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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: JANUARY 2, 1998
COMMISSION FILE NUMBER: 0-22811
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CORPORATEFAMILY SOLUTIONS, INC.
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(Exact name of Registrant as specified in its charter)
TENNESSEE 62-1302117
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
209 TENTH AVENUE SOUTH, SUITE 300
NASHVILLE, TENNESSEE 37203-4173
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(Address of principal executive offices) (Zip Code)
(615) 256-9915
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK , NO PAR VALUE PER SHARE
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 13, 1998, there were outstanding 4,543,294 shares of the
registrant's common stock, no par value, which is the only class of common or
voting stock of the registrant. As of that date, the aggregate market value of
the shares of common stock held by non-affiliates of the registrant (based on
the closing price for the common stock as reported by NASDAQ on March 13, 1998)
was approximately $63,232,700.
DOCUMENTS INCORPORATED BY REFERENCE
Documents from which
Part of Form 10-K portions are incorporated by reference
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Part III Portions of the Registrant's Proxy Statement relating to
the Registrant's Annual Meeting of Shareholders to be
held on May 21, 1998 are incorporated by reference into
Items 10, 11, 12 and 13.
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CORPORATEFAMILY SOLUTIONS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
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Part I..............................................................................................................3
Item 1. Business.......................................................................................3
Item 2. Properties....................................................................................12
Item 3. Legal Proceedings.............................................................................13
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 13
Part II............................................................................................................14
Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters.....................14
Item 6. Selected Financial and Operating Data.........................................................15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.........................................................................16
Item 8. Financial Statements and Supplementary Data...................................................23
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..........................................................................41
Part III...........................................................................................................41
Item 10. Directors and Executive Officers of the Registrant............................................41
Item 11. Executive Compensation........................................................................41
Item 12. Security Ownership of Certain Beneficial Owners and Management................................41
Item 13. Certain Relationships and Related Transactions................................................41
Part IV............................................................................................................42
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...............................42
Signatures.........................................................................................................46
Index to Exhibits..................................................................................................47
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ITEM 1. BUSINESS
OVERVIEW
CorporateFamily Solutions, Inc. (the "Company") is a leading national provider
of services for the corporate market that support families and business success.
The Company works with more than 100 employers seeking to create a "family
friendly" work environment by providing work place child care, education, family
support programs and consulting services. The Company manages
corporate-sponsored Family Centers, built and equipped by an employer at or near
its offices, providing high quality services such as early childhood education,
child care, back-up child care, kindergartens, get-well care, summer camps, and
parent support services. As of January 2, 1998, the Company managed 95 Family
Centers, representing 70 corporate clients, in 28 states and the District of
Columbia. Additionally, the Company had 16 Family Centers under development,
including nine for new corporate clients. Ten of the Company's corporate clients
operate multiple Family Centers. In addition, the Company provides work/life
consulting services to help employers realize the benefits of work and family
programs and policies and to align work/life concerns of working families with
business strategies of employers. Consulting services provided by the Company
include feasibility studies, work/life strategic planning, strategic planning
related to the development of public and private worksite schools, return on
investment analyses and development of work/life programs and policies. During
1997, the Company provided consulting services to 31 corporate clients.
SERVICES
The Company works in conjunction with its clients and their employees to respond
to changing workplace needs and to help employees balance their work and family
responsibilities. A client relationship often begins with the Company providing
consulting services to an employer, and progresses to the planning, development
and management of a Family Center, where the Company provides services to a
client's employees at the workplace. These work and family services are designed
to (i) address employers' ever-changing workplace needs, (ii) enhance employee
productivity, (iii) improve recruitment and retention of employees and (iv)
improve the overall employee-employer-family relationship. The Company
emphasizes operational excellence, client service and program leadership, and
requires that each Family Center be operated at National Association for the
Education of Young Children ("NAEYC") standards.
The "Family Center" concept evolved from the more traditional workplace child
care center and is designed to serve a broader segment of the work site
population. Each Family Center provides a number of services designed to meet
the business objectives of the corporate client and the family needs of the
client's employees. As a result, the physical facility, operating policies, and
services are tailored for each client. Services currently offered at the
Company's Family Centers include:
Early Childhood Education. The Company offers early childhood education
at each of its 95 Family Centers. The Company's proprietary program for
learning, entitled "The World at Their Fingertips," includes
educational programs for infants, toddlers, and preschoolers and
creates developmentally appropriate experiences for every child. "The
World at Their Fingertips" includes many components designed to promote
physical, cognitive, emotional, and language development and provides a
developmentally appropriate educational curriculum enabling teachers to
provide individualized, responsive care and affection for each child.
The infant and toddler program provides an environment for development
with learning centers planned to maximize large and small motor
experiences, sensory and cognitive experiences, language, music and
personal experiences. The preschool program provides a developmentally
appropriate learning-centered curriculum, including dramatic play, art
expression, construction/blocks, computer and music/movement. The
Company's early childhood
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educational services meet or exceed the standards established by the
National Academy of Early Childhood Programs ("NAECP"), a division of
NAEYC.
Employer-Sponsored Child Care. The Company operates 90 child care
programs in its Family Centers. At the end of 1997, the program
capacity at the Company's Family Centers exceeded 12,500 children.
Consistent, reliable child care is an essential service for working
families. Family Centers provide child care in many different ways,
including traditional day care, evening care when parents work late,
weekend care, 24-hour care for multiple shift work forces, special
event care, emergency care, school holiday care, as well as other
services.
Summer Camps. The Company operates summer camps in conjunction with 38
Family Centers and as a stand-alone service for one corporate client.
During 1997, the Company provided this service to approximately 2,000
children. The camps include programs for children in age-related groups
from five to 12 years old. Programs include age-appropriate enrichment
activities such as science, computers, gymnastics, dance, sports, and
other activities, and include both on-site and off-site day camps.
Back-Up Care Programs. The Company operates 39 back-up care programs.
Four centers exclusively offer back-up care programs, while other
back-up care programs are offered in designated rooms within a larger
Family Center. The Company has approximately 6,700 families registered
to use back-up care. Back-up care programs serve families whose primary
child care arrangements are unavailable because of emergencies,
illness, or caregiver turnover and provide care on school holidays and
release days. The Company's back-up care programs serve children from
ages six weeks to 12 years. Family Centers that exclusively offer
back-up care programs range in size from 12 to 110 children and include
the first such program ever accredited by NAEYC.
Kindergartens. The Company operates 29 Family Center kindergartens, all
of which meet or exceed the standards set by NAECP. During 1997, the
Company's kindergarten programs served approximately 600 children. The
kindergarten curriculum employs a comprehensive developmental approach
that challenges and prepares children for success in school and is
tailored to reflect the expectations of the surrounding school systems.
The Company has added kindergartens to certain of its Family Centers in
response to the demand from parents seeking to maintain the quality
learning environment that their children have experienced in Family
Centers.
School-age Programs. The Company operates 26 school-age programs in
Family Centers for children ages six to 12 years. During 1997, the
Company provided these services to approximately 2,300 children. These
programs may include before- and after-school care, tutorial services
and enrichment programs such as gymnastics, computer, or foreign
language instruction.
Get-Well Care. The Company offers get-well care in 16 Family Centers.
These programs serve mildly ill children recovering from various
illnesses and injuries and are typically staffed with a registered
nurse or licensed practical nurse.
Parent Support. All Family Centers include support programs for
parents, including parent education programs, seminars, support groups
and resource libraries. Parent education programs include family
resource rooms (serving as a library for parents and a site for parent
seminars), scheduled family counseling, "lunch and learns," evening
programs with presentations and round table discussions on topics of
concern to parents such as child behavior, time management, first-aid
and CPR training. Support services include meals-to-go, laundry pick-up
and carpooling coordination. The Company's
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parent support services are developed and implemented with the
involvement of a parent advisory group established at each Family
Center.
The Company offers a range of work/life consulting services to help employers
assess, plan and develop work and family solutions, realize the benefits of
work/life programs and policies and to align work/life concerns with other
strategic concerns of employers. Specific examples of services provided by the
Company include:
- Guidance, staffing and support for work and family
initiatives, including a company-wide work/life conference;
- Development of a strategic work/life plan for a national work
force based on a customized survey, focus groups and
management interviews;
- A feasibility study of the viability of worksite primary
schools;
- Consultation on the integration of a client's work/life,
diversity and training efforts;
- A multisite study to identify dependent care needs and develop
a strategic plan to meet those needs; and
- A return on investment study to analyze the benefits of a
client's work/life investments.
During 1997, the Company provided consulting services for 31 corporate clients,
13 of which are clients for which the Company operates one or more Family
Centers.
OPERATIONS
The Company is organized into two integrated operating units consisting of
Family Center operations and consulting services. The Company's management
philosophy promotes a commitment to excellence for children, parents, clients
and staff. Corporate operations are coordinated from the Company's headquarters
located in Nashville, Tennessee. Corporate office functions include Family
Center operations oversight, human resources, marketing, business development,
facility design, finance, accounting, risk management, information systems, and
corporate communications.
Family Center operations are organized into three operational divisions, each
managed by a Senior Vice President who reports to the Company's Chief Executive
Officer. Senior Vice Presidents, regional managers and divisional support staff
are responsible for Family Center development, direct management oversight,
quality control, financial performance, and client relations. Each Family Center
is managed by a Center Director. Each Family Center's size, staffing, hours of
operation and range of services provided vary according to each corporate
client's needs and desires. Family Centers range in size from 3,000 square feet
to 47,000 square feet and enrollment capacity from 35 to 450. Staffing for a
Family Center typically consists of an administrative team, a teaching staff and
support personnel. Family Centers are typically located on a corporate client's
worksite, either in converted space, or free-standing structures designed
specifically for use as a Family Center. Currently, 81 centers are located at
client worksites and 14 are located on properties contiguous to the worksite.
The facilities are generally owned or leased by the corporate clients, except
for two properties owned by the Company.
The Company's consulting services are provided through a division of the Company
titled The Resource Group. The Resource Group provides consulting services to
corporate clients including feasibility studies, work/life strategic planning,
strategic planning related to the development of public and private worksite
schools, benchmark studies, policy and practice alignment, return on investment
analysis and community investment. In addition to consulting services, The
Resource Group supports the Company's Family Center programs, ensuring such
programs remain state of the art and of the highest quality, and conducts
research and
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development of new services. The Resource Group is staffed by nine full-time
employees with additional contract consultants depending on the workload and
expertise needed to complete a particular project.
The Company has developed a training program for its employees. Teacher training
is conducted in each Family Center and includes orientation and ongoing
training, including training related to child development and education, health,
safety and emergency procedures. Training is conducted on a regular basis at
each Family Center and in company-wide meetings and is designed to meet NAEYC
training standards. Management training is provided on an ongoing basis to all
Center Directors and includes human resource management, risk management,
financial management, customer service, and program implementation.
The Company maintains a variety of security measures at its centers, which may
include electronic security or access systems, sign-out procedures for children
and other site-specific measures. Safety features are incorporated into the
facility design and operation of the Family Centers, including selection of safe
and age-appropriate toys and play equipment, cushioned surfaces surrounding play
structures, rounded corners on furniture, child-size amenities and open and
windowed lay-outs providing increased visibility for teachers and parents. The
Company schedules emergency drills for fire safety and other emergencies, and
requires current CPR and first aid certification for center management
personnel.
The Company has an information, communication and financial reporting system
which links every Family Center to the Company's divisional, regional and
corporate offices. This system provides timely financial information on such
items as revenue, expenses, enrollments, payroll and staff hours. The Company
seeks to improve its operating efficiencies by providing management with more
timely information through its information systems.
MARKETING
Management believes that the Company's operations in 28 states and the District
of Columbia with 95 Family Centers and the expertise and reputation of its
management team in working with many of the nation's leading companies have
created name recognition within the work and family services industry. The
Company's directors, senior officers and Advisory Board members are involved at
the national level with education, work/life and children's services issues, and
their prominence and involvement in such issues plays a key role in attracting
new clients and developing additional services and products for existing
clients.
The Company's marketing and sales efforts focus on (i) developing new corporate
client relationships, (ii) expanding existing relationships and (iii) promoting
and maintaining relationships with client employees and families. Sales and
marketing activities at the corporate level are led by the Company's business
development group, with assistance provided by executive officers, Senior Vice
Presidents, Center Directors, The Resource Group and support personnel. The
Company has four business development officers who generally cover distinct
geographic territories within the continental United States.
