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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-16162
CHILDREN'S COMPREHENSIVE SERVICES, INC.
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(Exact name of registrant as specified in its charter)
Tennessee 62-1240866
- ------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3401 West End Ave., Suite 500, Nashville, Tennessee 37203
- --------------------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (615) 383-0376
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Common Stock, $ .01 Par Value, outstanding at May 11, 1998 - 8,035,298 shares.
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INDEX
CHILDREN'S COMPREHENSIVE SERVICES, INC.
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets --March 31, 1998
and June 30, 1997...............................................................................3
Consolidated Statements of Income --
Three and nine month periods ended March 31, 1998 and 1997......................................5
Consolidated Statements of Cash Flows --
Nine months ended March 31, 1998 and 1997.......................................................6
Notes to Consolidated Financial Statements --
March 31, 1998..................................................................................8
Item 2. Management's Discussion and
Analysis of Financial Condition and Results
of Operations..................................................................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...............................................................19
SIGNATURES................................................................................................20
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, June 30,
(dollars in thousands) 1998 1997
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 17,951 $ 13,649
Accounts receivable, net of allowance for doubtful
accounts of $1,796 at March 31 and $2,361 at June 30 17,715 16,252
Prepaid expenses 697 606
Other current assets 2,760 1,499
-------- --------
TOTAL CURRENT ASSETS 39,123 32,006
PROPERTY AND EQUIPMENT, net of
accumulated depreciation of $7,308 at March 31 and
$5,919 at June 30 37,083 36,345
DEFERRED TAX ASSETS, net of valuation allowance 614 614
COST IN EXCESS OF NET ASSETS ACQUIRED, net 1,135 372
OTHER ASSETS AND DEFERRED CHARGES, net 530 431
-------- --------
TOTAL ASSETS $ 78,485 $ 69,768
======== ========
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
March 31, June 30,
(dollars in thousands) 1998 1997
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,555 $ 1,658
Current portion - capital leases 43 40
Accrued employee compensation 4,421 3,062
Income taxes payable 1,018 143
Accrued other expenses 2,664 3,082
Deferred revenue 165 168
-------- --------
TOTAL CURRENT LIABILITIES 10,866 8,153
LONG TERM DEBT AND CAPITAL LEASE
OBLIGATIONS 11,623 11,655
OTHER LIABILITIES 15 265
-------- --------
TOTAL LIABILITIES 22,504 20,073
-------- --------
SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00 per share--
10,000,000 shares authorized -0- -0-
Common stock, par value $.01 per share --
50,000,000 shares authorized; issued and outstanding
8,028,706 shares at March 31 and 7,916,236 shares at
June 30 80 79
Additional paid-in capital 57,755 56,637
Accumulated (deficit) (1,854) (7,021)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 55,981 49,695
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 78,485 $ 69,768
======== ========
See notes to consolidated financial statements.
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------------------------------
(In thousands, except per share amounts) 1998 1997 1998 1997
-------- -------- -------- --------
Revenues:
Operating revenues $ 24,044 $ 8,405 $ 65,995 $ 22,401
Management fee income 936 621 2,755 1,734
-------- -------- -------- --------
TOTAL REVENUES 24,980 9,026 68,750 24,135
-------- -------- -------- --------
Operating expenses:
Employee compensation and benefits 14,349 5,530 40,680 14,803
Purchased services and other expenses 6,635 1,556 19,590 4,799
Depreciation and amortization 564 247 1,547 685
Related party rent 25 25 76 76
-------- -------- -------- --------
TOTAL OPERATING EXPENSES 21,573 7,358 61,893 20,363
-------- -------- -------- --------
Income from operations 3,407 1,668 6,857 3,772
Other (income) expense:
Interest expense 223 25 737 252
Interest income (190) (267) (523) (720)
Other income (1,523) -- (1,740) (7)
-------- -------- -------- --------
TOTAL OTHER (INCOME) EXPENSE, NET (1,490) (242) (1,526) (475)
-------- -------- -------- --------
Income before income taxes and extraordinary
item 4,897 1,910 8,383 4,247
Provision (benefit) for income taxes 1,910 592 3,216 (525)
-------- -------- -------- --------
Income before extraordinary item 2,987 1,318 5,167 4,772
Extraordinary item:
Loss on early extinguishment of debt, net
of income tax benefit -- -- -- 377
-------- -------- -------- --------
NET INCOME $ 2,987 $ 1,318 $ 5,167 $ 4,395
======== ======== ======== ========
Basic earnings per common share:
Income before extraordinary item $ .37 $ .18 $ .66 $ .70
Extraordinary item -- -- -- (.06)
-------- -------- -------- --------
NET INCOME $ .37 $ .18 $ .66 $ .64
======== ======== ======== ========
Diluted earnings per common share:
Income before extraordinary item $ .36 $ .18 $ .64 $ .68
Extraordinary item -- -- -- (.05)
-------- -------- -------- --------
NET INCOME $ .36 $ .18 $ .64 $ .63
======== ======== ======== ========
See notes to consolidated financial statements.
