1
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, 1999
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
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(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
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 10, 1999 - 7,411,141 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, 1999
and June 30, 1998...............................................................................3
Consolidated Statements of Income -- Three and nine month
periods ended March 31, 1999 and 1998...........................................................5
Consolidated Statements of Cash Flows --
Nine months ended March 31, 1999 and 1998.......................................................6
Notes to Consolidated Financial Statements --
March 31, 1999..................................................................................8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..........................................................................10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................................................19
SIGNATURES.......................................................................................................20
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
March 31, June 30,
(dollars in thousands) 1999 1998
------- -------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,593 $20,067
Accounts receivable, net of allowance for doubtful
accounts of $1,520 at March 31 and $1,865 at
June 30 23,583 17,809
Prepaid expenses 977 634
Deferred income taxes 525 525
Other current assets 5,448 1,577
------- -------
TOTAL CURRENT ASSETS 32,126 40,612
PROPERTY AND EQUIPMENT, net of
accumulated depreciation of $9,756 at March 31
and $7,831 at June 30 50,440 37,162
DEFERRED TAX ASSETS, net of valuation allowance -- 785
COST IN EXCESS OF NET ASSETS ACQUIRED, net 14,262 1,180
OTHER ASSETS AND DEFERRED CHARGES, net 1,244 462
------- -------
TOTAL ASSETS $98,072 $80,201
======= =======
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
March 31, June 30,
(dollars in thousands) 1999 1998
------- -------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,674 $ 1,901
Current portion - long-term debt 803 44
Accrued employee compensation 5,143 5,192
Income taxes payable 1,064 136
Accrued other expenses 2,596 3,300
Other liabilities and deferred revenue 2,319 172
------- -------
TOTAL CURRENT LIABILITIES 14,599 10,745
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS 25,962 11,611
DEFERRED TAXES PAYABLE 1,755 --
OTHER LIABILITIES -- 13
------- -------
TOTAL LIABILITIES 42,316 22,369
------- -------
SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00 per share--
10,000,000 shares authorized -- --
Common stock, par value $.01 per share--
50,000,000 shares authorized; issued and
outstanding 7,399,483 shares at March 31
and 8,038,783 shares at June 30 74 80
Additional paid-in capital 51,884 57,820
Retained earnings (deficit) 3,798 (68)
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TOTAL SHAREHOLDERS' EQUITY 55,756 57,832
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $98,072 $80,201
======= =======
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) 1999 1998 1999 1998
-------- -------- -------- --------
Revenues:
Operating revenues $ 30,594 $ 24,044 $ 80,015 $ 65,995
Management fee income 955 936 2,699 2,755
-------- -------- -------- --------
TOTAL REVENUES 31,549 24,980 82,714 68,750
-------- -------- -------- --------
Operating expenses:
Employee compensation and benefits 19,004 14,349 50,343 40,680
Purchased services and other expenses 7,956 6,635 22,680 19,590
Depreciation and amortization 1,047 564 2,488 1,547
Related party rent 28 25 86 76
-------- -------- -------- --------
TOTAL OPERATING EXPENSES 28,035 21,573 75,597 61,893
-------- -------- -------- --------
Income from operations 3,514 3,407 7,117 6,857
Other (income) expense:
Interest expense 556 223 1,174 737
Interest income (88) (190) (393) (523)
Other income 3 (1,523) (54) (1,740)
-------- -------- -------- --------
TOTAL OTHER (INCOME) EXPENSE, NET 471 (1,490) 727 (1,526)
-------- -------- -------- --------
Income before income taxes 3,043 4,897 6,390 8,383
Provision for income taxes 1,202 1,910 2,524 3,216
======== ======== ======== ========
NET INCOME $ 1,841 $ 2,987 $ 3,866 $ 5,167
======== ======== ======== ========
Basic earnings per common share $ 0.25 $ 0.37 $ 0.52 $ 0.66
Diluted earnings per common share $ 0.25 $ 0.36 $ 0.51 $ 0.64
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) 1999 1998
