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 December 31, 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 February 11, 1997 - 7,126,444
shares.
2
INDEX
CHILDREN'S COMPREHENSIVE SERVICES, INC.
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets--December 31, 1996
(Unaudited) and March 31, 1996. . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income--
Three months ended December 31, 1996 and 1995;
Nine months ended December 31, 1996 and 1995. . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows--
Nine months ended December 31, 1996 and 1995. . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements--
December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 2. Management's Discussion and
Analysis of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . .18
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
December 31, March 31,
(dollars in thousands) 1996 1996
------------ ---------
ASSETS
CURRENT ASSETS
Cash (including cash equivalents of
$17,399 at December 31 and $-0-
at March 31) $ 18,384 $ 2,427
Short-term investments 1,474 -0-
Accounts receivable, net of allowance
for doubtful accounts of $108 at
December 31 and $146 at March 31 5,891 4,468
Prepaid expenses 311 303
Other current assets 654 254
------------ ----------
TOTAL CURRENT ASSETS 26,714 7,452
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $5,378 at December 31
and $4,803 at March 31 14,283 14,306
DEFERRED TAX ASSETS, net of valuation allowance
of $150 at December 31 and $2,391 at
March 31 1,783 -0-
NOTE RECEIVABLE 217 217
OTHER ASSETS AND DEFERRED CHARGES, at cost,
net of accumulated amortization of
$518 at December 31 and $332 at March 31 99 147
------------ ----------
TOTAL ASSETS $ 43,096 $ 22,122
============ ==========
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Continued)
December 31, March 31,
(dollars in thousands) 1996 1996
------------ ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 622 $ 658
Current maturities-long term debt -0- 201
Accrued employee compensation 1,440 1,570
Income taxes payable 335 311
Accrued other expenses 665 648
Deferred revenue 164 160
------------ -----------
TOTAL CURRENT LIABILITIES 3,226 3,548
DEFERRED TAXES PAYABLE 125 125
LONG TERM DEBT -0- 6,052
OTHER LIABILITIES 265 365
------------ -----------
TOTAL LIABILITIES 3,616 10,090
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
December 31 and 5,378,726 shares at
March 31 71 54
Additional paid-in capital 49,037 25,422
Accumulated (deficit) (9,628) (13,444)
------------ -----------
TOTAL SHAREHOLDERS' EQUITY 39,480 12,032
------------ -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 43,096 $ 22,122
============ ===========
See notes to consolidated financial statements.
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended
December 31, December 31,
-------------------- --------------------
(in thousands, except per share amounts) 1996 1995 1996 1995
------ ------ ------ -------
Revenues:
Operating revenues $7,858 $5,831 $20,478 $16,671
Management fee income 306 373 927 727
------ ------ ------- -------
TOTAL REVENUES 8,164 6,204 21,405 17,398
Operating expenses:
Employee compensation
and benefits 4,955 3,738 13,193 10,574
Purchased services and
other expenses 1,658 1,195 4,201 3,494
Depreciation and amortization 229 253 629 774
Related party rent 26 25 76 76
------ ------ ------- -------
TOTAL OPERATING EXPENSES 6,868 5,211 18,099 14,918
------ ------ ------- -------
Income from operations 1,296 993 3,306 2,480
Other (income) expense:
Interest expense:
Banks and other 12 202 411 621
Related parties -0- -0- -0- 49
Interest income (272) (10) (485) (13)
Other income (3) -0- (7) -0-
------ ------ ------- -------
TOTAL OTHER (INCOME) EXPENSE, NET (263) 192 (81) 657
------ ------ ------ -------
Income before income taxes and
extraordinary item 1,559 801 3,387 1,823
Provision for income taxes (1,365) 133 (877) 292
------ ------ ------- -------
Income before extraordinary item 2,924 668 4,264 1,531
Extraordinary item:
Loss on early extinguishment of
debt, net of income tax benefit
of $164 in 1996 and $10 in 1995 448 -0- 448 54
------ ------ ------- -------
NET INCOME $2,476 $ 668 $ 3,816 $ 1,477
====== ====== ======= =======
Earnings per common share:
Income before extraordinary item $ .40 $ .12 $ .65 $ .28
Extraordinary item (.06) -0- (.07) (.01)
------ ------ ------- -------
NET INCOME $ .34 $ .12 $ .58 $ .27
====== ====== ======= =======
Earnings per common share--
assuming full dilution:
Income before extraordinary item $ .40 $ .12 $ .65 $ .27
Extraordinary item (.06) -0- (.07) (.01)
------ ------ ------- -------
NET INCOME $ .34 $ .12 $ .58 $ .26
====== ====== ======= =======
See notes to consolidated financial statements.