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
March 31,
------------------------
(dollars in thousands) 1998 1997
--------- ---------
OPERATING ACTIVITIES
Net income $ 5,167 $ 4,395
Adjustments to reconcile net income to net cash provided by operating
activities:
Increase in deferred tax assets - 0 - (1,630)
Depreciation 1,450 632
Amortization 96 53
Amortization of deferred loan costs 26 26
Provision for bad debts 261 (67)
Loss on early extinguishment of debt - 0 - 119
Other - 0 - (7)
Changes in operating assets and liabilities:
Accounts receivable (1,570) (1,078)
Prepaid expenses (45) 88
Other current assets (1,043) (218)
Accounts payable 861 193
Accrued employee compensation 1,292 848
Accrued other expenses (21) (65)
Income taxes payable 875 283
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,349 3,572
INVESTING ACTIVITIES
Purchase of assets of Vendell Healthcare (710) - 0 -
Purchase of assets of Chad Youth Center (1,202) - 0 -
Purchase of property and equipment (1,614) (1,375)
Proceeds from sale of property and equipment 866 12
(Increase) in other assets (410) (514)
--------- ---------
NET CASH (USED) BY INVESTING ACTIVITIES $ (3,070) $ (1,877)
--------- ---------
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
Nine Months Ended
March 31,
------------------------
(dollars in thousands) 1998 1997
--------- ---------
FINANCING ACTIVITIES
Principal payments on revolving lines of credit, long-
term borrowings and capital lease obligations $ (30) $ (6,206)
Proceeds from issuance of Common Stock, net 63 23,415
---------- ---------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 23 17,209
---------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 4,302 18,904
Cash and cash equivalents at beginning of period 13,649 3,321
---------- ---------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 17,951 $ 22,225
========== =========
SUPPLEMENTAL INFORMATION
Income taxes paid $2,323,000 $ 587,000
Interest paid $ 698,000 $ 286,000
See notes to consolidated financial statements.
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1998
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Certain reclassifications have been made in the consolidated
financial statements for the three and nine month periods ended March 31, 1997,
to conform to the presentation of the financial statements for the three and
nine month periods ended March 31, 1998. Operating results for the three and
nine month periods ended March 31, 1998 are not necessarily indicative of the
results that may be expected for the fiscal year ending June 30, 1998. For
further information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1997, the Company's prior fiscal year end.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
NOTE B -- CONTINGENCIES
The Company is involved in various legal proceedings, none of which are expected
to have a material effect on the Company's financial position or results of
operations.
NOTE C -- EARNINGS PER COMMON SHARE
Effective December 31, 1997, the Company adopted Financial Accounting Standards
Board Statement ("SFAS") No. 128, Earnings per Share. Pursuant to this adoption,
the Company has restated earnings per share for all prior periods. The
computation of basic net income per common share is based on the weighted
average number of shares outstanding. Diluted net income per common share
includes the effect of common stock equivalents, consisting of dilutive stock
options and warrants.