The Company markets its services to prospective clients in a variety of ways,
including direct mail to qualified prospects, industry conferences, and
telephone and personal visits to interested potential clients. In addition,
clients often refer other employers to the Company. With existing clients, the
Company maintains regular contact through its business development personnel and
operations management. At each Family Center, regional and center management are
responsible for marketing to families and staying abreast of new and changing
needs for both the employer and employees. This responsiveness and client
involvement enable the Company to develop and market additional services to
existing clients as well as to new corporate clients.
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COMPETITION
Depending on the services provided, the Company competes with a variety of
companies in each segment of its operations. The Company's largest competitors
for employer-sponsored child care services include Bright Horizons, Inc. and, to
a lesser extent, the employer-sponsored child care divisions of other large
child care companies, such as Kindercare and Children's Discovery Centers.
Management believes that the Company is distinguished from these competitors by
its exclusive focus on corporate clients and commitment to accreditation
standards. Management believes that the Company is able to compete successfully
by understanding and responding to the business needs of prospective clients and
by offering professionally developed programs, highly qualified personnel,
attention to risk management and a broad range of services. The Company also
faces competition for enrollment from a variety of for-profit, not-for-profit
and government-based providers.
The Company has a number of competitors for work/life consulting services and
center services complementary to its Family Centers. Many of such competitors
provide, among other services and products, work/life consulting services, adult
education and contract school services, and have greater financial and operating
resources than the Company. Management believes that the Company distinguishes
itself from competitors by its presence at the workplace, knowledge of family
needs, and ability to integrate a number of services and programs into a Family
Center tailored to the needs of an employer.
The Company's ability to compete successfully for employer-sponsored work and
family services, developed in partnership with employers, depends on a number of
factors, including quality of service, cost-effective delivery of services and
ability to provide the scope of services necessary for an employer's needs. With
respect to child care services, there are many center-based child care companies
that compete for corporate relationships to provide on-site family services,
some of which have greater financial or other resources that allow them to
compete successfully against the Company. Management believes that the Company's
staff of trained professionals is well equipped to develop a plan with a
corporate client to best meet the work and family needs of the employer's work
force. Through participating in the development plan of the Family Center,
consulting with the contractor and employer, staffing the Family Center to
provide the scope and depth of services the employer and its employees need and
desire, management believes the Company is well positioned to provide services
that are family-friendly and improve the work environment for corporate
employees, thereby enhancing the overall productivity of the corporate client's
operations.
Along with competition for corporate clients, each Family Center faces
competition for enrollment from a wide range of community-based child care
providers. Management believes, however, that client employees perceive greater
value, convenience and flexibility associated with the Company's services.
REGULATION
The Company's child care operations are subject to a variety of federal, state
and local regulations and licensing requirements. The Company has policies and
procedures in place in order to comply with the regulations and requirements.
Although the regulations and requirements vary greatly from jurisdiction to
jurisdiction, governmental agencies generally review, among other things, the
center's safety, fitness and adequacy of buildings and equipment, licensed
capacity, the ratio of staff personnel to enrolled children, staff training,
dietary program, daily curriculum, recordkeeping, and compliance with health and
safety standards. In most jurisdictions, these agencies conduct scheduled and
unscheduled inspections of centers, and licenses must be renewed periodically.
In a few jurisdictions, new legislation or regulations have been enacted or are
being considered which establish requirements for employee background checks or
other clearance procedures for new employees of child care centers. Failures by
a center to comply with applicable regulations can subject it
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to governmental sanctions, which might include fines, corrective orders, being
placed on probation or, in more serious cases, suspension or revocation of the
center's license to operate or an award of damages to private litigants, and
could require significant expenditures by the Company to bring the Company's
centers into compliance.
In addition, state and local licensing regulations often provide that the
license held by the Company may not be transferred. As a result, any transferee
of a family services business (primarily child care) must apply to any
applicable administrative bodies for new licenses. There can be no assurance
that the Company would not have to incur material expenditures to relicense
centers it may acquire in the future. Management believes the Company is in
substantial compliance with all material regulations applicable to its business.
EMPLOYEES
As of March 13, 1998, the Company employed approximately 3,100 full-time
employees. In addition, at March 13, 1998, the Company had approximately 750
part-time employees and 900 substitutes on its payroll. None of the Company's
employees is represented by a labor union, and management believes its
relationship with its employees is good.
INSURANCE
The Company's insurance program currently includes the following types of
policies: worker's compensation, commercial general liability, automobile
liability, commercial property liability, student accident coverage, employment
practices liability and excess "umbrella" liability including coverage for child
abuse and molestation. The policies provide for a variety of coverages, are
subject to various limits, include deductibles or self-insured retentions.
Management believes that the Company's current insurance coverages are adequate
to meet its needs. The Company has not experienced difficulty in obtaining
insurance coverage, but there can be no assurances that adequate insurance
coverage will be available in the future, or that the Company's current coverage
will protect it against all possible claims. There is no assurance that claims
in excess of, or not included within, the Company's insurance coverage will not
be asserted, which could have an adverse effect on the Company.
TRADEMARKS
The Company has filed applications for registration of the following trademarks
and service marks with the United States Patent and Trademark Office: Family
Solutions(SM) and CorporateFamily Center(SM). A registered trademark/service
mark in the United States may be effective indefinitely subject only to a
required supplemental filing every ten years and the continued use of the mark
by the registrant. A properly registered trademark/service mark establishes the
presumption of ownership of the trademark/service mark by the registrant and
constitutes constructive notice of such ownership.
RISK FACTORS
Management of Growth. The Company has experienced substantial growth during the
past several years through internal growth and by acquisition. The Company's
ability to experience future growth will depend upon a number of factors,
including the ability to further develop existing client relationships and to
obtain new client relationships, the expansion of services and programs offered
by the Company, the maintenance of high quality services and programs and the
hiring and training of qualified management, divisional senior vice presidents,
regional managers, center directors and other personnel. The Company may
experience difficulty in attracting and retaining qualified personnel in various
markets necessary to meet growth
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opportunities. Hiring and retaining qualified personnel may require increased
salaries and enhanced benefits in more competitive markets, which could result
in a material adverse effect on the Company's business, results of operations
and financial condition. Sustaining growth may require the implementation of
enhancements to operational and financial systems and will also depend on the
Company's ability to expand its sales and marketing force. There can be no
assurance that the Company will be able to manage its expanding operations
effectively or that it will be able to maintain or accelerate its growth, and
any failure to do so could have a material adverse effect on the Company's
business, results of operations and financial condition.
Market Acceptance of Work and Family Services. The Company's business strategy
depends on employers recognizing the value of work and family services. There
can be no assurance that there will be continued growth in the number of
employers that view work-site family services as cost-effective or beneficial to
their work forces. Any negative change in current corporate acceptance of
financially supported child care could have a material adverse effect on the
Company's business, results of operations, financial condition and growth
prospects. There can be no assurance that demographic trends, including an
increasing percentage of mothers in the work force, will continue to lead to
increased market share for the center-based segment in general and the work-site
segment in particular.
Competition. The Company competes for corporate clients as well as individual
enrollment in a highly fragmented and competitive market. In the competition for
corporate clients, the Company primarily competes with other organizations which
focus on the work-site segment of the child care market and with certain
center-based child care chains that have divisions which compete for corporate
opportunities. The Company also competes with a diverse group of large and small
competitors for a range of child care and other work and family services
including work/life, employee benefits and management consultants. Some of these
competitors have significantly greater financial resources and may be willing to
enter into contract models, invest initial capital in facilities or enter into
other financial arrangements that are not consistent with the Company's business
strategy. Many of these competitors offer consulting, work-site child care and
other services at lower prices than the Company. Some of these competitors for
corporate relationships have greater penetration than the Company in certain
geographic regions and multiple relationships with corporate entities. Increased
competition for corporate relationships on a national or local basis could
result in increased pricing pressure and loss of market share, thereby having a
material adverse effect on the Company's business, results of operations and
financial condition as well as its ability to pursue its growth strategy
successfully.
Management believes the Company's ability to compete successfully for enrollment
at a Family Center depends on a number of factors, including quality of services
and products, convenience and price. The Company is often at a price
disadvantage with respect to family child care providers, who operate at
standards lower than national accreditation standards at which the Company
operates and generally do not comply or are not required to comply with the same
health, safety, insurance and operational regulations as the Company. The
Company also competes with many not-for-profit providers of child care and
preschools, some of which are able to offer lower pricing than the Company. Many
of the Company's competitors in the center-based segment also offer child care
at a lower price than the Company, and some have substantially greater financial
resources than the Company or have greater name recognition. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors or that competitive pressures faced by the Company will
not have a material adverse effect on its business, results of operations and
financial condition.
Dependence on Corporate Client Relationships. A significant portion of the
Company's business is derived from Family Centers associated with corporate
clients for which the Company provides work-site family
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services for single or multiple sites pursuant to management contracts. While
the specific terms of such contracts vary, some management contracts are subject
to early termination by the corporate client without cause. While the Company
has a history of consistent contract renewals, there can be no assurance that
future renewals will be secured. The early termination or nonrenewal of a
significant number of corporate management contracts or the termination of a
multiple-site corporate client relationship could have a material adverse effect
on the Company's business, results of operations and financial condition.
Changing Economic Conditions. The Company's revenue and net income are subject
to general economic conditions. A significant portion of the Company's revenue
is derived from employers which historically have reduced their expenditures for
work-site family services during economic downturns. Should the economy weaken
in any future period, these corporate clients may reduce or eliminate their
expenditures on work and family services, and prospective clients may not commit
resources to such services. These factors could have a material adverse effect
on the Company's business, results of operations and financial condition.
Risks Associated with Acquisitions. The Company plans as part of its growth
strategy to evaluate the acquisition of other providers of work/life,
employer-sponsored child care and consulting services. While the Company reviews
acquisition candidates in the ordinary course of its business, the Company is
not currently a party to any agreements or negotiations with respect to any
material acquisitions. Acquisitions involve numerous risks, including potential
difficulties in the assimilation of acquired operations, diversion of
management's attention, negative financial impacts based on the amortization of
acquired intangible assets, the dilutive effects of the issuance of Common Stock
in connection with an acquisition and potential loss of key employees of the
acquired operation. No assurance can be given as to the success of the Company
in identifying, executing and assimilating acquisitions in the future.
Dependence on Key Management. The success of the Company is highly dependent on
the efforts, abilities, and continued services of its executive officers and
other key employees. The loss of any of the executive officers or key employees
could have a material adverse effect on the Company's business, results of
operations and financial condition. The Company believes that its future success
will depend upon its ability to continue to attract, motivate and retain
highly-skilled managerial, sales and marketing, regional and center director
personnel. Although the Company historically has been successful in retaining
the services of its senior management, there can be no assurance that the
Company will be able to do so in the future.
Ability to Obtain and Maintain Insurance; Adverse Publicity. The Company
currently maintains the following types of insurance policies: workers'
compensation, commercial general liability, automobile liability, commercial
property liability, student accident coverage, employment practices liability
and excess "umbrella" liability including coverage for child abuse and
molestation. These policies provide for a variety of coverages and are subject
to various limitations, exclusions and deductibles. To date, the Company has
been able to obtain insurance in amounts it believes to be appropriate. There
can be no assurance that the Company's insurance premiums will not increase in
the future as a consequence of conditions in the insurance business generally or
the Company's experience in particular. As a result of adverse publicity
concerning reported incidents of alleged abuse at child care centers and the
length of time before the expiration of applicable statutes of limitations for
the bringing of child abuse and personal injury claims (typically a number of
years after the child reaches the age of majority), some operators of child care
and family centers have had difficulty obtaining general liability insurance,
child abuse liability insurance or similar liability insurance or have been able
to obtain such insurance only at substantially higher rates. Any adverse
publicity concerning reported incidents of child abuse at any child care
centers, whether or not directly relating to or involving the Company, could
result in decreased enrollment at the Company's centers, termination of existing
corporate relationships, inability to attract new corporate relationships or
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increased insurance costs, any of which could have a material adverse effect on
the Company's business, results of operations, and financial condition.