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
December 31,
----------------------
(in thousands) 1996 1995
------- ------
OPERATING ACTIVITIES
Net income $ 3,816 $1,477
Adjustments to reconcile net income
to net cash provided by operating
activities:
Increase in deferred tax assets (1,783) -0-
Depreciation 595 587
Amortization 34 187
Amortization of deferred loan costs 33 60
Provision for bad debts (35) 29
Loss on early extinguishment of debt 119 65
Other (7) 19
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (1,388) 36
(Increase) decrease in prepaid expenses (8) 90
(Increase) in other current assets (400) (120)
(Decrease) in accounts payable (36) (371)
Increase (decrease) in accrued employee
compensation (130) 285
Increase (decrease) in accrued expenses 17 (8)
Increase in deferred revenue 4 159
Increase in income taxes payable 24 43
(Decrease) in other liabilities (100) (100)
------- ------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 755 2,438
------- ------
INVESTING ACTIVITIES
Purchase of short-term investments (1,967) -0-
Sale of short-term investments 493 -0-
Purchase of property and equipment (577) (209)
Proceeds from sale of property and equipment 12 37
(Increase) in other assets (138) (19)
------- ------
NET CASH (USED) BY
INVESTING ACTIVITIES $(2,177) $ (191)
------- ------
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
Nine Months Ended
December 31,
-----------------------
(in thousands) 1996 1995
------ -------
FINANCING ACTIVITIES
Proceeds from revolving lines of credit
and long-term borrowings $ -0- $ 3,436
Principal payments on revolving lines of
credit and long-term borrowings (6,253) (3,565)
Principal payments on notes payable and
long-term borrowings--related parties -0- (731)
Proceeds from issuance of Common Stock, net 23,632 40
------- -------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 17,379 (820)
------- -------
INCREASE IN CASH AND CASH
EQUIVALENTS 15,957 1,427
Cash and cash equivalents at
beginning of period 2,427 69
------- -------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $18,384 $ 1,496
======= =======
SUPPLEMENTAL INFORMATION
Income taxes paid $ 717 $ 239
Interest paid 440 622
See notes to consolidated financial statements.
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
December 31, 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 nine month periods ended December 31,
1995, to conform to the presentation of the financial statements for the three
and nine month periods ended December 31, 1996. Operating results for the three
and nine month periods ended December 31, 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
included in the Company's Annual Report on Form 10-K for the fiscal 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 -- LINE OF CREDIT
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
bears interest 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, at the
Company's option. The line of credit is secured primarily by the Company's
accounts receivable and equipment.
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -- continued
December 31, 1996
NOTE E -- DEFERRED TAX ASSETS
At March 31, 1996, the Company had total deferred tax assets of $2,642,000.
Management evaluated the need for a valuation allowance for all or a portion of
the deferred tax assets and recorded a valuation allowance of $2,391,000 for
the excess of net operating loss carryforwards, credit carryforwards and future
deductible temporary differences over future taxable temporary differences.
