1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark one) FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF l934
For the transition period from to
------------ -------------
Commission File Number 0-16162
CHILDREN'S COMPREHENSIVE SERVICES, INC.
---------------------------------------
(Exact name of registrant as specified in its charter)
Tennessee 62-1240866
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
805 South Church Street, Murfreesboro, Tennessee 37130
- ------------------------------------------------ -----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (615) 896-3100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Common Stock, $ .01 Par Value, outstanding at November 11, 1996 - 7,126,444
shares.
Page 1 of 21
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INDEX
CHILDREN'S COMPREHENSIVE SERVICES, INC.
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets--September 30, 1996
(Unaudited) and March 31, 1996. . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income--
Three months ended September 30, 1996 and 1995;
Six months ended September 30, 1996 and 1995. . . . . . . . . . . . 5
Consolidated Statements of Cash Flows--
Six months ended September 30, 1996 and 1995. . . . . . . . . . . . 6
Notes to Consolidated Financial Statements--
September 30, 1996. . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 2. Management's Discussion and
Analysis of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
PART II. OTHER INFORMATION
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . 17
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . 17
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, March 31,
1996 1996
------------- ---------
ASSETS
CURRENT ASSETS
Cash (including cash equivalents of
$25,375,000 at September 30 and $-0-
at March 31) $26,651,000 $ 2,427,000
Short-term investments 491,000 -0-
Accounts receivable, net of allowance
for doubtful accounts of $106,000 at
September 30 and $146,000 at March 31 3,932,000 4,468,000
Prepaid expenses 355,000 303,000
Other current assets 613,000 254,000
----------- -----------
TOTAL CURRENT ASSETS 32,042,000 7,452,000
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $5,184,000 at September 30
and $4,803,000 at March 31 14,323,000 14,306,000
NOTE RECEIVABLE 217,000 217,000
OTHER ASSETS AND DEFERRED CHARGES, at cost,
net of accumulated amortization of
$373,000 at September 30 and $332,000 at
March 31 193,000 147,000
----------- -----------
TOTAL ASSETS $46,775,000 $22,122,000
=========== ===========
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Continued)
September 30, March 31,
1996 1996
------------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 731,000 $ 658,000
Current maturities-long term debt 213,000 201,000
Accrued employee compensation 1,147,000 1,570,000
Income taxes payable 127,000 311,000
Accrued other expenses 945,000 648,000
Deferred revenue 164,000 160,000
----------- -----------
TOTAL CURRENT LIABILITIES 3,327,000 3,548,000
DEFERRED TAXES PAYABLE 125,000 125,000
LONG TERM DEBT 5,945,000 6,052,000
OTHER LIABILITIES 365,000 365,000
----------- -----------
TOTAL LIABILITIES 9,762,000 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
--50,000,000 shares authorized; issued
and outstanding 7,126,444 shares at
September 30 and 5,378,726 shares at
March 31 71,000 54,000
Additional paid-in capital 49,046,000 25,422,000
Accumulated (deficit) (12,104,000) (13,444,000)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 37,013,000 12,032,000
----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $46,775,000 $22,122,000
=========== ===========
See notes to consolidated financial statements.