Litigation. Because of the nature of its business, the Company is and expects
that in the future it may be subject to claims and litigation alleging
negligence, inadequate supervision and other grounds for liability arising from
injuries or other harm to the people it serves, primarily children. In addition,
claimants may seek damages from the Company for child abuse, sexual abuse and
other acts allegedly committed by Company employees. There can be no assurance
that lawsuits will not be filed, that the Company's insurance will be adequate
to cover liabilities resulting from any claim or that any such claim or the
publicity resulting from it will not have a material adverse effect on the
Company's business, results of operations, and financial condition including,
without limitation, adverse effects caused by increased cost or decreased
availability of insurance and decreased demand for the Company's services from
corporate sponsors and parents.
Seasonality and Variability of Quarterly Operating Results. The Company's
revenue and results of operations fluctuate with the seasonal demands for child
care. The Company's revenue typically declines during the third quarter as a
result of decreased enrollments in its centers as parents withdraw their
children for vacations and their older children for entry into elementary
schools. There can be no assurance that the Company will be able to adjust its
expenses on a short-term basis to minimize the effect of these fluctuations in
revenue. The Company's quarterly results of operations may also fluctuate based
upon the number and timing of center openings and/or acquisitions, the
performance of new and existing centers, the contractual arrangements under
which centers are operated, the change in the mix of such contractual
arrangements, the timing and level of consulting and development fees, center
closings, competitive factors and general economic conditions. The inability of
existing centers to maintain their current profitability, the failure of newly
opened centers to contribute to profitability and the failure to maintain and
grow the consulting and development services could result in additional
fluctuations in the future operating results of the Company on a quarterly or
annual basis.
Impact of Governmental Regulation. The Company's Family Centers are subject to
numerous federal, state and local regulations and licensing requirements.
Although these regulations vary greatly from jurisdiction to jurisdiction,
government agencies generally review, among other things, the adequacy of
buildings and equipment, licensed capacity, the ratio of staff to children,
staff training, record keeping, the dietary program, the daily curriculum and
compliance with health and safety standards. Failure of a center to comply with
applicable regulations can subject it to governmental sanctions, which might
include fines, corrective orders, probation, or, in more serious cases,
suspension or revocation of the center's license to operate or an award of
damages to private litigants and could require significant expenditures by the
Company to bring its Family Centers into compliance. In addition, state and
local licensing regulations often provide that the license held by a family
services company may not be transferred. As a result, any transferee of a family
services business (primarily child care) must apply to any applicable
administrative bodies for new licenses. There can be no assurance that the
Company would not have to incur material expenditures to relicense centers it
may acquire in the future. There can be no assurance that government agencies
will not impose additional restrictions on the Company's operations which could
adversely affect the Company's business, results of operations, and financial
condition.
Risks Associated with Forward-Looking Statements. This Report contains certain
statements that are "forward-looking statements." Those statements include,
among other things, the discussions of the Company's business strategy and
expectations concerning developments in the work and family services industry,
the Company's market position, future operations, growth by acquisitions and as
internally generated, contribution margins and profitability and liquidity and
capital resources. When used in this
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Report, the words "anticipate," "believe," "estimate," "expect" and similar
expressions are intended to identify forward-looking statements. Investors in
the Common Stock are cautioned that reliance on any forward-looking statements
involves risks and uncertainties, and that although the Company believes that
the assumptions on which the forward-looking statements contained herein are
reasonable, any of those assumptions could prove to be inaccurate, and as a
result, the forward-looking statements based on those assumptions also could be
incorrect. The uncertainties in this regard include, but are not limited to,
those identified in the risk factors discussed above. In light of these and
other uncertainties, the inclusion of a forward-looking statement herein should
not be regarded as a representation by the Company that the Company's plans and
objectives will be achieved. The Company does not intend to update any of these
forward-looking statements.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages, titles and principal occupations and
employment for the past five years of the executive officers of the Company.
Marguerite W. Sallee, 52 -- President, Chief Executive Officer and Director. Ms.
Sallee is a founder of the Company and has served as President, Chief Executive
Officer and a director since February 1987. Prior thereto, Ms. Sallee served as
Commissioner of Human Services in former Governor Lamar Alexander's cabinet. Ms.
Sallee received a Bachelor of Arts from Duke University and a Master of Arts in
Psychology from Austin Peay University. She is a director of Proffitt's, Inc.,
an owner and operator of department stores; MagneTek, Inc., a manufacturer of
integrated electrical products; and Phoenix Healthcare Corporation, a managed
healthcare company; and is a former Chairman of the Nashville Area Chamber of
Commerce. In addition, Ms. Sallee is a delegate to the Presidential Summit for
Children.
Robert D. Lurie, 52 -- Chairman of the Board and Director of Research and
Development. Mr. Lurie has served as Chairman of the Company since December 1995
and as President of The Resource Group, a division of the Company focused on
providing consulting and resource support to work/life center operations, since
October 1995. From 1984 to 1995, Mr. Lurie served as President and Chief
Executive Officer of Resources for Child Care Management, Inc. ("RCCM"), which
was acquired by the Company in October 1995. Mr. Lurie received his Bachelor of
Arts degree from the University of Florida and his Master of Arts in American
Civilization from the University of Texas at Austin. He completed his graduate
studies in Administration and Social Policy at the Harvard University Graduate
School of Education.
Michael E. Hogrefe, 37 -- Executive Vice President, Chief Financial Officer and
Secretary. Mr. Hogrefe has served as an Executive Vice President, Chief
Financial Officer and Secretary since January 1996. Mr. Hogrefe served as
Treasurer of Service Merchandise Company, Inc., a national retail chain of
catalog stores, from July 1993 through January 1996 and as Assistant Treasurer
from March 1990 to July 1993. Prior to that, Mr. Hogrefe served as Assistant
Treasurer of Financial Management for Equicor - Equitable HCA Corporation from
1988 to 1990 and in a variety of positions for The Equitable Companies, Inc.,
from 1982 to 1988, culminating his employment as Assistant Treasurer. Mr.
Hogrefe received a Bachelor of Science in Management from Drake University and a
Master's in Business Administration from New York University, Stern School of
Business.
ITEM 2. PROPERTIES
The Company's executive offices are located in Nashville, Tennessee, and consist
of approximately 14,000 square feet leased through July 30, 2000, with an option
to renew the lease for two additional five-year terms. In addition, the Company
(i) owns two child care facilities and (ii) leases certain real property for use
at four
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Family Centers. Three of the above-mentioned leases have agreements whereby the
client becomes contractually responsible for the lease obligation in the event
the Company no longer operates a Family Center for such client at the location.
The Company also leases other facilities at various locations, which are not
material to its business.
ITEM 3. LEGAL PROCEEDINGS
The Company is, from time to time, subject to claims and suits arising in the
ordinary course of its business. Such claims have, in the past, generally been
covered by insurance. Management believes the resolution of other legal matters
will not have a material effect on the Company's financial condition or results
of operations, although no assurance can be given with respect to the ultimate
outcome of any such actions. Furthermore, there can be no assurance that the
Company's insurance will be adequate to cover all liabilities that may arise out
of claims brought against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders of CorporateFamily
Solutions, Inc. during the fourth quarter of fiscal year 1997.
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PART II
ITEM 5. MARKETS FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKETS FOR REGISTRANT'S COMMON EQUITY
The Company's common stock has been traded since August 13, 1997 on the NASDAQ
National Market (the "Nasdaq Stock Market") under the symbol "CFAM". Prior to
that time, there was no public market for the common stock. The following table
sets forth the range of high and low closing sale prices for the common stock as
reported on the Nasdaq Stock Market during each of the quarters presented.
Common Stock
----------------
High Low
------ ------
Quarterly period ended:
Third Quarter (from August 13, 1997) $18.25 $12.25
Fourth Quarter $22.38 $14.00
As of March 13, 1998, there were approximately 2,300 holders of Common Stock
including 126 holders of record of the Company's common stock.
DIVIDENDS
The Company has never declared or paid any cash dividends on its Common Stock.
It is the present policy of the Board of Directors to retain all earnings to
support operations and to finance expansion of the Company's business;
therefore, the Company does not anticipate declaring or paying dividends on the
Common Stock in the foreseeable future. The declaration and payment of cash
dividends in the future will be at the Board of Directors' discretion and will
depend on the Company's earnings, financial condition, capital needs and other
factors deemed pertinent by the Board of Directors, including limitations, if
any, on the payment of dividends under state law and any then-existing credit
agreement.
APPLICATION OF OFFERING PROCEEDS FROM INITIAL PUBLIC OFFERING
Pursuant to the Registration Statement on Form S-1, as amended, (Registration
No. 333-29523) dated August 12, 1997, the Company completed an initial public
offering of 2,702,500 shares of its common stock, which included the sale of
1,401,386 new shares of common stock by the Company, at a public offering price
of $10.00 per share (the "Offering"). The Company received net proceeds of
approximately $12.1 million of which approximately $3.7 million were used to
repay all of the Company's then outstanding bank borrowings. The Company intends
to use the balance of the net proceeds for working capital to further develop
its services and products and for other general corporate purposes, including
possible acquisitions of companies engaged in similar or complementary
businesses.
RECENT SALES OF UNREGISTERED SECURITIES
During the year ended January 2, 1998, the Company has issued 33,501 shares of
Common Stock upon the exercise of stock options granted to (i) to non-employee
directors of the Company and (ii) to employees pursuant to the Company's option
plans, with a weighted average exercise price of $5.11. Such issuances were
completed pursuant to the exemption found in Rule 701 under the Securities Act
of 1933, as amended.
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ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
The following table presents selected financial and operating data of the
Company. The historical data should be read in conjunction with the Consolidated
Financial Statements and the related notes thereto in Item 8 and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 7.
Fiscal Year(1)
-----------------------------------------------------------------------
1997 1996 1995(2) 1994 1993
----------- ----------- ----------- ----------- ------------
Revenue $77,722,000 $62,926,000 $36,920,000 $24,513,000 $ 16,967,000
Operating income (loss) 2,085,000 1,920,000 167,000 76,000 (1,074,000)
Income (loss) before income tax 2,194,000 1,577,000 81,000 26,000 (1,065,000)
Net income (loss) 1,104,000 2,736,000 541,000 26,000 (1,065,000)
Basic earnings (loss) per share 0.39 1.44 0.34 0.02 (0.72)
Diluted earnings per share 0.28 0.85 0.19 0.01 N/A(3)
Working capital 12,816,000 1,769,000 407,000 939,000 998,000
Total assets 30,217,000 20,378,000 17,055,000 5,265,000 4,774,000
Long-term debt, including
current maturities -- 4,416,000 5,064,000 883,000 758,000
Shareholders' equity 20,807,000 6,975,000 4,015,000 1,724,000 2,067,000
Dividends per common share -- -- -- -- --
SELECTED OPERATING DATA
(AT END OF PERIOD):
Family Center clients (4) 70 65 58 41 29
Family Centers (5) 95 85 75 48 33
Program Capacity (6) 12,529 10,702 9,113 5,295 3,850
- -------------------------
(1) The Company's fiscal year ends on the Friday closest to December 31.
(2) In October 1995, the Company acquired all of the outstanding capital
stock of RCCM, an operator of 21 employer-sponsored child care centers.
The transaction was accounted for as a purchase, and accordingly, the
results of operations include RCCM from the date of the acquisition.
(3) Not presented because the effect of considering the additional dilution
related to preferred stock, options and warrants would have been
anti-dilutive.
(4) A Family Center client is defined as an entity that as of the
applicable date was under contract with the Company for the management
of one or more open and operating Family Centers.
(5) Family Centers are defined as the facilities which the Company is
engaged to manage and operate on behalf of its Family Center Clients.
(6) Program capacity is defined as the maximum aggregate number of
individuals that the Company will enroll in the services and programs
at its Family Centers to be in compliance with NAEYC standards. As of
each of the respective dates, the state licensed capacity was 14,402,
12,440, 10,487, 6,361 and 5,279 individuals, respectively.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains certain forward-looking statements. 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 assurances that the forward-looking
statements included herein will prove to be accurate. There are many factors
that may cause actual results to differ materially from those indicated by the
forward-looking statements, including the various risk factors set forth in the
Company's registration statement on Form S-1 as filed with the Securities and
Exchange Commission and declared effective in August 1997. In light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of any such information should not be regarded as a
representation by the Company that the objectives and plans of the Company will
be achieved. The following discussion and analysis should be read in conjunction
with and is qualified in its entirety by the consolidated financial statements
including the notes thereto.