During the period ended December 31, 1996, management re-evaluated the need for
a valuation allowance and concluded that the majority of its deferred tax
assets would likely be realized in the future, and therefore that the majority
of the valuation allowance should be reversed. The amount of this reversal,
$1,783,000, was recorded as a credit to provision for income tax expense during
the period ended December 31, 1996.
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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 December 31, 1996, the Company was providing education and treatment
services to approximately 2,100 at risk and troubled youth pursuant to contracts
with governmental agencies to manage 45 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 December 31, 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 nine month periods ended
December 31, 1996 and during the three month period ended December 31, 1995, 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 nine month period ended December 31, 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 December 31,
1996, unpaid management fees, lease payments and advances, plus interest, due
the Company from Helicon totaled approximately $6,903,000. Based on the current
level of operations being maintained by Helicon, the Company does not anticipate
collecting any of this
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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.
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 Nine Months Ended
December 31, December 31,
------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
Operating revenues 96.2% 94.0% 95.7% 95.8%
Management fee income 3.8 6.0 4.3 4.2
----- ----- ----- -----
TOTAL REVENUES 100.0 100.0 100.0 100.0
----- ----- ----- -----
Employee compensation and
benefits 60.7 60.2 61.6 60.8
Purchased services and
other expenses 20.3 19.3 19.6 20.1
Depreciation and amortization 2.8 4.1 3.0 4.4
Related party rent .3 .4 .4 .4
----- ----- ----- -----
TOTAL OPERATING EXPENSES 84.1 84.0 84.6 85.7
----- ----- ----- -----
Income from operations 15.9 16.0 15.4 14.3
Other (income) expense:
Interest expense .1 3.3 1.9 3.8
Interest income (3.3) -- (2.3) --
Other income -- (.2) -- --
Provision for income taxes (16.7) 2.1 (4.1) 1.7
Extraordinary item, net of
income tax benefit 5.5 -- 2.1 .3
----- ----- ----- -----
NET INCOME 30.3% 10.8% 17.8% 8.5%
===== ===== ===== =====
Three Months Ended December 31, 1996 and December 31, 1995
Operating revenues for the three months ended December 31, 1996 increased
$2,027,000, or 34.8%, to $7,858,000 as compared to $5,831,000 for the three
months ended December 31, 1995. The increase in operating revenues results
primarily from the opening of six new programs during fiscal 1997, the opening
of one new program during fiscal 1996 which was in operation throughout the
entire three months ended December 31, 1996, and from significant increases in
student enrollment at three of the Company's programs.
Management fee income recognized under the Helicon Agreement for the three
months ended December 31, 1996 decreased $67,000 to $306,000 from $373,000 for
the three months ended December 31, 1995.
Total revenues for the three months ended December 31, 1996 increased
$1,960,000, or 31.6%, to $8,164,000 as compared to $6,204,000 for the three
months ended December 31, 1995 as a result of the factors described above.
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Employee compensation and benefits for the three months ended December 31,
1996 increased $1,217,000, or 32.6%, to $4,955,000, as compared to $3,738,000
for the three months ended December 31, 1995. As a percentage of total
revenues, employee compensation and benefits increased slightly from 60.2% for
the three months ended December 31, 1995 to 60.7% for the three months ended
December 31, 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 December
31, 1996 increased $463,000, or 38.7%, to $1,658,000, as compared to $1,195,000
for the three months ended December 31, 1995. As a percentage of total
revenues, purchased services and other expenses increased to 20.3% for the
three months ended December 31, 1996 from 19.3% for the three months ended
December 31, 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 consulting and audit expense, net of a decrease in
legal expense.
Depreciation and amortization for the three months ended December 31, 1996
decreased $24,000, or 9.5%, to $229,000 as compared to $253,000 for the three
months ended December 31, 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 December 31, 1995 to $-0- for the three
months ended December 31, 1996, net of increases in depreciation and
amortization at one of the Company's programs opened during fiscal 1997.