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The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------------------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
BASIC:
Average shares outstanding 7,999,354 7,126,444 7,867,046 6,823,108
========== ========== ========== ==========
Net income $2,987,000 $1,318,000 $5,167,000 $4,395,000
========== ========== ========== ==========
Per share amount $ .37 $ .18 $ .66 $ .64
========== ========== ========== ==========
DILUTED:
Average shares outstanding 7,999,354 7,126,444 7,867,046 6,823,108
Net effect of dilutive stock
options and warrants 259,692 173,262 254,493 221,627
---------- ---------- ---------- ----------
TOTAL 8,259,046 7,299,706 8,121,539 7,044,735
========== ========== ========== ==========
Net income $2,987,000 $1,318,000 $5,167,000 $4,395,000
========== ========== ========== ==========
Per share amount $ .36 $ .18 $ .64 $ .63
========== ========== ========== ==========
NOTE D -- MERGER & ACQUISITION
The Company's financial statements have been restated to reflect the Company's
merger with Ventures Healthcare of Gainesville, Inc. ("Ventures") effective
January 1, 1998. The merger was accounted for as a pooling of interests. The
Company issued 146,580 shares of common stock pursuant to the transaction. The
income statement impact resulting from the restatement due to the Ventures
merger is as follows:
Period Revenue (000's) Earnings (000's)
------ -------------- ---------------
Three month's ended March 31, 1997 $279 $ 51
Nine month's ended March 31, 1997 $776 $165
Nine month's ended March 31, 1998 $590 $137
In February 1998, the Company acquired Chad Youth Enhancement Center, a 46 bed
residential treatment center for $1.2 million cash and $1.1 million in stock.
This transaction has been accounted for as a purchase.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
During June 1997, the Company completed the acquisition of substantially all the
assets of Vendell Healthcare, Inc., and its subsidiaries ("Vendell
acquisition"). The results for the comparable fiscal 1997 periods do not include
the results of this acquisition. The Company's merger with Ventures Healthcare
of Gainesville, Inc. ("Ventures"), effective January 1, 1998, was accounted for
as a pooling of interests. Accordingly, the Company's prior period financial
statements have been restated to reflect this transaction.
The following discussion and this Quarterly Report on Form 10-Q contain
forward-looking statements and should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere herein.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. There are a
number of important factors that could cause the Company's actual results to
differ materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth under "Business - Risk
Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1997. The Company undertakes no obligation to publicly release any
revisions to any forward-looking statements contained herein to reflect events
or circumstances occurring after the date hereof or to reflect the occurrence of
unanticipated events.
General
As of March 31, 1998, the Company was providing education, treatment and
juvenile justice services to approximately 3,200 at risk and troubled youth and
100 adults either directly or through management contracts. It currently offers
these services through the operation and management of nonresidential
specialized education programs and day treatment programs and both open and
secured residential treatment centers in 11 states. These services are provided
directly or through the Company's management contract with Helicon, Incorporated
("Helicon"), a Section 501(c)(3) not-for-profit corporation. Revenues under
these contracts are recognized as services are rendered. The Company's
non-residential programs, which historically have generated higher operating
margins than the Company's residential facilities, generally receive revenues
based on per diem rates. The Company's residential facilities generally receive
revenues under either fixed fee contracts, at per diem rates or on a cost
reimbursed basis.
The Company receives management fee income from Helicon for consulting,
management and marketing services rendered pursuant to a Consulting and
Marketing Agreement, effective as of August 1992, by and between Helicon and the
Company (the "Helicon Agreement"). As of March 31, 1998, the Company was
providing consulting, management and marketing services to Helicon at 12
programs. In addition, Helicon also leases three facilities owned by the Company
to operate its programs. Pursuant to the Helicon Agreement, which expires
September 1, 1999, the Company is entitled to receive for these services
management fee income in an amount equal to 6% of the monthly gross revenues of
Helicon's programs. The payment of these management fees, however, is
subordinated in right of payment to amounts payable by Helicon to fund its
programs. During the
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periods reported herein, the Company recognized all of the management fee income
to which it was entitled. However, for certain periods prior to fiscal 1997, the
Company did not recognize all of the management fee income to which it was
entitled due to the inability of Helicon to pay these amounts, and there can be
no assurance that the Company will recognize all of the management fee income
due under the Helicon Agreement in the future. As of March 31, 1998, unpaid
management fees, lease payments and advances, plus interest, due the Company
from Helicon totaled approximately $7,320,000. Based on the current level of
operations being maintained by Helicon, the Company does not anticipate
collecting any of this amount. The Company has fully reserved this amount, and
future payments received from Helicon on this amount, if any, will be recognized
by the Company on the cash basis. The Company has also guaranteed Helicon's
obligations under a bank line of credit in the amount of $1,000,000. As of March
31, 1998, there was no balance outstanding under this line of credit. See
"-Liquidity and Capital Resources." The Company also receives management fee
income from services provided to other health care providers for management of
behavioral units or facilities pursuant to contracts.