OVERVIEW
The Company is a leading national provider of services for the corporate market
that support families and business success. The Company works with more than 100
employers seeking to create a "family friendly" work environment by providing
work place child care, education, family support programs and consulting
services. The Company manages corporate-sponsored Family Centers, built and
equipped by an employer at or near its offices, providing high quality services
such as early childhood education, child care, back-up child care,
kindergartens, get-well care, summer camps, and parent support services. As of
January 2, 1998, the Company managed 95 Family Centers, representing 70
corporate clients, in 28 states and the District of Columbia. Additionally, the
Company had 16 Family Centers under development, including nine for new
corporate clients. Ten of the Company's corporate clients operate multiple
Family Centers. In addition, the Company provides work/life consulting services
to help employers realize the benefits of work and family programs and policies
and to align work/life concerns of working families with business strategies of
employers. Consulting services provided by the Company include feasibility
studies, work/life strategic planning, return on investment analyses and
development of work/life programs and policies. During 1997, the Company
provided consulting services to 31 corporate clients. The Company expects its
future growth will be generated from (i) developing new corporate clients; (ii)
managing additional Family Centers for existing clients; (iii) providing
additional work and family services and programs for existing clients; (iv)
expanding its work/life consulting services; (v) developing new services; and
(vi) pursuing strategic acquisitions.
The Company's revenue is derived from (i) the operation of Family Centers and
(ii) other services, including consulting services. Revenue from Family Centers
consists of parent fees for tuition, amounts paid by corporate clients to fund a
portion of the operating costs of a Family Center ("Client Operating Financial
Support") and management fees from clients. Parent fees represent the largest
portion of the Company's revenue, are generally comparable to prevailing market
rates for similar services offered by centers operating under National
Association for the Education of Young Children ("NAEYC") guidelines in the
local market and are paid weekly or monthly in advance. Management fees are
generally a fixed monthly fee or a per diem, per child fee. Client Operating
Financial Support and management fees are paid monthly. Separate from Family
Center revenue, the Company generates revenue from consulting services, which
are typically fixed-fee based, are generated from specific engagements or
monthly retainers and are recognized as services are performed. In 1997, no
single client accounted for more than 8% of the Company's revenue.
Operating expenses consist of direct expenses associated with the operation of
Family Centers and with delivery of consulting services. Family Center operating
expenses consist primarily of (i) staff salaries, taxes
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and benefits; (ii) food costs; and (iii) program supplies and materials. Staff
salaries, taxes and benefits generally comprise approximately 85% of Family
Center operating expenses. Consulting operating expenses are comprised primarily
of (i) staff salaries, taxes and benefits; (ii) contract labor; and (iii) other
direct operating expenses. Selling, general and administrative expenses are
comprised primarily of (i) salaries, taxes and benefits for non-center
personnel, including corporate, regional and business development personnel;
(ii) accounting and legal fees; (iii) insurance; and (iv) general corporate
expenses. Depreciation and amortization expense consists of the depreciation of
two Company-owned Family Center facilities, the personalty owned by the Company
and amortization of goodwill primarily related to the acquisition of RCCM.
The Company's Family Center contracts are typically three to five years in
length, with automatic annual renewals. The Company operates Family Centers
under three contract models: (i) cost-plus contracts; (ii) partnership
contracts; and (iii) profit/loss contracts. Under each contract model, clients
typically finance the facility and equipment, provide for ongoing facility
expenses and reimburse the Company for center personnel expenses incurred prior
to the center opening date. Parent fees are collected under each contract model
and vary in amount depending, among other things, on the level of Client
Operating Financial Support of a Family Center and the services provided.
Cost-Plus Contract. Under a cost-plus contract, revenue consists of:
(i) parent fees; (ii) Client Operating Financial Support paid to the
Company for reimbursement of any of a Family Center's operating
expenses and allocated corporate overhead that are in excess of parent
fees; and (iii) management fees. The cost-plus contract model provides
that all operating costs of a Family Center are paid from parent fees
and Client Operating Financial Support. As of January 2, 1998, 45 of
the Company's 95 Family Centers were operated under cost-plus
contracts, generating 53% of Family Center revenue.
Partnership Contract. Under a partnership contract, revenue typically
consists of: (i) parent fees; (ii) a fixed amount of Client Operating
Financial Support; and (iii) management fees. To the extent that the
parent fees and Client Operating Financial Support do not cover the
Family Center operating expenses, the Company is responsible for such
excess expenses. To the extent that parent fees and Client Operating
Financial Support exceed operating expenses of a Family Center and an
allocated portion of the Company's overhead, the difference is
generally reimbursed to the employer. In addition, Client Operating
Financial Support often includes payments to cover initial operating
losses during the enrollment building period (typically in the 12
months following the opening of a Family Center). As of January 2,
1998, 37 of the Company's Family Centers were operated under
partnership contracts, generating 32% of Family Center revenue.
Profit/Loss Contract. Under a profit/loss contract, revenue is
generated primarily from parent fees, and the Company may receive
limited Client Operating Financial Support. The Company does not
receive a management fee and bears profit and loss responsibility for
the operations of the Family Center. These contracts are subject to a
greater degree of variability in operating results than the other
contract types. Initial operating losses during the enrollment building
period are generally funded by the Company. Initial operating losses
may range from $50,000 to $125,000 per center. As of January 2, 1998,
13 of the Company's Family Centers were operated under profit/loss
contracts, generating 15% of Family Center revenue.
Management believes the Company's operating model, which requires limited or no
capital investment for facilities and pre-opening expenses and provides three
contract structures to meet the varying needs of its clients, reduces Family
Center operating variability and risk. The mix of contracts has not varied
substantially over the past several years.
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The Company measures profitability at the client level based on the combined
results of Family Center operations and consulting services from a client. The
Company's Family Center profitability (the "Operating Contribution") is defined
as Family Center revenue, including management fees, less Family Center
operating expenses prior to allocated corporate overhead. During the first two
years of operation, a Family Center generates varying degrees of Operating
Contribution, depending upon the contract model. During 1997, the Company's 70
mature Family Centers (defined as those open as of December 29, 1995 and
remaining open as of January 2, 1998) averaged approximately $89,000 in
Operating Contribution. An additional component of client profitability is
consulting revenue for services performed. During 1997, the Company provided
consulting services through 45 consulting engagements to 31 corporate clients.
The consulting revenue and operating margins generated from consulting
engagements will vary significantly depending upon the general complexity of the
project and the resources the Company must allocate to complete the engagement.
Consulting engagements are quoted on a fixed-fee basis per engagement. In
general, management believes that the operating margin generated from the
consulting business will be greater than that attained from its Family Center
operations.
During 1997, the Company opened 13 Family Centers and closed three. In addition,
at January 2, 1998, the Company had 16 Family Centers under development. The
opening of a new center is subject to a number of conditions and factors,
including, among others, construction timing, employer needs and weather
conditions.
In November 1997, the Company acquired certain assets of MAW Enterprises, Inc.
d/b/a Schools at Work for a total purchase price of $300,000. The acquisition
has been accounted for as a purchase. MAW Enterprises, Inc. d/b/a Schools at
Work provides consulting and facilitating services to organizations interested
in educational opportunities for employees and their children.
In August 1997, the Company completed an initial public offering of 2,702,500
shares of its common stock, of which 1,401,386 shares were issued and sold by
the Company, at a public offering price of $10.00 per share (the "Offering").
The Company received net proceeds of approximately $12.1 million (after
deducting underwriting discounts and expenses). Approximately $3.7 million was
used to repay all of the Company's then outstanding bank borrowings. The Company
intends to use the balance of the net proceeds for working capital to further
develop its services and products and for other general corporate purposes,
including possible acquisitions of companies engaged in similar or complementary
businesses. Additionally, as a result of the Offering, all 1,125,000 shares of
the Company's issued and outstanding Series A preferred stock were converted
into 1,169,935 shares of common stock.
In October 1995, the Company acquired all of the outstanding capital stock of
RCCM, an operator of 21 employer-sponsored child care centers. The consideration
paid consisted of $3.4 million in cash and 324,995 shares of Common Stock. The
transaction was accounted for as a purchase and resulted in $5.7 million of
goodwill, which is being amortized over 18 years.
The Company reports its quarterly results in 13 week increments (two four-week
periods and one five-week period) instead of three calendar months. The 1997
fiscal year consisted of 53 weeks, and the fourth quarter of 1997 consisted of
14 weeks.
The Company's revenue and results of operations fluctuate with the seasonal
demands for child care. The Company's revenue typically declines during the
third quarter as a result of decreased enrollments in its Family Centers as
parents withdraw their older children for entry into elementary schools. Since a
portion of the Company's costs are fixed costs, the Company's results are
affected by fluctuation in center and program utilization. Quarterly results of
operations may also fluctuate based upon the number and timing of center
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openings and/or acquisitions, the performance of new and existing centers, the
contractual arrangements under which centers are operated, the change in the mix
of such contractual arrangements, the timing and level of consulting and
development fees, center closings, competitive factors and general economic
conditions.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial data
for the Company expressed as a percentage of revenue.
Fiscal Year
--------------------------
1997 1996 1995
------ ------ ------
Revenue 100.0% 100.0% 100.0%
Operating expenses 88.4 88.3 88.6
Selling, general and administrative expense 7.5 7.4 9.5
Special charge 0.4 -- --
Depreciation and amortization 1.0 1.2 1.4
----- ----- -----
Operating income 2.7 3.1 0.5
Interest (income) expense, net (0.1) 0.6 0.2
----- ----- -----
Income before income taxes 2.8 2.5 0.3
Income tax expense (benefit) 1.4 (1.8) (1.2)
----- ----- -----
Net income 1.4% 4.3% 1.5%
===== ===== =====
Operating income before special charge 3.1% 3.1% 0.5%
===== ===== =====
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Revenue. Revenue increased $14.8 million, or 23.5%, to $77.7 million in 1997
from $62.9 million in 1996. The revenue increase was primarily the result of (i)
a full year of operation at centers opened in 1996; (ii) internal growth
generated at mature centers; and (iii) the operation of net 10 new centers in
1997. In 1997, the Company opened 13 new centers for 11 clients and closed three
centers. Consulting revenue increased to $952,000 in 1997 from $415,000 in 1996.
The increase in consulting revenue resulted from the Company's expansion of its
consulting capabilities during the latter half of 1996.
Operating Expenses. Operating expenses increased $13.1 million, or 23.6%, to
$68.7 million in 1997 from $55.6 million in 1996. Operating expenses as a
percentage of revenue increased to 88.4% in 1997 from 88.3% in 1996. There were
no unusual fluctuations or trends in 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.1 million, or 23.4%, to $5.8 million in
1997 from $4.7 million in 1996. Selling, general and administrative expenses as
a percentage of revenue increased to 7.5% in 1997 from 7.4% in 1996. This
increase is primarily the result of (i) the Company increasing its sales and
marketing personnel during the second half of 1997 to expand its market
penetration and enhance its responsiveness to client requests and proposals and
(ii) to a lesser extent, general and administrative expenses necessary to open
and support the net 10 new Family Centers opened in 1997.
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Special Charge. Concurrent with its initial public offering, the Company removed
the restrictions, as set forth in the restricted stock agreement, on 32,500
shares of common stock held by an officer of the Company. As a result, the
Company recorded a non-recurring, non-cash compensation charge of $297,000, or
$0.07 per share, assuming dilution, (for which the Company received no tax
deduction) in 1997.
Depreciation and Amortization. Depreciation and amortization expense increased
$25,000, or 3.3%, to $784,000 in 1997 from $759,000 in 1996. Management
anticipates that depreciation expense in the future will increase at a higher
rate than experienced in 1997, however, as a percentage of revenue such expense
is expected to remain comparable.
Operating Income. Operating income increased to $2.1 million in 1997 from $1.9
million in 1996. Excluding the $297,000 special charge, operating income would
have increased $462,000, or 24.1%, to $2.4 million in 1997.
