
totaled $906,000 and $956,000, respectively. Additionally, accounts receivable
from Los Angeles City Unified School District totaled $366,000 and $478,000 at
March 31, 1996 and 1995, respectively.
F-20
64
Omitted Graphic and Image Material
Inside back cover:
1. A map of the United States with certain states shaded to indicate the
states in which the Company currently has contracts to operate, and a
cross-reference indicating the location of the Company's various program
types and corporate headquarters. The following caption accompanies
the map:
"Corporate Headquarters - Murfreesboro, Tennessee"
2. A table setting forth the location (by state), program type, number of
programs (by state and program type) and the provider of record for the
Company's non-residential and residential programs.
65
- ------------------------------------------------------
- ------------------------------------------------------
No dealer, sales representative, or any other person has been authorized to
give any information or to make any representations other than those contained
in this Prospectus, and, if given or made, such information or representation
must not be relied upon as having been authorized by the Company, any Selling
Shareholder or by the Underwriters. Neither the delivery of this Prospectus nor
any sale made hereunder shall under any circumstances create any implication
that there has been no change in the affairs of the Company since the date
hereof. This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any securities offered hereby by anyone in any jurisdiction
in which such offer or solicitation is not authorized or in which the person
making such offer or solicitation is not qualified to do so or to any person to
whom it is unlawful to make such offer or solicitation.
----------------------------
TABLE OF CONTENTS
----------------------------
Page
----
Prospectus Summary.................... 3
Risk Factors.......................... 7
Use of Proceeds....................... 13
Price Range of Common Stock........... 14
Dividend Policy....................... 14
Capitalization........................ 15
Selected Consolidated Financial
Data................................ 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 25
Management............................ 35
Principal and Selling Shareholders.... 37
Description of Capital Stock.......... 38
Underwriting.......................... 41
Legal Matters......................... 42
Experts............................... 42
Available Information................. 42
Incorporation of Certain Information
by Reference........................ 43
Index to Consolidated Financial
Statements.......................... F-1
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,300,000 SHARES
CHILDRENS COMPREHENSIVE SERVICES LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MONTGOMERY SECURITIES
EQUITABLE SECURITIES
CORPORATION
LEHMAN BROTHERS
August 15, 1996
- ------------------------------------------------------
- ------------------------------------------------------