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Six Months Ended
September 30, September 30,
------------------------ -------------------------
1996 1995 l996 1995
---------- ---------- ----------- -----------
Revenues:
Operating revenues $6,138,000 $5,322,000 $12,620,000 $10,840,000
Management fee income 310,000 248,000 621,000 354,000
---------- ---------- ----------- -----------
TOTAL REVENUES 6,448,000 5,570,000 13,241,000 11,194,000
Operating expenses:
Employee compensation
and benefits 4,175,000 3,421,000 8,238,000 6,836,000
Purchased services and
other expenses 1,361,000 1,213,000 2,543,000 2,299,000
Depreciation and amortization 209,000 257,000 400,000 521,000
Related party rent 25,000 26,000 50,000 51,000
---------- ---------- ----------- -----------
TOTAL OPERATING EXPENSES 5,770,000 4,917,000 11,231,000 9,707,000
---------- ---------- ----------- -----------
Income from operations 678,000 653,000 2,010,000 1,487,000
Other (income) expense:
Interest expense:
Banks and other 199,000 208,000 399,000 419,000
Related parties -0- 20,000 -0- 49,000
Interest income (181,000) (1,000) (213,000) (3,000)
Other income (4,000) -0- (4,000) -0-
---------- ---------- ----------- -----------
TOTAL OTHER (INCOME) EXPENSE, NET 14,000 227,000 182,000 465,000
---------- ---------- ----------- -----------
Income before income taxes and
extraordinary item 664,000 426,000 1,828,000 1,022,000
Provision for income taxes 177,000 70,000 488,000 159,000
---------- ---------- ----------- -----------
Income before extraordinary item 487,000 356,000 1,340,000 863,000
Extraordinary item:
Loss on early extinguishment of
debt, net of income tax benefit
of $10,000 -0- 54,000 -0- 54,000
---------- ---------- ----------- -----------
NET INCOME $ 487,000 $ 302,000 $ 1,340,000 $ 809,000
========== ========== =========== ===========
Earnings per common share:
Income before extraordinary item $ .08 $ .06 $ .22 $ .16
Extraordinary item -0- (.01) -0- (.01)
---------- ---------- ----------- -----------
NET INCOME $ .08 $ .05 $ .22 $ .15
========== ========== =========== ===========
Earnings per common share--
assuming full dilution:
Income before extraordinary item $ .08 $ .06 $ .22 $ .15
Extraordinary item -0- (.01) -0- (.01)
---------- ---------- ----------- -----------
NET INCOME $ .08 $ .05 $ .22 $ .14
========== ========== =========== ===========
See notes to consolidated financial statements.
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
September 30,
----------- -----------
1996 1995
----------- -----------
OPERATING ACTIVITIES
Net income $ 1,340,000 $ 809,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 387,000 396,000
Amortization 13,000 125,000
Amortization of deferred loan costs 28,000 47,000
Provision for bad debts (38,000) -0-
Loss on early extinguishment of debt -0- 65,000
Other (4,000) 20,000
Changes in operating assets and liabilities:
Decrease in accounts receivable 574,000 218,000
(Increase) decrease in prepaid expenses (52,000) 3,000
(Increase) in other current assets (359,000) (105,000)
Increase (decrease) in accounts payable 73,000 (265,000)
Increase (decrease) in accrued employee
compensation (423,000) 139,000
Increase in accrued expenses 297,000 39,000
Increase in deferred revenue 4,000 113,000
(Decrease) in income taxes payable (184,000) (90,000)
----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,656,000 1,514,000
----------- -----------
INVESTING ACTIVITIES
Purchase of short-term investments (491,000) -0-
Purchase of property and equipment (409,000) (131,000)
Proceeds from sale of property and equipment 9,000 36,000
(Increase) in other assets (87,000) (12,000)
----------- -----------
NET CASH (USED) BY
INVESTING ACTIVITIES $ (978,000) $ (107,000)
----------- -----------
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
Six Months Ended
September 30,
----------- -----------
1996 1995
----------- -----------
FINANCING ACTIVITIES
Proceeds from revolving lines of credit
and long-term borrowings $ -0- $ 1,855,000
Principal payments on revolving lines of
credit and long-term borrowings (95,000) (1,939,000)
Principal payments on notes payable and
long-term borrowings--related parties -0- (731,000)
Proceeds from issuance of Common Stock, net 23,641,000 39,000
----------- -----------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 23,546,000 (776,000)
----------- -----------
INCREASE IN CASH AND CASH
EQUIVALENTS 24,224,000 631,000
Cash and cash equivalents at
beginning of period 2,427,000 69,000
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $26,651,000 $ 700,000
=========== ===========
SUPPLEMENTAL INFORMATION
Income taxes paid $ 672,000 $ 239,000
Interest paid 375,000 432,000
See notes to consolidated financial statements.
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 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 with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Certain reclassifications have been made in the consolidated
financial statements for the three and six month periods ended September 30,
1995, to conform to the presentation of the financial statements for the three
and six month periods ended September 30, 1996. Operating results for the three
and six month periods ended September 30, 1996 are not necessarily indicative of
the results that may be expected for the year ending March 31, 1997. For
further information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended March
31, 1996.
NOTE B -- EARNINGS 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.
NOTE C -- PUBLIC OFFERING OF STOCK
On August 22, 1996, the Company completed a public offering of 2,645,000 shares
of Common Stock, 1,575,000 shares of which were shares sold by the Company and
1,070,000 shares of which were sold by certain shareholders of the Company.