Net Interest Income/Expense. In 1997 the Company recorded net interest income of
$109,000 as compared to net interest expense of $343,000 in 1996. The increase
in interest income and decrease in interest expense was primarily the result of
(i) in August 1997, the Company's use of approximately $3.7 million of the net
proceeds received from the Offering to repay all of its then outstanding bank
borrowings and (ii) the investment of the remaining net proceeds, approximately
$8.4 million, primarily in high quality commercial paper.
Income Taxes. The provision for income taxes was $1.1 million in 1997. In 1996,
the Company recorded an income tax benefit of $1.2 million as a result of a
reduction of valuation allowances in order to utilize net operating loss
carryforwards. The Company's effective tax rate for 1997 was 49.7% due to the
non-deductibility of (i) approximately $325,000 of goodwill amortization and
(ii) the special charge of $297,000 related to the removal of restrictions on
certain shares of common stock.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
Revenue. Revenue increased $26.0 million, or 70.5%, to $62.9 million in 1996
from $36.9 million in 1995. The revenue increase was primarily the result of (i)
$19.6 million in revenue generated by RCCM in 1996 compared to $4.3 million in
revenue from October 1995; (ii) internal growth generated at mature centers;
(iii) a full year of operation at centers opened in 1995; and (iv) the operation
of net 10 new centers in 1996. In 1996, the Company opened 12 new centers for
nine clients and closed two centers. Consulting revenue increased to $415,000 in
1996 from $86,000 in 1995. The increase in consulting revenue resulted from the
Company's expansion of its consulting capabilities during the latter half of
1996.
Operating Expenses. Operating expenses increased $22.9 million, or 70.0%, to
$55.6 million in 1996 from $32.7 million in 1995. Operating expenses as a
percentage of revenue declined to 88.3% in 1996 from 88.6% in 1995. Operating
expenses in 1995 were impacted by expenses of $512,000 incurred in the operation
and closing of a neighborhood child care center that the Company acquired as a
part of an acquisition in 1993. This impact was offset in part by the 1996
operating expenses reflecting a full year of operations associated with the
Family Centers acquired in the RCCM acquisition. In general, RCCM Family Centers
had a greater proportion of cost-plus contracts which had typically operated
with higher operating expense levels.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.2 million, or 34.3%, to $4.7 million in
1996 from $3.5 million in 1995. Selling, general and administrative expenses as
a percentage of total revenue decreased to 7.4% in 1996 from 9.5% in 1995. This
reduction
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resulted primarily from the economies of scale achieved in connection with the
21 Family Centers acquired in the RCCM acquisition, as well as the operation of
net ten new centers in 1996. The Company does not anticipate that future
declines in selling, general and administrative expenses as a percentage of
revenues, if any, will be comparable to declines experienced in prior periods.
Depreciation and Amortization. Depreciation and amortization expense increased
$239,000, or 46.0%, to $759,000 in 1996 from $520,000 in 1995. Amortization
expense increased to $419,000 in 1996 from $270,000 in 1995. This increase is
attributable to a full year of amortization of the goodwill associated with the
RCCM acquisition. Depreciation expense increased to $340,000 in 1996 from
$250,000 in 1995 and is attributable to a full year of depreciation on two
Family Center properties acquired in the RCCM acquisition.
Operating Income. Operating income increased to $1.9 million in 1996 from
$167,000 in 1995 and increased as a percent of revenue to 3.1% in 1996 from 0.5%
in 1995.
Net Interest Expense. Net interest expense increased to $343,000 in 1996 from
$86,000 in 1995. The increase is a result of increased borrowings related
primarily to the acquisition of RCCM in October 1995.
Income Taxes. In 1996, the Company recorded an income tax benefit of $1.2
million as a result of a reduction in the valuation allowance relative to
deferred tax assets. In 1995, the Company recorded an income tax benefit of
$460,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has primarily provided its services under management contracts which
require little or no capital investment by the Company for growth of its
operations. Corporate clients typically assume financial responsibility for
construction costs and ongoing facility expenses. Prior to August 1997, the
Company had financed its operating needs and acquisitions from investments from
shareholders, funded debt and cash flow from operations.
In August 1997, the Company completed the Offering of 2,702,500 shares of its
common stock, of which 1,401,386 shares were issued and sold by the Company, at
a public offering price of $10.00 per share. The Company received net proceeds
of approximately $12.1 million, of which approximately $3.7 million were used to
repay all of the Company's then outstanding bank borrowings. The Company intends
to use the balance of the net proceeds for working capital to further develop
its services and products and for other general corporate purposes, including
possible acquisitions of companies engaged in similar or complementary
businesses.
The Company had working capital of $12.8 million and $1.8 million as of January
2, 1998 and December 27, 1996, respectively. During 1997, net cash provided by
operating activities was $1.9 million as compared to $2.0 million in 1996. Cash
used by investing activities during 1997 totaled $518,000, as compared to
$169,000 in 1996. The increase in cash used in investing activities resulted
primarily from the purchase of the assets of Schools at Work. Cash provided from
financing activities during 1997 totaled $8.0 million as compared to cash used
in financing activities of $551,000 for the comparable period in 1996. The
increase in the cash provided from financing activities in 1997 was due to the
net proceeds received from the Company's initial public offering completed in
August 1997 less the amount used to repay all of the Company's then outstanding
bank borrowings.
21
22
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Cash equivalents consist primarily
of high quality commercial paper. The carrying value of these instruments
approximates market value due to their short maturities.
The Company has entered into a $5.0 million revolving credit facility to be used
for working capital and other general corporate purposes. Borrowings under the
credit facility, which is subject to renewal on an annual basis, will bear
interest at the lender's prime rate. No amounts were outstanding under this
credit facility at January 2, 1998.
Management believes that funds provided by operations, available borrowing under
the credit facility and the net proceeds from the initial public offering will
be sufficient to meet the Company's needs for working capital, capital
expenditures and the Company's anticipated needs to fund future growth through
the end of 1998. The Company does not anticipate material increases in the level
of capital expenditures in 1998. An element of the Company's strategy is to
pursue strategic acquisitions. The Company may be required to seek external
financing sources to pursue such acquisitions. There can be no assurance that
the Company would be able to obtain such financing on reasonable terms, if at
all.
YEAR 2000 CONVERSION
The Company is coordinating the identification, evaluation, and implementation
of changes to computer systems and applications necessary to achieve a year 2000
date conversion with no effect on customers or disruption to business
operations. These actions are necessary to ensure that the systems and
applications will recognize and process the year 2000 and beyond. The Company is
also evaluating non-system issues relative to the year 2000 and beyond. As
appropriate, the Company is communicating with suppliers, customers, financial
institutions and others with which it does business to coordinate year 2000
conversion. Management does not anticipate the total cost of compliance will
have a significant impact on the Company's consolidated financial statements or
results of operations.
22
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CORPORATEFAMILY SOLUTIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Number
------
Report of Independent Public Accountants..............................................24
Consolidated Balance Sheets as of January 2, 1998 and December 27, 1996............ 25
Consolidated Statements of Income for each of the three years ended
January 2, 1998, December 27, 1996 and December 29, 1995...........................26
Consolidated Statements of Shareholders' Equity for each of the three years
ended January 2, 1998, December 27, 1996 and December 29, 1995................... 27
Consolidated Statements of Cash Flows for each of the three years ended
January 2, 1998, December 27, 1996 and December 29, 1995...........................28
Notes to Consolidated Financial Statements ...........................................29
23
24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO CORPORATEFAMILY SOLUTIONS, INC.:
We have audited the accompanying consolidated balance sheets of CORPORATEFAMILY
SOLUTIONS, INC. (a Tennessee corporation) and subsidiaries as of January 2,
1998 and December 27, 1996 and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended January 2, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 financial position of CorporateFamily
Solutions, Inc. and subsidiaries as of January 2, 1998 and December 27, 1996 and
the results of their operations and their cash flows for each of the three years
in the period ended January 2, 1998, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
February 13, 1998
24
25
CORPORATEFAMILY SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
January 2, December 27,
1998 1996
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 12,349,000 $ 2,913,000
Restricted cash 176,000 169,000
Accounts receivable, less allowance of $125,000 and
$123,000, respectively 6,115,000 5,390,000
Prepaid expenses 143,000 103,000
Deferred income taxes 1,014,000 970,000
------------ ------------
Total current assets 19,797,000 9,545,000
Property and equipment, net 3,593,000 3,757,000
Intangible assets, net 5,651,000 5,753,000
Deferred income taxes 175,000 1,012,000
Other assets 1,001,000 311,000
------------ ------------
Total Assets $ 30,217,000 $ 20,378,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ -- $ 911,000
Trade accounts payable 801,000 1,289,000
Income tax payable 51,000 138,000
Accrued expenses:
Payroll and related benefits 3,914,000 3,343,000
Other 1,097,000 1,257,000
Deferred revenue, current portion 479,000 332,000
Other current liabilities 463,000 337,000
Amounts held in escrow 176,000 169,000
------------ ------------
Total current liabilities 6,981,000 7,776,000
Long-term debt, net of current portion -- 3,505,000
Deferred revenue, net of current portion 862,000 979,000
Other long-term liabilities 1,567,000 1,143,000
------------ ------------
Total liabilities 9,410,000 13,403,000
------------ ------------
Commitments, Contingencies and Guarantees (See Note 9)
SHAREHOLDERS' EQUITY:
Series A preferred stock, no par value; authorized, issued and
outstanding, none and 1,125,000 shares, respectively -- 4,480,000
Preferred stock, no par value; authorized, 10,000,000 and
3,875,000 shares, respectively; issued and outstanding none -- --
Common stock, no par value; authorized, 100,000,000 and
10,000,000 shares, respectively; issued and outstanding
4,491,104 shares and 1,866,203 shares, respectively 24,134,000 6,906,000
Accumulated deficit (3,327,000) (4,411,000)
------------ ------------
Total shareholders' equity 20,807,000 6,975,000
------------ ------------
Total liabilities and shareholders' equity $ 30,217,000 $ 20,378,000
============ ============
The accompanying notes to consolidated financial statements are an
integral part of these statements.
25
26
CORPORATEFAMILY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended
--------------------------------------------
January 2, December 27, December 29,
1998 1996 1995
------------ ------------ ------------
Revenue $ 77,722,000 $ 62,926,000 $ 36,920,000
Expenses:
Operating 68,734,000 55,588,000 32,708,000
Selling, general and administrative 5,822,000 4,659,000 3,525,000
Special charge 297,000 -- --
Depreciation and amortization 784,000 759,000 520,000
------------ ------------ ------------
Operating income 2,085,000 1,920,000 167,000
Interest (income) expense, net (109,000) 343,000 86,000
------------ ------------ ------------
Income before income taxes 2,194,000 1,577,000 81,000
------------ ------------ ------------
Income tax expense (benefit):
Current 297,000 142,000 8,000
Deferred 793,000 (1,301,000) (468,000)
------------ ------------ ------------
1,090,000 (1,159,000) (460,000)
------------ ------------ ------------
Net income $ 1,104,000 $ 2,736,000 $ 541,000
============ ============ ============
Earnings per share:
Basic $ 0.39 $ 1.44 $ 0.34
============ ============ ============
Diluted $ 0.28 $ 0.85 $ 0.19
============ ============ ============
The accompanying notes to consolidated financial statements are an
integral part of these statements.