Income from operations for the three months ended December 31, 1996
increased $303,000, or 30.5%, to $1,296,000 as compared to $993,000 for the
three months ended December 31, 1995, and decreased as a percentage of total
revenues to 15.9% for the three months ended December 31, 1996 from 16.0% for
the three months ended December 31, 1995, as a result of the factors described
above.
Interest expense for the three months ended December 31, 1996 decreased
$190,000, or 94.1%, to $12,000 as compared to $202,000 for the three months
ended December 31, 1995. The decrease in interest expense over the same period
in the prior year is attributed principally to the prepayment of the Company's
long-term debt on October 1, 1996 and the related elimination of deferred loan
cost amortization.
Interest income increased $262,000 to $272,000 for the three months ended
December 31, 1996 as compared to $10,000 for the three months ended December
31, 1995. The increase in interest income over the same period in the prior
year is attributable primarily to the increase in cash available for investment
from operations and from the Company's public offering completed in August
1996.
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Provision for income tax expense for the three months ended December 31,
1996 decreased $1,498,000 to ($1,365,000) from $133,000 for the three months
ended December 31, 1995. The decrease in provision for income tax expense
compared to the same period in the prior year results primarily from a
nonrecurring credit to income tax expense of $1,783,000 related to the reversal
of a portion of the valuation allowance against the Company's deferred tax
assets, net of the impact of an increase in the Company's effective tax rate.
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.
Loss on early extinguishment of debt for the three months ended December
31, 1996 of $612,000, before the related income tax benefit of $164,000,
resulted from the prepayment of the Company's outstanding indebtedness to NHI on
October 1, 1996. As a result of the prepayment of this debt, the Company
incurred a prepayment penalty of approximately $493,000, and wrote off deferred
loan costs totalling $119,000.
Nine Months Ended December 31, 1996 and December 31, 1995
Operating revenues for the nine months ended December 31, 1996 increased
by $3,807,000, or 22.8%, to $20,478,000 as compared to $16,671,000 for the same
period in the prior fiscal year. The increase in operating revenues results
primarily from the opening of six new programs during fiscal 1997, the opening
of two new programs during fiscal 1996 which were in operation throughout the
entire nine months ended December 31, 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 nine
months ended December 31, 1996 increased $200,000 to $927,000 as compared to
$727,000 for the nine months ended December 31, 1995. Additional management
fee income of $217,000 for the nine months ended December 31, 1995 was not
recognized by the Company due to the inability of Helicon to pay those amounts.
Total revenues for the nine months ended December 31, 1996 increased
$4,007,000, or 23.0%, to $21,405,000 as compared to $17,398,000 for the nine
months ended December 31, 1995 as a result of the factors described above.
Employee compensation and benefits for the nine months ended December 31,
1996 increased $2,619,000, or 24.8%, to $13,193,000, as compared to $10,574,000
for the nine months ended December 31, 1995. As a percentage of total
revenues, employee compensation and benefits increased from 60.8% for the nine
months ended December 31, 1995 to 61.6% for the nine months ended December 31,
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.
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Purchased services and other expenses for the nine months ended December
31, 1996 increased $707,000, or 20.2%, to $4,201,000 as compared to $3,494,000
for the nine months ended December 31, 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 consulting, audit, travel
and investor relations expense, net of a decrease in legal expense. As a
percentage of total revenues, purchased services and other expenses decreased
from 20.1% for the nine months ended December 31, 1995 to 19.6% for the nine
months ended December 31, 1996.
Depreciation and amortization for the nine months ended December 31, 1996
decreased $145,000, or 18.7%, to $629,000 as compared to $774,000 for the nine
months ended December 31, 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
$188,000 for the nine months ended December 31, 1995 to $-0- for the nine months
ended December 31, 1996, net of increases in depreciation and amortization at
one of the Company's programs opened during fiscal 1997.