Net proceeds to the Company, after underwriting discount and offering expenses,
were approximately $23,400,000. On October 1, 1996, the Company used
approximately $6,651,000 of the proceeds to prepay the Company's outstanding
indebtedness to National Health Investors, Inc. ("NHI").
NOTE D -- SUBSEQUENT EVENT
On November 8, 1996, the Company entered into a loan and security agreement
with First American National Bank ("FANB"). Under the terms of this agreement,
FANB has made available to the Company, for acquisition financing and working
capital requirements, a revolving line of credit for up to $13,000,000. The
initial term of the agreement extends through November 1, 1999. The credit
facility will bear interest at the Company's option at either (i) the one, two
or three month LIBOR rate plus an applicable margin, which ranges between 1.35%
and 2.10% and is dependent on the ratio of funded debt to operating earnings or
(ii) FANB's index rate. The line of credit is secured primarily by the
Company's accounts receivable and equipment.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and this Quarterly Report on Form 10-Q contain
forward-looking statements and should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere herein.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. There are a
number of important factors that could cause the Company's actual results to
differ materially from those indicated by such forward-looking statements.
These factors include, without limitation, those set forth under "Business -
Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1996. The Company undertakes no obligation to publicly release
any revisions to any forward-looking statements contained herein to reflect
events or circumstances occurring after the date hereof or to reflect the
occurrence of unanticipated events.
General
As of September 30, 1996, the Company was providing education and treatment
services to approximately 1,800 at risk and troubled youth pursuant to
contracts with governmental agencies to manage 43 programs in 6 states. These
services were provided directly or through the Company's management contract
with Helicon, Incorporated ("Helicon"), a Section 501(c)(3) not-for-profit
corporation. 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 a Consulting and
Marketing Agreement, effective as of August 1992, by and between Helicon and
the Company (the "Helicon Agreement"). As of September 30, 1996, the Company
was providing consulting, management and marketing services to Helicon at 12
programs. In addition, Helicon also leases two facilities owned by the Company
to operate its 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 and six month
periods ended September 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, and for the three and six month periods
ended September 30, 1995, 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 September 30, 1996, unpaid
management fees, lease payments and advances, plus interest, due the Company
from Helicon totaled approximately $6,778,000. Based on the current level of
operations being maintained by Helicon, the Company does not
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10
anticipate collecting any of this amount. The Company has fully reserved this
amount, and future payments received from Helicon on this amount, if any, will
be recognized by the Company on the cash basis. The Helicon Agreement expires
September 1, 1999. The Company has also guaranteed Helicon's obligations under
a bank line of credit in the amount of $1,000,000. 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 worker's
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 tax 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.
On October 1, 1996, the Company used approximately $6,158,000 of the net
proceeds from its public offering of stock to prepay all of the Company's
outstanding indebtedness to NHI. As a result of the prepayment of this debt,
the Company incurred a prepayment penalty of approximately $493,000. Because
of the prepayment penalty, and the related write-off of deferred loan costs
related to the NHI loan, the Company will incur a pre-tax extraordinary charge
of approximately $613,000 for the quarter ending December 31, 1996.
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. The Company's quarterly results may
also be impacted by seasonality, as revenues generated by youth education
services are generally seasonal in nature, fluctuating with the academic school
year.
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Results of Operations
The following table sets forth, for the periods indicated, the percentage
relationship to the Company's total revenues of certain items in the Company's
statements of income:
Three Months Ended Six Months Ended
September 30, September 30,
--------------------- ---------------------
1996 1995 1996 1995
------ ------ ------ ------
Operating revenues 95.2% 95.6% 95.3% 96.8%
Management fee income 4.8 4.4 4.7 3.2
----- ----- ----- -----
TOTAL REVENUES 100.0 100.0 100.0 100.0
----- ----- ----- -----
Employee compensation and
benefits 64.8 61.4 62.2 61.1
Purchased services and
other expenses 21.1 21.8 19.2 20.5
Depreciation and amortization 3.2 4.6 3.0 4.6
Related party rent .4 .5 .4 .5
----- ----- ----- -----
TOTAL OPERATING EXPENSES 89.5 88.3 84.8 86.7
----- ----- ----- -----
Income from operations 10.5 11.7 15.2 13.3
Other (income) expense:
Interest expense 3.1 4.1 3.0 4.2
Interest income (2.8) -- (1.6) --
Other income (.1) -- -- --
Provision for income taxes 2.8 1.2 3.7 1.4
Extraordinary item, net of
income tax benefit -- 1.0 -- .5
----- ----- ----- -----
NET INCOME 7.5% 5.4% 10.1% 7.2%
===== ===== ===== =====
Three Months Ended September 30, 1996 and September 30, 1995
Operating revenues for the three months ended September 30, 1996
increased $816,000, or 15.3%, to $6,138,000 as compared to $5,322,000 for the
three months ended September 30, 1995. The increase in operating revenues
results primarily from the opening of four new programs during fiscal 1997, the
opening of two new programs during fiscal 1996 which were in operation
throughout the entire three months ended September 30, 1996, and from increases
in student enrollment at five of the Company's programs.