-------- --------
OPERATING ACTIVITIES
Net income $ 3,866 $ 5,167
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,969 1,450
Amortization 519 96
Amortization of deferred loan costs 68 26
Provision for bad debts 684 261
Changes in operating assets and liabilities, net of the effects from
acquisitions:
Accounts receivable (4,364) (1,570)
Prepaid expenses (281) (45)
Other current assets (1,172) (1,043)
Accounts payable (103) 861
Accrued employee compensation (623) 1,292
Accrued other expenses 362 (21)
Income taxes payable 246 875
Other liabilities 774 --
-------- --------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 1,945 7,349
-------- --------
INVESTING ACTIVITIES
Purchase of assets of Vendell Healthcare -- (710)
Purchase of assets of Chad Youth Center -- (1,202)
Purchase of Ameris (12,499) --
Purchase of Somerset (8,175) --
Purchase of note receivable (2,500) --
Purchase of property and equipment (3,079) (1,614)
Proceeds from sale of property and equipment -- 866
(Increase) in other assets (959) (410)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES $(27,212) $ (3,070)
-------- --------
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
Nine Months Ended
March 31,
--------------------------
(dollars in thousands) 1999 1998
-------- --------
FINANCING ACTIVITIES
Principal payments on revolving lines of credit, long-
term borrowings and capital lease obligations $(21,736) $ (30)
Proceeds from revolving lines of credit and long-term
borrowings 34,471 --
Common Stock repurchased (6,263) --
Proceeds from issuance of Common Stock, net 389 63
Stock registration costs (68) (10)
-------- --------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 6,793 23
-------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (18,474) 4,302
Cash and cash equivalents at beginning of period 20,067 13,649
-------- --------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 1,593 $ 17,951
======== ========
See notes to consolidated financial statements.
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CHILDREN'S COMPREHENSIVE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1999
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. Operating results for the three and nine month periods ended
March 31, 1999 are not necessarily indicative of the results that may be
expected for the fiscal year ending June 30, 1999. 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, 1998,
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 -- COMPREHENSIVE INCOME
As of July 1, 1998, the Company adopted SFAS No. 130, "Reporting 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 components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements. During
the first nine months of fiscal 1999 and 1998, the Company had no items of other
comprehensive income.
NOTE D -- EARNINGS PER COMMON SHARE
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,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
BASIC:
Average shares outstanding 7,377,622 7,999,354 7,473,088 7,867,046
========== ========== ========== ==========
Net income $1,841,000 $2,987,000 $3,866,000 $5,167,000
========== ========== ========== ==========
Per share amount $ 0.25 $ 0.37 $ 0.52 $ 0.66
========== ========== ========== ==========
DILUTED:
Average shares outstanding 7,377,622 7,999,354 7,473,088 7,867,046
Net effect of dilutive stock
options and warrants 118,766 259,692 101,108 254,493
---------- ---------- ---------- ----------
TOTAL 7,496,388 8,259,046 7,574,196 8,121,539
========== ========== ========== ==========
Net income $1,841,000 $2,987,000 $3,866,000 $5,167,000
========== ========== ========== ==========
Per share amount $ 0.25 $ 0.36 $ 0.51 $ 0.64
========== ========== ========== ==========
NOTE E -- ACQUISITIONS
In September 1998, the Company acquired Ameris Health Systems ("Ameris") for net
consideration of approximately $12.5 million in cash. This transaction has been
accounted for as a purchase. Pursuant to this transaction, the Company also
purchased a note receivable for $2.5 million in cash. The payment of this note,
which matures in September 1999, is guaranteed by $2.5 million cash escrowed in
conjunction with this transaction. Ameris, through its wholly-owned subsidiary,
American Clinical Schools, Inc., operates residential juvenile sex offender
programs in Tennessee, Alabama and Pennsylvania with an aggregate capacity of
228 licensed beds.
In December 1998, the Company acquired Somerset, Inc., the operator of a
200-seat educational day treatment program located in southern California.