Employee compensation and benefits include facility and program payrolls and
related taxes, as well as employee benefits, including insurance and worker's
compensation coverage. Employee compensation and benefits also includes general
and administrative payroll and related benefit costs.
Purchased services and other expenses include all expenses not otherwise
presented separately in the Company's statements of income. Significant
components of these expenses at the operating level include items such as
professional fees and contracted services, food, utilities, supplies, rent and
insurance. Significant components of these expenses at the administrative level
include legal, accounting, investor relations, marketing, consulting and travel
expense.
The Company's effective tax rate for the three and nine month periods ended
March 31, 1997 is less than the statutory tax rate primarily because of the
utilization of tax net operating loss carryforwards for which no tax benefit had
been recognized prior to the quarterly period ended December 31, 1996. At June
30, 1997, the Company's prior fiscal and tax year end, the Company had net
operating loss carryforwards of $2,112,000, utilization of which is subject to
annual limitations pursuant to the provisions of Internal Revenue Code Section
382.
The Company's quarterly results may fluctuate significantly as a result of a
variety of factors, including the timing of the opening of new programs. When
the Company opens a new program, the program may be unprofitable until the
program population, and net revenues contributed by the program, approach
intended levels, primarily because the Company staffs its programs in advance of
achieving such levels. The Company's quarterly results may also be impacted by
seasonality, as revenues generated by youth education and treatment services are
generally seasonal in nature, fluctuating with the academic school year.
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During the three month period ended March 31, 1998, the Company:
- Acquired a management services company providing contract services in
Florida and Arkansas;
- Acquired a 46 bed residential treatment center in Ashland City,
Tennessee;
- Opened a 24 chair special education program in Chula Vista,
California; and
- Exchanged the Company's Houston, Texas facility for a similar facility
in Longview, Texas plus cash.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
relationship to the Company's total revenues of certain items in the Company's
statements of income:
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------------- ------------
1998 1997 1998 1997
------ ------ ------ ------
Operating revenues 96.3% 93.1% 96.0% 92.8%
Management fee income 3.7 6.9 4.0 7.2
------ ------ ------ ------
TOTAL REVENUES 100.0 100.0 100.0 100.0
------ ------ ------ ------
Employee compensation and benefits 57.4 61.3 59.2 61.3
Purchased services and other expenses 26.6 17.2 28.5 19.9
Depreciation and amortization 2.3 2.7 2.2 2.9
Related party rent 0.1 0.3 0.1 0.3
------ ------ ------ ------
TOTAL OPERATING EXPENSES 86.4 81.5 90.0 84.4
------ ------ ------ ------
Income from operations 13.6 18.5 10.0 15.6
Other (income) expense:
Interest expense 0.9 0.3 1.1 1.0
Interest income (0.8) (3.0) (0.8) (3.0)
Other income (6.1) (0.0) (2.5) (0.0)
Provision for income taxes 7.6 6.6 4.7 (2.2)
Extraordinary item, net of income tax -- -- -- 1.6
------ ------ ------ ------
NET INCOME 12.0% 14.6% 7.5% 18.2%
====== ====== ====== ======
Three Months Ended March 31, 1998 versus March 31, 1997
Operating revenues for the three months ended March 31, 1998 increased
$15,639,000 or 186.1%, to $24,044,000 as compared to $8,405,000 for the three
months ended March 31, 1997.
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Approximately $13,000,000 of the increase in operating revenues is attributable
to the Vendell acquisition. The increase is also due to increased utilization in
certain programs, other acquisitions and the opening of new programs during the
current and preceding three quarters.
Management fee income increased $315,000 for the three months ended March 31,
1998 to $936,000 from $621,000 for the three month period ended March 31, 1997.
Management fee income recognized under the Helicon Agreement for the three
months ended March 31, 1998 decreased $13,000 to $329,000 from $342,000 for the
three months ended March 31, 1997. Other management fee income, attributable to
the Vendell and Ventures transactions, accounted for the increase.
Total revenues for the three months ended March 31, 1998 increased $15,954,000,
or 176.8%, to $24,980,000 as compared to $9,026,000 for the three months ended
March 31, 1997 as a result of the factors described above.