Management fee income recognized under the Helicon Agreement for the
three months ended September 30, 1996 increased $62,000 to $310,000 as compared
to $248,000 for the three months ended September 30, 1995. Additional
management fee income of $69,000 for the three months ended September 30, 1995
was not recognized by the Company due to the inability of Helicon to pay those
amounts.
Total revenues for the three months ended September 30, 1996 increased
$878,000, or 15.8%, to $6,448,000 as compared to $5,570,000 for the three
months ended September 30, 1995 as a result of the factors described above.
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Employee compensation and benefits for the three months ended September
30, 1996 increased $754,000, or 22.0%, to $4,175,000, as compared to $3,421,000
for the three months ended September 30, 1995. As a percentage of total
revenues, employee compensation and benefits increased from 61.4% for the three
months ended September 30, 1995 to 64.8% for the three months ended September
30, 1996. The increase in employee compensation and benefits over the same
period in the prior year results primarily from the growth in the number and
scope 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 September
30, 1996 increased $148,000, or 12.2%, to $1,361,000, as compared to $1,213,000
for the three months ended September 30, 1995. As a percentage of total
revenues, purchased services and other expenses decreased to 21.1% for the
three months ended September 30, 1996 from 21.8% for the three months ended
September 30, 1995. The increase in purchased services and other expenses over
the same period in the prior year is attributed primarily to the Company's
growth and to increases in investor relations and legal expenses.
Depreciation and amortization for the three months ended September 30,
1996 decreased $48,000, or 18.7%, to $209,000 as compared to $257,000 for the
three months ended September 30, 1995. The decrease in depreciation and
amortization compared to the same period in the prior year is attributable
primarily to the reduction in amortization of non-competition agreements from
approximately $62,000 for the three months ended September 30, 1995 to $-0- for
the three months ended September 30, 1996.
Income from operations for the three months ended September 30, 1996
increased $25,000, or 3.8%, to $678,000 as compared to $653,000 for the three
months ended September 30, 1995, and decreased as a percentage of total
revenues to 10.5% for the three months ended September 30, 1996 from 11.7% for
the three months ended September 30, 1995, as a result of the factors described
above.
Interest expense for the three months ended September 30, 1996 decreased
$29,000, or 12.7%, to $199,000 as compared to $228,000 for the three months
ended September 30, 1995. The decrease in interest expense over the same
period in the prior year is attributed principally to a reduction in the
average balance of debt outstanding and to a decrease in the amortization of
deferred loan costs.
Interest income increased $180,000 to $181,000 for the three months ended
September 30, 1996 as compared to $1,000 for the three months ended September
30, 1995. The increase in interest income over the same period in the prior
year is attributable primarily to the increase in cash available from
operations for investment and the cash proceeds from the Company's public
offering in August 1996.
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Provision for income tax expense for the three months ended September 30,
1996 increased $107,000 to $177,000 as compared to $70,000 for the three months
ended September 30, 1995. 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.
Six Months Ended September 30, 1996 and September 30, 1995
Operating revenues for the six months ended September 30, 1996 increased
by $1,780,000, or 16.4%, to $12,620,000 as compared to $10,840,000 for the same
period in the prior fiscal year. The increase in operating revenues results
primarily from the opening of four new programs during fiscal 1997, the opening
of three new programs during fiscal 1996 which were in operation throughout the
entire six months ended September 30, 1996, and from increases in student
enrollment at five of the Company's programs.
Management fee income recognized under the Helicon Agreement for the six
months ended September 30, 1996 increased $267,000 to $621,000 as compared to
$354,000 for the six months ended September 30, 1995. Additional management
fee income of $286,000 for the six months ended September 30, 1995 was not
recognized by the Company due to the inability of Helicon to pay those amounts.