Consideration for this transaction consisted of approximately $8.2 million in
cash and $2.3 million in notes payable. This transaction has been accounted for
as a purchase. Cost in excess of net assets acquired totaled approximately $13.5
million for the Ameris and Somerset acquisitions, and is being amortized over
fifteen years.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and this Quarterly Report on Form 10-Q contain
forward-looking statements and should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto included elsewhere herein.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. There are a
number of important factors that could cause the Company's actual results to
differ materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth under "Business - Risk
Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1998. 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, 1999, the Company was providing education, treatment and
juvenile justice services to approximately 4,300 at risk and troubled youth
either directly or through management contracts. A limited number of programs
for adults are also provided in specific markets. The Company currently offers
these services through the operation and management of non-residential
specialized education programs and day treatment programs and both open and
secured residential treatment centers in 14 states. These services are provided
directly or through the Company's revenue-based management contracts. Revenues
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 services provided to third
parties, including medical/surgical facilities, community mental health centers
and other behavioral health providers, for management of day treatment programs,
residential treatment centers, behavioral units in medical/surgical facilities
and free-standing behavioral facilities. The Company also receives management
fee income from Helicon, Incorporated ("Helicon"), a Section 501(c)(3)
not-for-profit corporation, 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, 1999, 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, payment of these management
fees is subordinated in right of payment to amounts payable by Helicon to fund
its programs. The Company expects that this Agreement will be renewed. The
Company has also guaranteed Helicon's obligations under a bank line of credit in
the amount of $1,500,000. As of March 31, 1999, there was $487,000 outstanding
under this line of credit. See "-Liquidity and Capital Resources."
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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.
At June 30, 1998, the Company had regular tax net operating loss carryforwards
of $2,449,000 which expire from 2002 through 2010. Utilization of a portion of
the net operating loss carryforwards is subject to an annual limitation pursuant
to 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.
During the three month period ended March 31, 1999, the Company:
- Opened a 48-bed residential treatment program in Longview, Texas for
adolescent female offenders;
- Opened a 20-chair education day treatment program in Hilo, Hawaii;
- Opened a 28-bed secure juvenile detention facility in Dyersburg,
Tennessee; and
- Opened a 30-bed secure residential program for adolescent female
offenders in Mansfield, Ohio.
Prompted by recent legislation that changes the funding method for non-public
school services in California, two districts where the Company operates programs
have indicated their plans to provide their own programs and cease referrals to
the Company. While this has not had a major impact on the Company's revenues or
operating income to date, it has caused a gradual loss of census in those
programs. The Company does not expect that the majority of California school
districts with which the Company contracts will choose to provide their own
programs.
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Results of Operations
The following table sets forth, for the periods indicated, the percentage
relationship to the Company's total revenues of certain items in the Company's
statements of income:
Three Months Ended Nine Months Ended
March 31, March 31,
---------------- ----------------
1999 1998 1999 1998
------ ------ ------ ------
Operating revenues 97.0 % 96.3 % 96.7 % 96.0 %
Management fee income 3.0 3.7 3.3 4.0
------ ------ ------ ------
TOTAL REVENUES 100.0 100.0 100.0 100.0
------ ------ ------ ------
Employee compensation and benefits 60.2 57.4 60.9 59.2
Purchased services and other expenses 25.3 26.6 27.4 28.4
Depreciation and amortization 3.3 2.3 3.0 2.3
Related party rent 0.1 0.1 0.1 0.1
------ ------ ------ ------
TOTAL OPERATING EXPENSES 88.9 86.4 91.4 90.0
------ ------ ------ ------
Income from operations 11.1 13.6 8.6 10.0
Other (income) expense:
Interest expense 1.8 0.9 1.4 1.1
Interest income (0.3) (0.8) (0.5) (0.8)
Other income -- (6.1) (0.1) (2.5)
Provision for income taxes 3.8 7.6 3.1 4.7
------ ------ ------ ------
NET INCOME 5.8 % 12.0 % 4.7 % 7.5 %
====== ====== ====== ======
Three Months Ended March 31, 1999 versus March 31, 1998
Operating revenues for the three months ended March 31, 1999 increased
$6,550,000 or 27.2%, to $30,594,000 as compared to $24,044,000 for the three
months ended March 31, 1998. Approximately $4,900,000 of the increase in
operating revenues is attributable to the Ameris and Somerset acquisitions. The
increase is also due to increased utilization in certain programs, other
acquisitions and the opening of new programs during the current and preceding
comparative quarters, offset by a change in the method of reimbursement for the
Company's residentially-based schools, located in Riverside and Los Angeles
Counties, California. The effect of that change, which precludes retroactive
billing from the date a child is certified for special education services to the
date of request for certification, resulted in a decrease in revenue of
approximately $400,000 over the same period last year.