Employee compensation and benefits for the three months ended March 31, 1998
increased $8,819,000, or 159.5%, to $14,349,000, as compared to $5,530,000 for
the three months ended March 31, 1997. As a percentage of total revenues,
employee compensation and benefits decreased from 61.3% for the three months
ended March 31, 1997 to 57.4% for the three months ended March 31, 1998. The
increase in employee compensation and benefits over the same period in the prior
year results primarily from the Company's growth, including the Vendell
acquisition. The decrease in employee compensation and benefits as a percent of
revenue over the same period in the prior year results primarily from the effect
of the Vendell acquisition.
Purchased services and other expenses for the three months ended March 31, 1998
increased $5,079,000, or 326.4%, to $6,635,000, as compared to $1,556,000 for
the three months ended March 31, 1997. As a percentage of total revenues,
purchased services and other expenses increased to 26.6% for the three months
ended March 31, 1998 from 17.2% for the three months ended March 31, 1997. The
increase in purchased services and other expenses over the same period in the
prior year is attributed primarily to the Company's growth, including the
Vendell acquisition. The increase in purchased services and other expenses as a
percent of revenue over the same period in the prior year results primarily from
the effect of the Vendell acquisition.
Depreciation and amortization for the three months ended March 31, 1998
increased $317,000, or 128.3%, to $564,000 as compared to $247,000 for the three
months ended March 31, 1997. The increase in depreciation and amortization
compared to the same period in the prior year is attributable to the Company's
growth, including the Vendell acquisition.
Income from operations for the three months ended March 31, 1998 increased
$1,739,000, or 104.3%, to $3,407,000 as compared to $1,668,000 for the three
months ended March 31, 1997, and decreased as a percentage of total revenues to
13.6% for the three months ended March 31, 1998 from 18.5% for the three months
ended March 31, 1997 as a result of the factors described above.
Interest expense for the three months ended March 31, 1998 increased $198,000 to
$223,000 as compared to $25,000 for the three months ended March 31, 1997. The
increase in interest expense
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over the same period in the prior year is attributed principally to debt
incurred as part of the Vendell acquisition.
Interest income decreased $77,000 to $190,000 for the three months ended March
31, 1998 as compared to $267,000 for the three months ended March 31, 1997. The
decrease in interest income over the same period in the prior year is
attributable primarily to the decrease in cash available for investment as a
result of the June 1997 Vendell acquisition.
Other income for the three months ended March 31, 1998 was $1,523,000 consisting
primarily of a $1,530,000 gain on the exchange of the Company's Houston, Texas
facility for a facility in Longview, Texas plus $3,000,000 cash. A portion of
the cash received reduced the Company's basis in the Longview facility.
Provision for income tax expense for the three months ended March 31, 1998
increased $1,318,000 to $1,910,000 from $592,000 for the three months ended
March 31, 1997. The increase in provision for income tax expense compared to the
same period in the prior year results from both the increase in the Company's
taxable income and the increase in the Company's effective tax rate.
Effective December 31, 1997, the Company adopted SFAS No. 128, Earnings per
Share. Pursuant to this adoption, the Company has restated earnings per share
for all prior periods.
Nine Months Ended March 31, 1998 versus March 31, 1997
Operating revenues for the nine months ended March 31, 1998 increased
$43,594,000 or 194.6%, to $65,995,000 as compared to $22,401,000 for the nine
months ended March 31, 1997. Approximately $36,600,000 of the increase in
operating revenues is attributable to the Vendell acquisition. The increase is
also due to increased utilization in certain programs along with the opening of
new programs and other acquisitions made during the current and preceding three
quarters.
Management fee income increased $1,021,000 for the nine months ended March 31,
1998 to $2,755,000 from $1,734,000 for the nine month period ended March 31,
1997. Management fee income recognized under the Helicon Agreement for the nine
months ended March 31, 1998 increased $15,000 to $973,000 from $958,000 for the
nine months ended March 31, 1997. Other management fee income, attributable to
the Vendell and Ventures acquisitions, accounted for the remainder of the
increase.
Total revenues for the nine months ended March 31, 1998 increased $44,615,000,
or 184.9%, to $68,750,000 as compared to $24,135,000 for the nine months ended
March 31, 1997 as a result of the factors described above.
Employee compensation and benefits for the nine months ended March 31, 1998
increased $25,877,000, or 174.8%, to $40,680,000, as compared to $14,803,000 for
the nine months ended
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March 31, 1997. As a percentage of total revenues, employee compensation and
benefits decreased from 61.3% for the nine months ended March 31, 1997 to 59.2%
for the nine months ended March 31, 1998. The increase in employee compensation
and benefits over the same period in the prior year results primarily from the
Company's growth, including the Vendell acquisition. The decrease in employee
compensation and benefits as a percent of revenue over the same period in the
prior year results primarily from the effect of the Vendell acquisition.