Income from operations for the nine months ended December 31, 1996
increased $826,000, or 33.3%, to $3,306,000 as compared to $2,480,000 for the
nine months ended December 31, 1995, and increased as a percentage of total
revenues to 15.4% for the nine months ended December 31, 1996 from 14.3% for
the nine months ended December 31, 1995, as a result of the factors described
above.
Interest expense for the nine months ended December 31, 1996 decreased
$259,000, or 38.7%, to $411,000 as compared to $621,000 for the nine months
ended December 31, 1995. The decrease in interest expense is attributed
principally to the prepayment of the Company's long-term debt on October 1,
1996 and the related elimination of deferred loan cost amortization.
Interest income increased $472,000 to $485,000 for the nine months ended
December 31, 1996 as compared to $13,000 for the nine months ended December 31,
1995. The increase in interest income over the same period in the prior year
is attributable primarily to the increase in cash available for investment from
operations and from the Company's public offering completed in August 1996.
Provision for income tax expense for the nine months ended December 31,
1996 decreased $1,169,000 to ($877,000) from $290,000 for the nine months ended
December 31, 1995. The decrease in provision for income tax expense compared
to the same period in the prior year results primarily from a nonrecurring
credit to income tax expense of $1,783,000, related to the reversal of a
portion of the valuation allowance against the Company's deferred tax assets,
net of the impact of an increase in the Company's effective tax rate. 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.
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Loss on early extinguishment of debt for the nine months ended December 31,
1996 of $612,000, before the related income tax benefit of $164,000, resulted
from the prepayment 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, and wrote off deferred loan costs totalling $119,000.
Loss on early extinguishment of debt for the nine months ended December 31, 1995
of $65,000, before the related income tax benefit of $10,000, resulted from the
write off of deferred loan costs associated with the Company's term loan with
T. Rowe Price Strategic Partners Fund II, L.P. which was repaid.
Liquidity and Capital Resources
Cash provided by operating activities for the nine months ended December
31, 1996 was $755,000 on net income of $3,816,000 as compared to $2,438,000 on
net income of $1,477,000 for the nine months ended December 31, 1995. Working
capital at December 31, 1996 was $23,488,000, as compared to $3,904,000 at
March 31, 1996.
Cash used by investing activities was $2,177,000 for the nine months ended
December 31, 1996 as compared to $191,000 for the nine months ended December
31, 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
$17,379,000 was provided by financing activities for the nine months ended
December 31, 1996 as compared to a use of $820,000 for the nine months ended
December 31, 1995, due primarily to the receipt of net proceeds of $23,641,000
from the issuance of shares of the Company's Common Stock, net of the use of
approximately $6,158,000 of such proceeds to prepay the Company's long-term
debt with NHI in October, 1996.
In September 1994, the Company obtained a $2.5 million one-year revolving
line of credit from FANB. 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. In November 1996, Helicon's line of credit with FANB, and the
Company's guarantee, was increased to $1 million. At December 31, 1996,
$155,000 was outstanding under Helicon's line of credit, all of which was
subsequently repaid.
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
bears interest 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, at the
Company's option. The line of credit is secured primarily by the Company's
accounts receivable and equipment.
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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.
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 occurred during January 1997. The Company also
may consider possible strategic acquisitions, including acquisitions of
existing programs and other companies engaged in youth services or related
businesses.
Current obligations, typically due within thirty days or less, are
expected to be funded with cash 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 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
(10) Loan and Security Agreement between First American
National Bank and Children's Comprehensive
Services, Inc. and its wholly owned subsidiary
Children's Comprehensive Services of California,
Inc., dated as of November 8, 1996
(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 December 31, 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: February 13, 1997 /s/ WILLIAM J BALLARD
---------------------------------------
William J Ballard
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: February 13, 1997 /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.
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10 Loan and Security Agreement between First American National Bank and
Children's Comprehensive Services, Inc. and its wholly owned
subsidiary Children's Comprehensive Services of California, Inc.,
dated as of November 8, 1996
11 Computation of Per Share Earnings
27 Financial Data Schedule (SEC use only)
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