Total revenues for the six months ended September 30, 1996 increased
$2,047,000, or 18.3%, to $13,241,000 as compared to $11,194,000 for the six
months ended September 30, 1995 as a result of the factors described above.
Employee compensation and benefits for the six months ended September 30,
1996 increased $1,402,000, or 20.5%, to $8,238,000, as compared to $6,836,000
for the six months ended September 30, 1995. As a percentage of total
revenues, employee compensation and benefits increased from 61.1% for the six
months ended September 30, 1995 to 62.2% for the six months ended September 30,
1996. The increase in employee compensation and benefits over the same period
in the prior year results primarily from the growth in the number and scope 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 six months ended September
30, 1996 increased $244,000, or 10.6%, to $2,543,000 as compared to $2,299,000
for the six months ended September 30, 1995. As a percentage of total
revenues, purchased services and other expenses decreased from 20.5% for the
six months ended September 30, 1995 to 19.2% for the six months ended September
30, 1996. The increase in purchased services and other expenses over the same
period in the prior year is attributed primarily to the Company's growth and to
increases in consulting, audit and travel expenses, net of a decrease in legal
expense.
Depreciation and amortization for the six months ended September 30, 1996
decreased $121,000, or 23.2%, to $400,000 as compared to $521,000 for the six
months ended September 30, 1995. The decrease in depreciation and amortization
compared to the same period in the prior year is attributable primarily to the
reduction in amortization of non-competition agreements from approximately
$125,000 for the six months ended September 30, 1995 to $-0- for the six months
ended September 30, 1996.
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Income from operations for the six months ended September 30, 1996
increased $523,000, or 35.2%, to $2,010,000 as compared to $1,487,000 for the
six months ended September 30, 1995, and increased as a percentage of total
revenues to 15.2% for the six months ended September 30, 1996 from 13.3% for
the six months ended September 30, 1995, as a result of the factors described
above.
Interest expense for the six months ended September 30, 1996 decreased
$69,000, or 14.7%, to $399,000 as compared to $468,000 for the six months ended
September 30, 1995. The decrease in interest expense is attributed principally
to a reduction in the average balance of debt outstanding and to a decrease in
the amortization of deferred loan costs.
Interest income increased $210,000 to $213,000 for the six months ended
September 30, 1996 as compared to $3,000 for the six months ended September 30,
1995. The increase in interest income over the same period in the prior year
is attributable primarily to the increase in cash available from operations for
investment and the cash proceeds from the Company's public offering in August
1996.
Provision for income tax expense for the six months ended September 30,
1996 increased $329,000 to $488,000 as compared to $159,000 for the six months
ended September 30, 1995. 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.
Liquidity and Capital Resources
Cash provided by operating activities for the six months ended September
30, 1996 was $1,656,000 on net income of $1,340,000 as compared to $1,514,000
on net income of $809,000 for the six months ended September 30, 1995. Working
capital at September 30, 1996 was $28,715,000, as compared to $3,904,000 at
March 31, 1996.
Cash used by investing activities was $978,000 for the six months ended
September 30, 1996 as compared to $107,000 for the six months ended September
30, 1995, due primarily to an increase in cash outlays for the purchase of
property and equipment and for the purchase of short-term investments. Cash of
$23,546,000 was provided by financing activities for the six months ended
September 30, 1996 as compared to a use of $776,000 for the six months ended
September 30, 1995, due primarily to the receipt of net proceeds of $23,641,000
from the issuance of shares of the Company's Common Stock, primarily through
the Company's public offering of shares, during the six months ended September
30, 1996 and from the retirement of the Company's loan with T. Rowe Price
Strategic Partners Fund II, L.P. ("Strategic Partners") during the six months
ended September 30, 1995.
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In September 1994, the Company executed agreements with NHI, Strategic
Partners and FANB 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 the period ended September 30, 1995, the Company
made unscheduled principal payments of approximately $708,000 towards the
Strategic Partners term loan, resulting in the retirement of the remaining
obligation under that loan.
In October 1996, the Company used approximately $6,158,000 of the net
proceeds from its public offering of stock to prepay all of the Company's
outstanding indebtedness to NHI. With the repayment of the NHI indebtedness,
including the amount due under the revenue participation agreement, the
provisions of the loan agreement with NHI and the obligations under the NHI
equity and revenue participation agreements were terminated.