Purchased services and other expenses for the nine months ended March 31, 1998
increased $14,791,000, or 308.2%, to $19,590,000, as compared to $4,799,000 for
the nine months ended March 31, 1997. As a percentage of total revenues,
purchased services and other expenses increased to 28.5% for the nine months
ended March 31, 1998 from 19.9% for the nine months ended March 31, 1997. The
increase in purchased services and other expenses over the same period in the
prior year is attributed primarily to the Company's growth, including the
Vendell acquisition. The increase in purchased services and other expenses as a
percent of revenue over the same period in the prior year results primarily from
the effect of the Vendell acquisition.
Depreciation and amortization for the nine months ended March 31, 1998 increased
$862,000, or 125.8%, to $1,547,000 as compared to $685,000 for the nine months
ended March 31, 1997. The increase in depreciation and amortization compared to
the same period in the prior year is attributable to the Company's growth,
including the Vendell acquisition.
Income from operations for the nine months ended March 31, 1998 increased
$3,085,000, or 81.8%, to $6,857,000 as compared to $3,772,000 for the nine
months ended March 31, 1997, and decreased as a percentage of total revenues to
10.0% for the nine months ended March 31, 1998 from 15.6% for the nine months
ended March 31, 1997, as a result of the factors described above.
Interest expense for the nine months ended March 31, 1998 increased $485,000, or
192.5%, to $737,000 as compared to $252,000 for the nine months ended March 31,
1997. The increase in interest expense over the same period in the prior year is
attributed principally to debt incurred as part of the Vendell acquisition,
offset by the Company's previous long-term debt, the prepayment of which was
made on October 1, 1996, and the related elimination of deferred loan cost
amortization.
Interest income decreased $197,000 to $523,000 for the nine months ended March
31, 1998 as compared to $720,000 for the nine months ended March 31, 1997. The
decrease in interest income over the same period in the prior year is
attributable primarily to the decrease in cash available for investment as a
result of the June 1997 Vendell acquisition.
Other income for the nine months ended March 31, 1998 was $1,740,000 versus
$7,000 for the nine months ended March 31, 1997. Other income for the fiscal
1998 period is primarily the result of a $1,530,000 gain on the exchange of the
Company's Houston, Texas facility for a facility in Longview, Texas plus
$3,000,000 cash combined with a one time payment by Helicon of management fees
for which a reserve had previously been established.
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Provision for income tax expense for the nine months ended March 31, 1998
increased $3,741,000 to $3,216,000 from a benefit of $525,000 for the nine
months ended March 31, 1997. The increase in provision for income tax expense
compared to the same period in the prior year results both from the increase in
the Company's taxable income and an increase in the Company's effective tax rate
due to the reversal, during the period ended December 31, 1996, of a portion of
the valuation allowance against the Company's deferred tax assets.
Liquidity and Capital Resources
Cash provided by operating activities for the nine months ended March 31, 1998
was $7,349,000 on net income of $5,167,000 as compared to cash provided of
$3,572,000 on net income of $4,395,000 for the nine months ended March 31, 1997.
Working capital at March 31, 1998 was $28,257,000, as compared to $23,853,000 at
June 30, 1997, and the current ratio at March 31, 1998 was 3.6:1, as compared to
3.9:1 at June 30, 1997.
Cash used by investing activities was $3,070,000 for the nine months ended March
31, 1998 as compared to $1,877,000 for the nine months ended March 31, 1997, due
primarily to (I) an increase in cash outlays for the purchase of property and
equipment,(ii) the Chad Youth Enhancement Center acquisition and (iii) for the
additional cash payment related to the Vendell acquisition, offset by funds
received in the exchange of Texas facilities.
Cash of $17,209,000 was provided by financing activities for the nine months
ended March 31, 1997, due primarily to the receipt of net proceeds of
$23,359,000 from the issuance of shares of the Company's Common Stock in the
public offering completed in August 1996, and the subsequent repayment of
outstanding debt with a portion of the proceeds. Cash of $23,000 was provided by
financing activities for the nine months ended March 31, 1998.