26
27
CORPORATEFAMILY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SERIES A
PREFERRED STOCK COMMON STOCK
NO PAR VALUE NO PAR VALUE
------------------------- -------------------------- ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
---------- ----------- ----------- ------------ ------------ -----------
Balance, December 30, 1994 1,125,000 $ 4,422,000 1,493,023 $ 4,931,000 $ (7,630,000) $ 1,723,000
Acquisition of RCCM -- -- 324,995 1,750,000 -- 1,750,000
Accretion of preferred
stock -- 29,000 -- -- (29,000) --
Net income -- -- -- -- 541,000 541,000
---------- ----------- ----------- ------------ ------------ -----------
Balance, December 29, 1995 1,125,000 4,451,000 1,818,018 6,681,000 (7,118,000) 4,014,000
Issuance of stock
options -- -- -- 100,000 -- 100,000
Stock options exercised -- -- 15,685 97,000 -- 97,000
Common stock issued -- -- 32,500 28,000 -- 28,000
Accretion of preferred
stock -- 29,000 -- -- (29,000) --
Net income -- -- -- -- 2,736,000 2,736,000
---------- ----------- ----------- ------------ ------------ -----------
Balance, December 27, 1996 1,125,000 4,480,000 1,866,203 6,906,000 (4,411,000) 6,975,000
Stock options exercised -- -- 53,580 346,000 -- 346,000
Accretion of preferred
stock -- 20,000 -- -- (20,000) --
Conversion of preferred
stock (1,125,000) (4,500,000) 1,169,935 4,500,000 -- --
Common stock
restriction removed -- -- -- 297,000 -- 297,000
Common stock issued -- -- 1,401,386 12,085,000 -- 12,085,000
Net income -- -- -- -- 1,104,000 1,104,000
---------- ----------- ----------- ------------ ------------ -----------
Balance, January 2, 1998 -- $ -- 4,491,104 $ 24,134,000 $ (3,327,000) $20,807,000
========== =========== =========== ============ ============ ===========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
27
28
CORPORATEFAMILY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
-------------------------------------------
January 2, December 27, December 29,
1998 1996 1995
------------ ----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 1,104,000 $ 2,736,000 $ 541,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 784,000 759,000 520,000
Other noncash expense 297,000 68,000 --
Deferred tax expense (benefit) 793,000 (1,301,000) (468,000)
Loss on disposal of assets -- 69,000 159,000
Changes in assets and liabilities:
Increase in accounts receivable (725,000) (1,826,000) (543,000)
(Increase) decrease in prepaid expenses (40,000) 37,000 (73,000)
Increase (decrease) in accounts payable and accrued (77,000) 1,575,000 596,000
expenses
Decrease in income taxes payable (87,000) -- --
Increase in other current liabilities 126,000 142,000 162,000
Increase (decrease) in deferred revenue 30,000 (43,000) (27,000)
Increase (decrease) in other long-term liabilities 424,000 (204,000) (53,000)
(Increase) decrease in other noncurrent assets (690,000) 37,000 (44,000)
------------ ----------- -----------
Net cash provided by operating activities 1,939,000 2,049,000 770,000
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (507,000) (169,000) (514,000)
Increase in intangible assets -- -- (35,000)
Proceeds from sale of property and equipment, net 289,000 -- --
Purchase of assets of Schools at Work (300,000) -- --
Purchase of capital stock of RCCM -- -- (3,613,000)
------------ ----------- -----------
Net cash used in investing activities (518,000) (169,000) (4,162,000)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 12,431,000 97,000 --
Payments on long-term debt (4,416,000) (648,000) (439,000)
Debt financing related to acquisition -- -- 3,500,000
------------ ----------- -----------
Net cash provided by (used in) financing activities 8,015,000 (551,000) 3,061,000
------------ ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,436,000 1,329,000 (331,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,913,000 1,584,000 1,915,000
------------ ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,349,000 $ 2,913,000 $ 1,584,000
============ =========== ===========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
28
29
CORPORATEFAMILY SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization -- CorporateFamily Solutions, Inc. (the "Company" and formerly
Corporate Child Care, Inc.) was incorporated under the laws of the state of
Tennessee on February 1, 1987 for the purpose of developing and managing Family
Centers. The Company is a leading national provider of a broad range of
management and consulting services for employers seeking to provide their
employees with child care services and other family support programs. The
Company operates and manages employer-sponsored Family Centers, built and
equipped by the employer at or near its offices, providing such services as
early childhood education, child care, back-up child care, kindergartens,
get-well care, summer camps and parent support services. In addition, the
Company provides work/life consulting services to help employers realize the
benefits of work and family programs and policies and to align work/life
concerns of working families with business strategies of employers. Consulting
services provided by the Company include feasibility studies, work/life
strategic planning, return on investment analyses, and development of work/life
programs and policies. The Company operates and manages employer-sponsored
Family Centers for major corporations, healthcare and governmental entities
located throughout the United States.
Principles of Consolidation -- The consolidated financial statements include the
accounts of CorporateFamily Solutions, Inc. and its wholly-owned subsidiaries.
All significant intercompany balances and transactions have been eliminated in
consolidation.
Cash Equivalents -- The Company considers all highly liquid investments with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist primarily of high quality commercial paper. The carrying
value of these instruments approximates market value due to their short
maturities.
Restricted Cash -- In connection with the acquisition of RCCM in 1995 (see Note
2), the Company is required to maintain cash in escrow pending the final
resolution of certain tax matters associated with RCCM prior to the acquisition
date. The majority of the tax matters were resolved in 1996.
Property and Equipment -- Property and equipment are recorded at cost and
depreciated on a straight-line basis over the estimated useful lives of the
assets as follows: furniture and equipment--3 to 10 years; center
improvements--3 to 10 years; buildings--30 to 32 years. Expenditures for
maintenance and repairs are generally charged to expense as incurred, whereas
expenditures for improvements and replacements are capitalized.
The cost and accumulated depreciation of assets sold or otherwise disposed of
are removed from the accounts and the resulting gain or loss is reflected in the
consolidated statements of income.
Property and equipment obtained through purchase acquisitions are stated at the
estimated fair value determined on the respective dates of acquisition.
Intangible Assets -- In connection with acquisitions, the Company has entered
into various noncompete agreements with certain individuals and assumed certain
management contracts. The estimated values allocated to such contracts are
amortized on a straight-line basis over the terms of the respective contracts.
29
30
The excess of the aggregate purchase price over the fair value of assets of
businesses acquired (goodwill) is being amortized on a straight-line basis over
a period of 15 to 20 years.
Subsequent to an acquisition, the Company continually evaluates whether later
events and circumstances have occurred that indicate the remaining estimated
useful life of its intangible assets may warrant revision or that the remaining
balance of such assets may not be recoverable. When factors indicate that such
assets should be evaluated for possible impairment, the Company uses an estimate
of the acquired operation's undiscounted cash flows over the remaining life of
the asset in measuring whether the asset is recoverable.
Deferred Revenue -- Deferred revenue results from employer-sponsor advances (see
Note 3), and cash received on uncompleted consulting or development projects.
Other Current Liabilities -- Other current liabilities consist primarily of
amounts refundable to clients pursuant to certain Family Center management
contracts. Based on the terms of certain Family Center management contracts,
refundable profits may be either reinvested in future Family Center operations,
or refunded to the employer-sponsors.
Other Long-Term Liabilities -- Other long-term liabilities consist primarily of
deposits held pursuant to certain Family Center management contracts. The
deposits will be remitted to the clients upon termination of the respective
contracts.
Income Taxes -- The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", ("SFAS
109"). Under the asset and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the fiscal years in which those temporary differences are expected to
be recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
Revenue Recognition -- The Company maintains contracts with its customers to
manage and operate their Family Centers under various terms. The Company's
contracts are generally three to five years in length with annual renewals.
Management expects to renew the Company's existing contracts for periods
consistent with the remaining renewal options allowed by the contracts or other
reasonable extensions. Revenue from Family Center operations is recognized as
services are rendered. Revenue from consulting projects and from development
activities is recognized as the services are performed.
Stock-Based Compensation -- Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", ("SFAS 123"), encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for employee stock-based compensation using the intrinsic value method as
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", ("APB Opinion No. 25"), and related Interpretations. Under
APB Opinion No. 25, no compensation cost related to employee stock options has
been recognized because all options are granted with exercise prices equal to or
greater than the fair market value at the date of grant. See Note 7 for further
discussion.
Earnings Per Share -- In the fourth quarter of 1997, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per
Share", ("SFAS 128"). Under the standards established by SFAS 128, earnings per
share is measured at two levels: basic earnings per share and diluted
30
31
earnings per share. Basic earnings per share is computed by dividing net income
by the weighted average number of common shares outstanding during the year.
Diluted earnings per share is computed by dividing net income by the weighted
average number of common shares after considering the additional dilution
related to preferred stock, options and warrants. See Note 8 for further
discussion.
Fiscal Year -- The Company's fiscal year is the 52-53 week period ending on the
Friday nearest to December 31. The Company's year ended January 2, 1998
consisted of 53 weeks and the fourth quarter of 1997 consisted of 14 weeks.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from these estimates.
New Pronouncements -- In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure", ("SFAS 129"). SFAS 129 establishes
standards for disclosing information about an entity's capital structure. The
Company adopted SFAS 129 in the fourth quarter of 1997. The adoption of SFAS 129
did not have a material impact on the Company's financial position, results of
operations or cash flows.
Reclassifications -- Certain reclassifications have been made in the 1996 and
1995 consolidated financial statements to conform to the 1997 presentation.
2. ACQUISITIONS
In November 1997, the Company purchased the assets of MAW Enterprises, Inc.
d/b/a Schools at Work for $300,000. The transaction was accounted for as a
purchase.
Effective October 2, 1995, the Company acquired, through a reverse subsidiary
merger, RCCM. The transaction was accounted for as a purchase. The merger was
consummated by the exchange of 324,995 shares of the Company's common stock and
$3,373,000 cash for 100% of the outstanding shares of RCCM's common stock. The
principal shareholder of RCCM also entered into an employment agreement and an
agreement not to compete with the Company (see Note 9). The results of RCCM's
operations since the date of the acquisition have been reflected in the
accompanying consolidated financial statements. Effective December 31, 1997,
RCCM was merged with and into the Company.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
1997 1996
----------- -----------
Furniture and equipment $ 1,311,000 $ 1,075,000
Buildings and improvements 3,472,000 3,834,000
Land -- 54,000
----------- -----------
4,783,000 4,963,000
Less accumulated depreciation (1,190,000) (1,206,000)
----------- -----------
Property and equipment, net $ 3,593,000 $ 3,757,000
=========== ===========
31
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Advances of $1,290,500 were received to fund the building of a child care
facility in Westchester County, New York. Such advances were recorded as
deferred revenue when received. The Company is required to maintain certain
standards relating to the ongoing operations of the center for a minimum
operating period as defined in agreements with the parties advancing the funds.
In the absence of default under agreements with these parties, repayment of the
funds received is forgiven on a pro-rata basis over a ten to fifteen year
period. The Company recognizes this forgiveness of the advances as income on the
same pro-rata basis. The Company recognized income of $117,000, $117,000 and
$78,000 during 1997, 1996 and 1995, respectively, and at January 2, 1998 and
December 27, 1996, $862,000 and $1,096,000 of the original funding remains in
deferred revenue on the Company's consolidated balance sheets.
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
1997 1996
---------- -----------
Goodwill, net of amortization of $826,000 and $481,000, respectively $5,569,000 $ 5,614,000
Management contracts, net of amortization of $169,000
and $152,000, respectively 40,000 57,000
Noncompete agreements, net of amortization of $129,000
and $99,000, respectively 21,000 51,000
Other 21,000 31,000
---------- -----------
Total $5,651,000 $ 5,753,000
========== ===========
5. LONG-TERM DEBT
Long-term debt consists of the following:
1997 1996
---------- -----------
Bank term loan, bearing interest at 9.75%,
repaid in 1997 $ -- $ 3,033,000
Promissory notes to banks, bearing interest at rates
ranging from 8% to 9.875%, repaid in 1997 -- 1,313,000
Notes payable to shareholder, bearing interest at 10%,
repaid in 1997 -- 70,000
---------- -----------
Total -- 4,416,000
Less current maturities -- (911,000)
---------- -----------
Long-term debt $ -- $ 3,505,000
========== ===========
The Company has entered into a $5,000,000 revolving credit facility with a bank
to be used for working capital and other general corporate purposes. Borrowings
under the credit facility, which is subject to renewal on an annual basis, will
bear interest at the lender's prime rate and are secured by a deed of trust on
certain real estate, a security interest in the Company's accounts receivable,
and certain furniture and equipment. No amounts have been advanced under the
facility as of January 2, 1998.