Management fee income increased $19,000 for the three months ended March 31,
1999 to $955,000 from $936,000 for the three month period ended March 31, 1998.
Management fee income recognized under the Helicon Agreement for the three
months ended March 31, 1999 increased $11,000 to $340,000 from $329,000 for the
three months ended March 31, 1998.
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Total revenues for the three months ended March 31, 1999 increased $6,569,000,
or 26.3%, to $31,549,000 as compared to $24,980,000 for the three months ended
March 31, 1998 as a result of the factors described above.
Employee compensation and benefits for the three months ended March 31, 1999
increased $4,655,000, or 32.4%, to $19,004,000, as compared to $14,349,000 for
the three months ended March 31, 1998. As a percentage of total revenues,
employee compensation and benefits increased from 57.4% for the three months
ended March 31, 1998 to 60.2% for the three months ended March 31, 1999. The
increase in employee compensation and benefits over the same period in the prior
year results primarily from the Company's growth. In addition, the Company
increased compensation in certain employment categories in California. These
changes in compensation structure resulted from higher base rates of pay and
staffing levels versus the same period last year. The increase in employee
compensation and benefits as a percent of revenue over the same period in the
prior year results in part from start-up operations during the quarter and from
the changes mentioned above.
Purchased services and other expenses for the three months ended March 31, 1999
increased $1,321,000, or 19.9%, to $7,956,000, as compared to $6,635,000 for the
three months ended March 31, 1998. As a percentage of total revenues, purchased
services and other expenses decreased to 25.3% for the three months ended March
31, 1999 from 26.6% for the three months ended March 31, 1998. The increase in
purchased services and other expenses over the same period in the prior year is
attributed primarily to the Company's growth. The decrease in purchased services
and other expenses as a percent of revenue over the same period in the prior
year resulted primarily from the effect of increased utilization at certain
facilities.
Depreciation and amortization for the three months ended March 31, 1999
increased $483,000, or 85.6%, to $1,047,000 as compared to $564,000 for the
three months ended March 31, 1998. The increase in depreciation and amortization
compared to the same period in the prior year is primarily attributable to the
Company's growth, including an increase in the amortization of goodwill arising
from the Company's acquisitions.
Income from operations for the three months ended March 31, 1999 increased
$107,000, or 3.1%, to $3,514,000 as compared to $3,407,000 for the three months
ended March 31, 1998, and decreased as a percentage of total revenues to 11.1%
for the three months ended March 31, 1999 from 13.6% for the three months ended
March 31, 1998 as a result of the factors described above. For the three months
ended March 31, 1999, the Company's income from operations was negatively
impacted by the fact that the Company opened four new programs during the
quarter. One of these programs, a contract in Ohio, was delayed in its opening
from February until March. The other three programs (located in Texas, Hawaii
and Tennessee) generated significant operating losses during the quarter due to
both expense issues, principally related to staffing, and
slower-than-anticipated ramp-up in census.
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Interest expense for the three months ended March 31, 1999 increased $333,000 to
$556,000 as compared to $223,000 for the three months ended March 31, 1998. The
increase in interest expense over the same period in the prior year is
attributed principally to debt incurred pursuant to the Somerset acquisition.