The Company has a loan and security agreement with First American National Bank
("FANB"), the term of which extends through November 1, 1999. Under the terms of
this agreement, FANB has made available to the Company, for acquisition
financing and working capital requirements, a revolving line of credit for up to
$13,000,000. The credit facility bears interest at either (i) the one, two or
three month LIBOR rate plus an applicable margin, which ranges between 1.35% and
2.10% and is dependent on the ratio of funded debt to operating earnings or (ii)
FANB's index rate, at the Company's option. The line of credit is secured
primarily by the Company's accounts receivable and equipment. At March 31, 1998,
the outstanding balance under the line of credit was $11,450,000.
The Company's line of credit with FANB requires the Company to comply with
certain restrictive covenants with respect to its business and operations and to
maintain certain financial ratios. The restrictive covenants under this
agreement prohibit the Company, without the prior consent of its lender, from
entering into major corporate transactions, such as a merger, tender offer or
sale of its assets, and from incurring additional indebtedness in excess of
$1,000,000. The agreement also prohibits the Company from declaring dividends in
excess of 25% of the Company's net income during any fiscal year.
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Helicon has also entered into a $1 million line of credit with FANB. As a
condition to this line of credit, the Company agreed to guarantee Helicon's
performance under such line of credit. At March 31, 1998, there was no
outstanding amount under Helicon's line of credit.
Capital expenditures during the remainder of fiscal 1998 and fiscal 1999 are
expected to include the replacement of existing capital assets as necessary, as
well as the costs associated with the opening of new programs and facilities,
including the possible purchase of certain real estate and improvements. The
Company also may consider other possible strategic acquisitions, including
acquisitions of existing programs and other companies engaged in youth services
or related businesses.
The Company has substantially completed an initial assessment of its internal
systems' exposure to the Year 2000 ("Y2K") computer issue. At this time, the
Company believes that its main systems are Year 2000 compliant. Some of the
Company's non-critical systems as well as individual computers and associated
software are not currently Year 2000 compliant. The Company believes that the
cost of replacing such systemsor making such systems compliant will not
materially increase the Company's expected capital.Efforts to identify and
address all Y2K issues are continuing. The Company has business relationships
with a number of third party payors, including governmental entities, and is
unaware of these parties' Y2K compliance status. Should these entities
experience problems due to Y2K issues, there could be a material adverse effect
on the Company's operations and financial condition. Furthermore, if the
Company's Y2K issues are not solved, or if there are unforeseen problems, then
there could be a material impact on the Company's financial condition and/or
operations.
Current obligations, typically due within thirty days or less, are expected to
be funded with cash flows from operations and borrowings under the Company's
line of credit. Management believes that funds from operations, remaining
proceeds from the August 1996 public offering, and amounts available under its
line of credit will provide sufficient cash flow for the foreseeable future.
Inflation
Inflation has not had a significant impact on the Company's results of operation
since inception. Certain of the Company's existing contracts provide for annual
price increases based upon changes in the Consumer Price Index.
Impact of Accounting Changes
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting of Comprehensive
Income", which establishes the standards for the reporting and display of
comprehensive income and its components. This Statement requires that all items
that are income be reported in a financial statement that is displayed with the
same prominence as other financial statements. The Company does not expect the
effect of adoption of SFAS No. 130 to materially change the disclosures
currently being provided.
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In June 1997 the FASB also issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," which changes the way public companies
report segment information in annual financial statements and also requires
those companies to report selected segment information in interim financial
reports to shareholders. This Statement is effective for financial statements
for fiscal years beginning after December 31, 1997. The adoption of the
statement will affect only disclosures provided and will have no impact on the
Company's consolidated balance sheets or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
This information called for by Item 3 is not required for the fiscal quarter
ended March 31, 1998 as the Company's market capitalization was less than $2.5
billion as of January 28, 1997.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
(27) Financial Data Schedule. (SEC use only)
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHILDREN'S COMPREHENSIVE SERVICES, INC.
(Registrant)
Date: May 14, 1998 /s/ WILLIAM J BALLARD
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William J Ballard
Chairman and Chief Executive Officer
Date: May 14, 1998 /s/ DONALD B. WHITFIELD
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Donald B. Whitfield
Vice President of Finance, Chief
Financial Officer (Principal
Financial and Accounting Officer)
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Exhibit Index
Exhibit No.
27 Financial Data Schedule (SEC use only)
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