32
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6. INCOME TAXES
Income tax expense (benefit) consisted of the following for fiscal years 1997,
1996 and 1995:
1997 1996 1995
---------- ----------- ---------
Current tax expense $ 297,000 $ 142,000 $ 8,000
Deferred tax expense 793,000 624,000 102,000
Reduction in valuation allowance -- (1,925,000) (570,000)
---------- ----------- ---------
Income tax expense (benefit), net $1,090,000 $(1,159,000) $(460,000)
========== =========== =========
A reconciliation of the U.S. Federal statutory rate to the effective rate is as
follows:
1997 1996 1995
---------- ----------- ---------
U. S. Federal statutory rate $ 746,000 $ 536,000 $ 27,000
State taxes on income 88,000 85,000 3,000
Expenses not deductible 256,000 145,000 80,000
Change in valuation allowance -- (1,925,000) (570,000)
---------- ----------- ---------
Income tax expense (benefit), net $1,090,000 $(1,159,000) $(460,000)
========== =========== =========
Significant components of the Company's deferred tax liabilities and assets,
using a tax rate of 38%, are as follows:
1997 1996
---------- ----------
Current assets:
Reserve on assets $ 48,000 $ 47,000
Liabilities not yet deductible 966,000 923,000
---------- ----------
Total current assets 1,014,000 970,000
---------- ----------
Noncurrent assets:
Net operating loss carryforwards 152,000 945,000
Other 23,000 67,000
---------- ----------
Noncurrent asset 175,000 1,012,000
---------- ----------
Total net deferred tax asset $1,189,000 $1,982,000
========== ==========
The 1995 reduction in valuation allowance results from management's
determination during the fourth quarter of 1995 that it is more likely than not
that the deferred tax assets other than net operating losses would be realized.
Based on 1996 pre-tax income and projected future earnings, management
determined in the fourth quarter of 1996 that it is more likely than not that
the Company's net operating loss carryforwards are realizable. Therefore, the
remaining valuation allowance was removed in 1996.
33
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7. SHAREHOLDERS' EQUITY
COMMON STOCK
In August 1997, the Company completed an initial public offering of 2,702,500
shares of its common stock, of which 1,401,386 shares were issued and sold by
the Company, at a public offering price of $10.00 per share (the "Offering").
The Company received net proceeds of approximately $12.1 million (after
deducting underwriting discounts and expenses). Approximately $3.7 million was
used to repay all of the Company's then outstanding bank borrowings. The Company
intends to use the balance of the net proceeds for working capital to further
develop its services and products and for other general corporate purposes,
including possible acquisitions of companies engaged in similar or complementary
businesses.
In connection with the Offering, the Company effected a .65 to 1 reverse stock
split. Accordingly, all references in the accompanying consolidated financial
statements to common share or per common share information have been restated to
reflect the reverse stock split. Additionally, as a result of the Offering, all
1,125,000 shares of the Company's issued and outstanding Series A preferred
stock were converted into 1,169,935 shares of common stock.
Concurrent with the Offering, the Company removed the restrictions, set forth in
the restricted stock agreement, on 32,500 shares of common stock held by an
officer of the Company. As a result, the Company recorded a non-recurring,
non-cash stock compensation charge of $297,000, or $0.07 per share, assuming
dilution, (for which the Company received no tax deduction) in the third quarter
of fiscal 1997.
During fiscal 1997, the Company adopted the 1997 Outside Directors' Incentive
Plan (the "1997 Directors' Plan") which provides for restricted stock grants to
outside directors. Under the terms of the 1997 Directors' Plan, each outside
director shall receive, on the date of the annual meeting of the Company's
shareholders, commencing with the 1998 annual meeting of shareholders, an award
of restricted stock such that the total number of shares of restricted stock has
an aggregate fair market value of $10,000. Restricted stock granted under the
1997 Directors' Plan will vest at the rate of one-third each year beginning on
the date of grant and the remainder on the first and second annual meetings of
shareholders following the annual meeting at which the restricted stock was
granted, provided that the grantee is still serving as a Director of the
Company. At January 2, 1998, no restricted stock had been granted under the 1997
Directors' Plan and there were 25,000 shares of unissued common stock reserved
for issuance under the 1997 Directors' Plan.
STOCK OPTIONS
During fiscal 1997, the Company adopted the 1997 Stock Incentive Plan (the "1997
Plan") which provides for qualified and non-qualified incentive stock option
grants and other stock-based awards for which options may be granted to
officers, key employees, and consultants as designated by the Board of
Directors. The option price per share under the 1997 Plan must be at least 100%
of the fair market value of a share of common stock at grant, in the case of
incentive stock options and at least 50% of the fair market value of a share of
common stock at grant, in the case of a non-qualified stock option. At January
2, 1998, no options had been granted under the 1997 Plan and there were 450,000
shares of unissued common stock reserved for issuance under the 1997 Plan.
Prior to the adoption of the 1997 Plan, the Company had two stock incentive
plans, the 1987 Stock Option Plan and the 1996 Stock Incentive Plan, which
provided for qualified and non-qualified incentive stock option grants and other
stock-based awards for which options may be granted to key employees as
designated by the Board of Directors. These options are exercisable commencing
on dates specified in the option agreements.
34
35
The options expire at the earlier of ten years from date of grant or three
months after termination of the holder's employment with the Company unless
otherwise determined by the Compensation Committee. The exercise prices on stock
options granted to date range from $4.62 to $10.00 per share. Subsequent to the
adoption of the 1997 Plan, no further grants may be made under the 1987 Stock
Option Plan or the 1996 Stock Incentive Plan.
Prior to the adoption of the 1997 Directors' Plan, the Company periodically
issued options to members of its Board of Directors. These options have the same
terms and conditions as the options issued to employees and expire at the
earlier of ten years from date of grant or three months after termination of
service as a member of the Board of Directors.
The Company accounts for options issued to employees and Directors under APB
Opinion No. 25. All options have been granted with exercise prices equal to or
greater than the fair value of the Company's common stock on the date of grant.
As a result, no compensation cost has been recognized.
SFAS 123 established new financial accounting and reporting standards for
stock-based compensation plans. The Company has adopted the disclosure-only
provision of SFAS 123. As a result, no compensation cost has been recognized for
the Company's stock option plans. Had compensation cost for the stock option
plans been determined based on the fair value at the grant date for awards in
fiscal 1997, 1996 and 1995 consistent with the provisions of SFAS 123, the
Company's net income and earnings per share would have been reduced to the
following pro forma amounts for the 1997, 1996 and 1995 fiscal years:
1997 1996 1995
---------- ---------- -----------
Net income:
As reported $1,104,000 $2,736,000 $ 541,000
========== ========== ===========
Pro forma $ 593,000 $2,432,000 $ 434,000
========== ========== ===========
Earnings per common share:
As reported $ 0.39 $ 1.44 $ 0.34
========== ========== ===========
Pro forma $ 0.21 $ 1.28 $ 0.27
========== ========== ===========
Earnings per common share assuming dilution:
As reported $ 0.28 $ 0.85 $ 0.19
========== ========== ===========
Pro forma $ 0.15 $ 0.75 $ 0.15
========== ========== ===========
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The fair value of each option on its date of grant has been estimated for pro
forma purposes using the Black-Scholes option pricing model using the following
weighted average assumptions:
1997 1996 1995
-------- -------- --------
Expected dividend yield 0.0% 0.0% 0.0%
Expected stock price volatility 35.0% 0.0% 0.0%
Risk free interest rate 5.7% 5.6% 7.8%
Expected life of options 5 years 10 years 10 years
Weighted-average fair value per share
of options granted during the year $ 10.71 $ 3.29 $ 4.18
35
36
A summary of the status of the Company's option plans, including options issued
to members of the Board of Directors, is as follows for the 1997, 1996 and 1995
fiscal years:
1997 1996 1995
--------------------- -------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
---------- ----- ---------- ----- -------- -----
Outstanding at beginning
of period 1,093,046 $6.98 650,397 $6.57 469,697 $5.65
Granted 156,000 8.06 490,425 7.69 206,700 7.69
Exercised (53,580) 5.84 (15,685) 6.20 -- --
Canceled (23,370) 7.57 (32,091) 6.68 (26,000) 6.66
---------- ----- ---------- ----- -------- -----
Outstanding at end of
period 1,172,096 $7.18 1,093,046 $6.98 650,397 $6.57
========== ===== ========== ===== ======== =====
Exercisable 723,921 $6.80 446,513 $6.11 363,245 $5.78
========== ===== ========== ===== ======== =====
Available for future grant 450,000 318,994 60,704
========== ========== ========
The weighted average contractual life remaining on options outstanding under the
above plans at January 2, 1998 is 6.9 years.
In addition to the above plans, the Company issued 32,500 options during 1996 to
its vice chairman in exchange for consulting services. The options have an
exercise price of $7.69 per share and expire in 2005. At the grant date, 13,000
of the options vested and the remainder vests ratably over a three year period.
The options were valued under the provisions of SFAS 123 and appropriate
compensation expense was recorded.
During 1995, the Company also issued 325,000 options to an employee and former
shareholder of RCCM. The options are exercisable at $7.69 per share and will
vest at a rate of 65,000 shares per year over a five year period unless the
shareholder is terminated without cause prior to the end of the vesting period,
in which case all options will immediately vest and will remain in effect until
their expiration ten years after date of issuance. The Company determined the
intrinsic value of the options was not material.
The Company recognizes a tax deduction upon exercise of non-qualified stock
options in an amount equal to the difference between the option price and the
fair market value of the common stock. These tax benefits are credited to common
stock.
STOCK PURCHASE WARRANTS
Prior to 1994, the Company issued 78,000 stock purchase warrants to a
shareholder. Warrants outstanding at January 2, 1998 and December 27, 1996,
total 26,000 and 52,000 respectively, and have exercise prices ranging from
$5.77 to $7.69 per share. The warrants were exercised in January 1998.
36
37
8. EARNINGS PER SHARE
In the fourth quarter of 1997, the Company adopted the provisions of SFAS 128.
Under the standards established by SFAS 128, earnings per share is measured at
two levels: basic earnings per share and diluted earnings per share. Basic
earnings per share is computed by dividing net income by the weighted average
number of common shares outstanding during the year. Diluted earnings per share
is computed by dividing net income by the weighted average number of common
shares after considering the additional dilution related to preferred stock,
options and warrants. All periods presented have been restated to reflect the
adoption of SFAS 128.
The following tables present information necessary to calculate earnings per
share for fiscal years 1997, 1996 and 1995:
1997
---------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ------------ ---------
Basic earnings per share:
Income available to common shareholders $1,104,000 2,841,434 $0.39
=====
Effect of dilutive securities:
Options and warrants -- 418,827
Convertible preferred stock -- 734,766
---------- ----------
Diluted earnings per share $1,104,000 3,995,027 $0.28
========== ========== =====
1996
---------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ------------ ---------
Basic earnings per share:
Income available to common shareholders $2,736,000 1,903,278 $1.44
=====
Effect of dilutive securities:
Options and warrants -- 153,859
Convertible preferred stock -- 1,169,935
---------- ----------
Diluted earnings per share $2,736,000 3,227,072 $0.85
========== ========== =====
1995
---------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ------------ ---------
Basic earnings per share:
Income available to common shareholders $ 541,000 1,614,454 $0.34
=====
Effect of dilutive securities:
Options and warrants -- 138,155
Convertible preferred stock -- 1,169,935
---------- ----------
Diluted earnings per share $ 541,000 2,922,544 $0.19
========== ========== =====
37
38
9. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases various equipment, automobiles, office space and Family
Center facilities under non-cancelable operating leases. Rent expense was
approximately $814,000, $735,000, and $895,000 in 1997, 1996 and 1995,
respectively. Future minimum payments under non-cancelable operating leases are
as follows:
Year Ending
-----------
1998 $690,000
1999 555,000
2000 231,000
2001 112,000
2002 32,000
Thereafter 214,000
----------
Total $1,834,000
==========
Future minimum lease payments include approximately $920,000 of lease
commitments which are guaranteed by third parties pursuant to operating
agreements for Family Centers.
EMPLOYMENT AND NONCOMPETE AGREEMENTS
Subsequent to its acquisition of RCCM, the Company entered into an employment
agreement with a former shareholder of RCCM. The agreement contains certain
severance benefits including salary continuation until August 27, 1998, if the
employee is terminated without cause prior to that date.
The same individual also entered into an agreement not to compete with the
Company. This agreement provides for the payment of an aggregate of $500,000,
payable in equal yearly installments of $100,000, in exchange for the
individual's commitment not to compete with the Company for a period of five
years from the date of his termination.