Interest income decreased $102,000 to $88,000 for the three months ended March
31, 1999 as compared to $190,000 for the three months ended March 31, 1998. 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 Company's repurchase of 700,000 shares of its outstanding Common
Stock and its acquisition of Ameris.
Other income for the three months ended March 31, 1999 was an expense of $3,000
versus income of $1,523,000 for the three months ended March 31, 1998. Other
income for the comparable prior period reflects a gain recognized on the
exchange of the Company's Houston, Texas facility for a facility in Longview,
Texas, plus cash.
Provision for income tax expense for the three months ended March 31, 1999
decreased $708,000 to $1,202,000 from $1,910,000 for the three months ended
March 31, 1998. The decrease in provision for income tax expense compared to the
same period in the prior year results primarily from the decrease in the
Company's taxable income.
Nine Months Ended March 31, 1999 versus March 31, 1998
Operating revenues for the nine months ended March 31, 1999 increased
$14,020,000 or 21.2%, to $80,015,000 as compared to $65,995,000 for the nine
months ended March 31, 1998. Approximately $8,700,000 of the increase in
operating revenues is attributable to acquisitions made during fiscal 1999. The
increase is also due to increased utilization in certain programs along with the
opening of new programs since the comparable prior period.
Management fee income decreased $56,000 for the nine months ended March 31, 1999
to $2,699,000 from $2,755,000 for the nine month period ended March 31, 1998.
Management fee income recognized under the Helicon Agreement for the nine months
ended March 31, 1999 increased $38,000 to $1,011,000 from $973,000 for the nine
months ended March 31, 1998. Other management fee income declined primarily as
the result of one contract acquired pursuant to the Vendell transaction which
was not renewed.
Total revenues for the nine months ended March 31, 1999 increased $13,964,000,
or 20.3%, to $82,714,000 as compared to $68,750,000 for the nine months ended
March 31, 1998 as a result of the factors described above.
Employee compensation and benefits for the nine months ended March 31, 1999
increased $9,663,000, or 23.8%, to $50,343,000, as compared to $40,680,000 for
the nine months ended March 31, 1998. As a percentage of total revenues,
employee compensation and benefits increased from 59.2% for the nine months
ended March 31, 1998 to 60.9% for the nine months ended March 31,
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1999. The increase in employee compensation and benefits over the same period in
the prior year results primarily from the Company's growth, including
acquisitions. The increase in employee compensation and benefits as a percent of
revenue over the same period in the prior year results in part from intentional
overstaffing at the Company's Montana facility during the period, as well as
higher base rates of pay and staffing levels in the Company's California
operations.
Purchased services and other expenses for the nine months ended March 31, 1999
increased $3,090,000, or 15.8%, to $22,680,000, as compared to $19,590,000 for
the nine months ended March 31, 1998. As a percentage of total revenues,
purchased services and other expenses decreased to 27.4% for the nine months
ended March 31, 1999 from 28.4% for the nine months ended March 31, 1998. 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
acquisitions. The decrease 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 increased utilization at certain facilities.
Depreciation and amortization for the nine months ended March 31, 1999 increased
$941,000, or 60.8%, to $2,488,000 as compared to $1,547,000 for the nine months
ended March 31, 1998. The increase in depreciation and amortization compared to
the same period in the prior year is attributable to the Company's growth,
including an increase in the amortization of goodwill arising from the Company's
acquisitions.
Income from operations for the nine months ended March 31, 1999 increased
$260,000, or 3.8%, to $7,117,000 as compared to $6,857,000 for the nine months
ended March 31, 1998, and decreased as a percentage of total revenues to 8.6%
for the nine months ended March 31, 1999 from 10.0% for the nine months ended
March 31, 1998, as a result of the factors described above. The Company's income
from operations was negatively impacted by the fact that the Company opened four
new programs during the quarter ended March 31, 1999. One of these programs, a
contract in Ohio, was delayed in its opening from February until March. The
other three programs (located in Texas, Hawaii and Tennessee) generated
significant operating losses during the period due to both expense issues,
principally related to staffing, and slower-than-anticipated ramp-up in census.