In September 1994, the Company also obtained a $2.5 million one-year
revolving line of credit from FANB. This line of credit, which was renewed in
September 1995 for a term of one year, bore interest at prime + 3/4% (9.0% as
of September 30, 1996) and was 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, the Company agreed to guarantee Helicon's performance
under such line of credit. There were no amounts outstanding under Helicon's
line of credit at September 30, 1996. In November 1996, Helicon's line of
credit with FANB, and the Company's guarantee, was increased to $1 million.
The Company's $2.0 million line of credit matured on September 30, 1996,
and, on November 8, 1996, the Company entered into a new loan and security
agreement with FANB. Under the terms of this agreement, FANB has made
available to the Company, for acquisition financing and working capital
requirements, a revolving line of credit for up to $13,000,000. The initial
term of the agreement extends through November 1, 1999. The credit facility
will bear interest at the Company's option at either (i) the one, two or three
month LIBOR rate plus an applicable margin, which ranges between 1.35% and
2.10% and is dependent on the ratio of funded debt to operating earnings or
(ii) FANB's index rate. The line of credit is secured primarily by the
Company's accounts receivable and equipment.
The Company's line of credit with FANB requires the Company to comply with
certain restrictive covenants with respect to its business and operations and
to maintain certain financial ratios. The restrictive covenants under this
agreement prohibit the Company, without the prior consent of its lender, from
entering into major corporate transactions, such as a merger, tender offer or
sale of its assets, and from incurring additional indebtedness in excess of
$1,000,000. The agreement also prohibits the Company from declaring dividends
in excess of 25% of the Company's net income during any fiscal year.
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16
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
currently being utilized by Helicon for certain of its Tennessee 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.
Current obligations, typically due within thirty days or less, are
expected to be funded with cash flow from operations and borrowings under the
Company's line of credit. Management believes that operations, remaining
proceeds from the August 1996 public offering, and amounts available under its
line of credit will provide sufficient cash flow for the foreseeable future.
Inflation
Inflation has not had a significant impact on the Company's results of
operation since inception. Certain of the Company's existing contracts provide
for annual price increases based upon changes in the Consumer Price Index.
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PART II. OTHER INFORMATION
Item 2. Changes in Securities
Effective August 14, 1996, the Company's Restated Charter was
amended to increase the authorized shares of Common Stock from
10,000,000 to 50,000,000. The additional authorized shares of
Common Stock may be issued by the Board of Directors, at their
discretion and without shareholder approval, except as may be
required by law or the rules of The Nasdaq Stock Market's National
Market.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company's Annual Meeting of Shareholders was held on
August 14, 1996.
(b) Election of Directors:
Affirmative Negative
Votes Votes Abstentions
----------- -------- -----------
William J Ballard 4,678,533 -0- 138,450
Amy S. Harrison 4,678,533 -0- 138,450
Martha A. Petrey, Ph.D. 4,678,528 -0- 138,455
Thomas B. Clark 4,679,283 -0- 137,700
Joseph A. Fernandez, Ed.D. 4,679,183 -0- 137,800
David L. Warnock 4,679,278 -0- 137,705
(c) Other matters voted upon:
(1) Approval of an amendment to the Company's Restated
Charter to increase the number of authorized shares of
the Company's Common Stock from 10,000,000 to
50,000,000.
Affirmative Votes: 4,224,909
Negative Votes: 584,195
Abstentions: 7,879
Broker non-votes: -0-
(2) Ratification of the selection of Ernst & Young as the
Company's independent auditors for the 1997 fiscal year.
Affirmative Votes: 4,808,188
Negative Votes: 1,305
Abstentions: 7,490
Broker non-votes: -0-
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
(11) Statement re: computation of earnings per share.
(27) Financial Data Schedule. (SEC use only)
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed by the Company during the
three months ended September 30, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHILDREN'S COMPREHENSIVE SERVICES, INC.
---------------------------------------
(Registrant)
Date: November 13, 1996 /s/WILLIAM J BALLARD
---------------------------------------
William J Ballard
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 1996 /s/DONALD B. WHITFIELD
---------------------------------------
Donald B. Whitfield
Vice President of Finance, Secretary
and Treasurer (Principal Financial
and Accounting Officer)
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Exhibit Index
Exhibit No. Page
- ----------- ----
11 Computation of Per Share Earnings 20
27 Financial Data Schedule (SEC use only) 21
19