OTHER
The Company is a defendant in certain legal matters in the ordinary course of
business. Management believes the resolution of such legal matters will not have
a material effect on the Company's financial condition or results of operations.
The Company's Family Centers are subject to numerous federal, state and local
regulations and licensing requirements. Failure of a center to comply with
applicable regulations can subject it to governmental sanctions which could
require expenditures by the Company to bring its Family Centers into compliance.
10. EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) Retirement Savings Plan (the "Plan") for all
employees with more than 1,000 hours of credited service annually and who have
been with the Company one or more years. The Plan is funded by elective employee
contributions of up to 15% of their compensation, and the Company matches 25% of
employee contributions for each participant up to 6% of the employee's
compensation. Expense under the Plan, consisting of Company contributions and
Plan administrative expenses paid by the Company, was $190,000, $71,000 and
$8,000 in 1997, 1996 and 1995, respectively.
38
39
During 1997, the Company adopted an employee stock purchase plan (the "Stock
Purchase Plan"). The Stock Purchase Plan allows eligible employees the right to
purchase common stock on a semi-annual basis at the lower of 85% of the market
price at the beginning or end of each six-month offering period. At January 2,
1998, no shares had been issued under the Stock Purchase Plan and there were
100,000 shares of unissued common stock reserved for issuance under the Stock
Purchase Plan.
11. RELATED PARTY TRANSACTIONS
During 1995, the Company maintained a verbal consulting agreement with a member
of the Company's Board of Directors for development and marketing services. The
agreement was terminated in December 1995 in connection with the individual's
resignation from the Board of Directors. Fees paid under this agreement totaled
$61,000 in 1995.
The Company purchases food for use in several Company managed Family Centers
from an affiliate of a shareholder, Marriott Management Services Corp. Total
food purchases from such affiliate during 1997, 1996 and 1995 were approximately
$532,000, $417,000, and $420,000, respectively.
The Company has agreements with the employers of two members of its Board of
Directors and an affiliate of a shareholder, Marriott Management Services Corp.,
to operate and manage a Family Center. In return for its services under these
agreements, the Company received management fees of $181,000, $108,000, and
$66,000, respectively for fiscal 1997, 1996 and 1995. Additionally, the Company
provided consulting services for such employers in 1997 and 1996 and received
consulting fees of $68,000 and $65,000, respectively.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values of financial instruments is made in
accordance with the requirements of Statement of Financial Accounting Standards
No. 107, "Disclosures About Fair Value of Financial Instruments". The estimated
fair value amounts have been determined by the Company using available market
information and appropriate valuation methodologies.
CASH, ACCOUNTS RECEIVABLE, AND ACCOUNTS PAYABLE
The carrying amounts of these items are a reasonable estimate of their fair
value due to their short-term nature.
39
40
13. STATEMENT OF CASH FLOW INFORMATION
The following table presents supplemental disclosure of cash flow information
for fiscal years 1997, 1996 and 1995:
1997 1996 1995
---------- -------- ----------
Supplemental cash flow information:
Cash payments of interest $ 312,000 $456,000 $ 136,000
========== ======== ==========
Cash payments of income taxes $ 350,000 $ -- $ --
========== ======== ==========
Noncash financing activities:
Issuance of options in exchange for consulting
services $ -- $100,000 $ --
========== ======== ==========
Conversion of 1,125,000 Series A preferred
shares into 1,169,935 common shares $4,500,000 $ -- $ --
========== ======== ==========
Restriction removed on common stock $ 297,000 $ -- $ --
========== ======== ==========
Issuance of restricted common shares $ -- $ 28,000 $ --
========== ======== ==========
Accretion of preferred stock $ 20,000 $ 29,000 $ 29,000
========== ======== ==========
Issuance of common stock in connection with
acquisition of RCCM $ -- $ -- $1,750,000
========== ======== ==========
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for 1997 and 1996 are summarized as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
1997:
Revenue $17,479,000 $18,900,000 $19,755,000 $21,588,000
Operating income 522,000 649,000 227,000 687,000
Income before income taxes 450,000 596,000 276,000 872,000
Net income 229,000 317,000 31,000 527,000
Basic earnings per share 0.12 0.17 0.01 0.12
Diluted earnings per share 0.07 0.10 0.01 0.10
1996:
Revenue $14,435,000 $15,644,000 $15,984,000 $16,863,000
Operating income 418,000 439,000 417,000 646,000
Income before income taxes 285,000 378,000 340,000 574,000
Net income 278,000 358,000 318,000 1,782,000
Basic earnings per share 0.15 0.19 0.17 0.93
Diluted earnings per share 0.09 0.11 0.10 0.55
40
41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section entitled "Election of Class III Directors" appearing in the
Registrant's proxy statement for the annual meeting of shareholders to be held
on May 21, 1998, sets forth certain information with respect to the directors of
the Registrant and is incorporated herein by reference. Pursuant to General
Instruction G(3), certain information with respect to persons who are or may be
deemed to be executive officers of the Registrant is set forth under the caption
"Business - Executive Officers of the Registrant" in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" appearing in the Registrant's
proxy statement for the annual meeting of shareholders to be held on May 21,
1998, sets forth certain information with respect to the compensation of
management of the Registrant and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Security Ownership of Certain Beneficial Owners and
Management" appearing in the Registrant's proxy statement for the annual meeting
of shareholders to be held on May 21, 1998, sets forth certain information with
respect to the ownership of the Registrant's Common Stock and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Relationships and Related Transactions" appearing
in the Registrant's proxy statement for the annual meeting of shareholders to be
held on May 21, 1998, sets forth certain information with respect to certain
business relationships and transactions between the Registrant and its directors
and officers and is incorporated herein by reference.
41
42
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) Documents filed as part of this Report
(1) FINANCIAL STATEMENTS
The financial statements filed as part of this report are listed
on the Index to Consolidated Financial Statements on page 23.
(2) FINANCIAL STATEMENT SCHEDULES
Index to Consolidated Financial Statement Schedules
Page
Number
------
Report of Arthur Andersen LLP, Independent Public Accountants........................... 44
For the three years 1997, 1996 and 1995
Schedule II - Valuation and Qualifying Accounts..................................... 45
All other Schedules have been omitted because the required
information is shown in the consolidated financial statements or
notes thereto or they are not applicable.
42
43
(3) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 * Amended and Restated Charter of Registrant
3.2 * Amended and Restated Bylaws of Registrant
4.1 * Specimen Common Stock certificate
4.2 * Article 7 of the Registrant's Amended and Restated Charter
(included in Exhibit 3.1)
10.1 * CorporateFamily Solutions, Inc. Employee Stock Purchase Plan
10.2 * CorporateFamily Solutions, Inc. 1997 Stock Incentive Plan
10.3 ** Amended and Restated 1987 Stock Option Plan
10.4 * 1996 Stock Incentive Plan
10.5 * Employment Agreement of Robert D. Lurie dated August 27, 1995
10.6 * Agreement Not to Compete of Robert D. Lurie dated August 27,
1995
10.7 * Letter Agreement with Lamar Alexander dated August 26, 1996
10.8 * Form of Severance Agreement.
10.9 * Form of Commitment for Revolving Credit Agreement
10.10 * Form of Indemnification Agreement
10.11 * Registration Agreement dated August 29, 1991
10.12 * Stock Purchase Warrant dated January 15, 1993
10.13 * 1997 Outside Directors' Plan
10.14 Renewal and Modification Line of Credit Note
10.15 Agreement between David J. Gleason and the Company
dated March 25, 1998
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule (for SEC use only)
- ---------------
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1, as amended, dated August 12, 1997 (Registration No.
333-29523).
** Incorporated by reference to the Registrant's Registration Statement
on Form S-8, dated October 17, 1997 (Registration No. 333-38185).
(B) REPORTS ON FORM 8-K
None.
43
44
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO CORPORATEFAMILY SOLUTIONS, INC.:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of CorporateFamily Solutions, Inc. and
subsidiaries for the three years ended January 2, 1998 included in the Form 10-K
and have issued our report thereon dated February 13, 1998. Our audits were made
for the purpose of forming an opinion on the basic consolidated financial
statements taken as a whole. The schedule listed under Item 14(a)(2) is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects, the
financial data required to be set forth herein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Nashville, Tennessee
February 13, 1998
44
45
CORPORATEFAMILY SOLUTIONS, INC.
VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at Charged to Balance at
Beginning of Costs and Deductions End of
Period Expenses(1) (Charge Offs)(1) Period
------ ----------- ---------------- ------
Year ended January 2, 1998:
Allowance for doubtful accounts $123,000 $ 11,000 $ 9,000 $125,000
======== ======== ======== ========
Year ended December 27, 1996:
Allowance for doubtful accounts $ 84,000 $ 58,000 $ 19,000 $123,000
======== ======== ======== ========
Year ended December 29, 1995:
Allowance for doubtful accounts $ 45,000 $ 61,000 $ 22,000 $ 84,000
======== ======== ======== ========
- ------------------------------------------------
(1) Additions to the allowance for doubtful accounts are included in
selling, general and administrative expense. All deductions or charge
offs are charged against the allowance for doubtful accounts.
45
46
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
CorporateFamily Solutions, Inc.
By: /s/ Michael E. Hogrefe
---------------------------------
Michael E. Hogrefe
Executive Vice President, Chief
Financial Officer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ MARGUERITE W. SALLEE President and Chief Executive March 31, 1998
- ---------------------------------------------------- Officer (Principal Executive
Marguerite W. Sallee Officer)
/s/ MICHAEL E. HOGREFE Executive Vice President, Chief March 31, 1998
- ---------------------------------------------------- Financial Officer and Secretary
Michael E. Hogrefe (Principal Financial and
Accounting Officer)
/s/ ROBERT D. LURIE Chairman of the Board and Director March 31, 1998
- ----------------------------------------------------
Robert D. Lurie
/s/ LAMAR ALEXANDER Vice Chairman of the Board and March 31, 1998
- ---------------------------------------------------- Director
Lamar Alexander
/s/ JOANNE BRANDES Director March 31, 1998
- ----------------------------------------------------
JoAnne Brandes
/s/ JERRY L. CALHOUN Director March 31, 1998
- ----------------------------------------------------
Jerry L. Calhoun
/s/ THOMAS G. CIGARRAN Director March 31, 1998
- ----------------------------------------------------
Thomas G. Cigarran
/s/ E. TOWNES DUNCAN Director March 31, 1998
- ----------------------------------------------------
E. Townes Duncan
/s/ JOSEPH J. GUZZO Director March 31, 1998
- ----------------------------------------------------
Joseph J. Guzzo
46
47
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 * Amended and Restated Charter of Registrant
3.2 * Amended and Restated Bylaws of Registrant
4.1 * Specimen Common Stock certificate
4.2 * Article 7 of the Registrant's Amended and Restated Charter
(included in Exhibit 3.1)
10.1 * CorporateFamily Solutions, Inc. Employee Stock Purchase Plan
10.2 * CorporateFamily Solutions, Inc. 1997 Stock Incentive Plan
10.3 ** Amended and Restated 1987 Stock Option Plan
10.4 * 1996 Stock Incentive Plan
10.5 * Employment Agreement of Robert D. Lurie dated August 27, 1995
10.6 * Agreement Not to Compete of Robert D. Lurie dated August 27,
1995
10.7 * Letter Agreement with Lamar Alexander dated August 26, 1996
10.8 * Form of Severance Agreement.
10.9 * Form of Commitment for Revolving Credit Agreement
10.10 * Form of Indemnification Agreement
10.11 * Registration Agreement dated August 29, 1991
10.12 * Stock Purchase Warrant dated January 15, 1993
10.13 * 1997 Outside Directors' Plan
10.14 Renewal and Modification Line of Credit Note
10.15 Agreement between David J. Gleason and the Company
dated March 25, 1998
23.1 Consent of Arthur Andersen LLP
27 Financial Data Schedule (for SEC use only)
- ---------------
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1, as amended, dated August 12, 1997 (Registration No.
333-29523).
** Incorporated by reference to the Registrant's Registration Statement
on Form S-8, dated October 17, 1997 (Registration No. 333-38185).
47