Interest expense for the nine months ended March 31, 1999 increased $437,000, or
59.3%, to $1,174,000 as compared to $737,000 for the nine months ended March 31,
1998. The increase in interest expense over the same period in the prior year is
attributed principally to debt incurred pursuant to the Somerset acquisition.
Interest income decreased $130,000 to $393,000 for the nine months ended March
31, 1999 as compared to $523,000 for the nine months ended March 31, 1998. 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 Company's repurchase of 700,000 shares of its outstanding Common
Stock and its acquisition of Ameris.
Other income for the nine months ended March 31, 1999 was $54,000, consisting
primarily of the recognition of previously deferred gain on the sale of property
concurrent with the collection of the note receivable related to the sale. Other
income of $1,740,000 for the comparable prior period
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reflects a one time payment by Helicon of management fees for which a reserve
had previously been established combined with a gain on the exchange of the
Company's Houston, Texas facility for a facility in Longview, Texas, plus cash.
Provision for income tax expense for the nine months ended March 31, 1999
decreased $692,000 to $2,524,000 from $3,216,000 for the nine months ended March
31, 1998.
Liquidity and Capital Resources
Cash provided by operating activities for the nine months ended March 31, 1999
was $1,945,000 on net income of $3,866,000 as compared to cash provided of
$7,349,000 on net income of $5,167,000 for the nine months ended March 31, 1998.
An increase in accounts receivable combined with a decrease in accrued employee
compensation were the primary factors contributing to the decrease in cash
provided by operating activities during the fiscal 1999 period versus the same
period in the prior year. The increase in accounts receivable is the result of a
number of factors, including an increase in the Company's revenues and the
timing of ratification of contracts by certain of the Company's California
school district customers. The decrease in accrued employee compensation results
primarily from differences in normal pay cycles and the payment of annual
bonuses. Working capital at March 31, 1999 was $17,527,000, as compared to
$29,867,000 at June 30, 1998. The change results primarily from acquisitions
during the period and the repurchase of the Company's Common Stock.
Cash used by investing activities was $27,212,000 for the nine months ended
March 31, 1999 as compared to $3,070,000 for the nine months ended March 31,
1998, due primarily to (i) additional capital expenditures and, (ii) the Ameris
and Somerset acquisitions during fiscal 1999 versus the additional cash payment
related to the Vendell acquisition and the Chad acquisition during fiscal 1998.
Cash of $6,793,000 was provided by financing activities for the nine months
ended March 31, 1999, due primarily to borrowings under the Company's credit
facility for the Somerset acquisition offset by funds used for the repurchase of
700,000 shares of the Company's Common Stock. Cash of $23,000 was provided by
financing activities for the nine months ended March 31, 1998.
The Company has a credit agreement with SunTrust Bank and First American
National Bank (jointly "the Lenders"), the term of which extends through
December 1, 2001. Under the terms of this agreement, the Lenders have made
available to the Company, for acquisition financing and working capital
requirements, a revolving line of credit for up to $25,000,000. The credit
facility bears interest at either (i) the one, two, three or six month LIBOR
rate plus an applicable margin, which ranges between .75% and 1.75% and is
dependent on the ratio of funded debt to earnings before interest, taxes,
depreciation and amortization, or (ii) SunTrust Bank's index rate plus an
applicable margin, which ranges between .00% and .50%, at the Company's option.
The line of credit is secured primarily by the Company's accounts receivable and
equipment. At March 31, 1999, the outstanding balance under the line of credit
was $9,400,000.
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Additionally, effective December 1, 1998, the Company entered into a term loan
with the Lenders in the amount of $15,000,000 at a fixed interest rate. The term
loan is for a period of seven years. The Company's effective rate of interest on
the loan is 8.10%. No payment of principal is required until December 2001, at
which time increasing payments that amortize the loan fully are due over the
remaining four years of the agreement.
The Company's line of credit 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 the Lenders, 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
$500,000. The agreement also prohibits the Company from declaring dividends in
excess of 25% of the Company's net income during any fiscal year.
Pursuant to the Somerset transaction, the Company issued a note payable to the
sellers totaling $2,375,000. This note bears interest at 6%, will amortize fully
over the three year period ending December 1, 2001, and is secured by the
Company's real estate and improvements purchased pursuant to the Somerset
transaction. At March 31, 1999, $756,000 of the note is included in current
liabilities and $1,437,000 of the note is included in long-term debt.
Helicon has entered into a $1.5 million line of credit with First American
National Bank. As a condition to this line of credit, the Company agreed to
guarantee Helicon's performance under the line. At March 31, 1999, there was
$487,000 outstanding under Helicon's line of credit.
Capital expenditures during the next twelve months 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 may also
consider other strategic acquisitions, including acquisitions of existing
programs and other companies engaged in youth services or related businesses.
Current obligations, typically due within thirty days or less, are expected to
be funded with cash flows from operations and borrowings under the Company's
line of credit. Management believes that funds from operations and amounts
available under its line of credit will provide sufficient cash flow for the
foreseeable future.
Year 2000
The Year 2000 ("Y2K") issue involves the inability of some computers or
microprocessors to correctly handle the century change that will occur at
midnight, December 31, 1999. The Y2K issue, which also includes a number of
related problems, affects nearly every business in the world. The Company's
assessment of potential Y2K problems has focused on three areas: (i) the
Company's information technology ("IT") systems, (ii) its non-IT systems, and
(iii) its relationships with third parties. The Company has substantially
completed an initial assessment of its IT systems' exposure to the Y2K-related
problems, and currently believes that its main IT systems, which include
billing, accounting, and payroll systems, are Y2K compliant. Although the
Company has not tested the Y2K
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compliance of such systems, such systems have been represented as Y2K compliant
by the vendors thereof. Certain less-critical IT systems as well as certain
individual computers and associated software are not currently Y2K compliant,
however, the Company expects to continue to replace these systems or make them
Y2K compliant as needed.
The Company has also assessed the exposure of its non-IT systems (such as time
clocks) to Y2K problems, and does not believe that Y2K issues related to non-IT
systems will have a material adverse effect on the Company's results of
operations, financial position or cash flows.
The Company has begun an assessment of the Y2K readiness of its payors and other
third parties with whom it does business, and will continue to focus on this
aspect of its Y2K compliance during calendar 1999. The Company has contacted all
material payors and other third party payors in an attempt to assess the effect
of any Y2K issues that may arise. The Company will continue discussion with any
non-compliant material payors in an attempt to assess and encourage their Y2K
readiness. Despite efforts that the Company may make in this regard, there can
be no assurance that the systems of other companies with whom it does business
will be compliant.
To date, the Company has incurred no material expenses related to the Y2K
compliance of its IT and non-IT systems. The Company believes that the costs
associated with finalizing the Y2K compliance of such systems will not
materially increase the Company's future operating expenses or capital
expenditures.
The Company believes that its most likely worst case Y2K scenario is that some
of its material third party payors will not be Y2K compliant and will have
difficulty processing and paying the Company's bills, which could affect the
Company's cash flows. The Company has implemented an initial contingency plan to
address this scenario by increasing its available line of credit facility. The
Company expects to continue to assess its contingency plan during the remainder
of calendar 1999.
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 FASB 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. This Statement is
effective for financial statements for the Company's fiscal year which began
July 1, 1998; however, the Statement is not required to be applied to interim
financial statements in the initial year of its application. The adoption of the
statement will affect
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only disclosures provided and will have no impact on the Company's consolidated
balance sheets or results of operations.
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position ("SOP") 98-5 "Reporting on Costs of Start-up Activities" which changes
the way in which public companies account for start-up costs. The SOP requires
most entities, upon adoption, to write off as a cumulative effect of a change in
accounting principle any previously capitalized start-up or organization costs.
This SOP is effective for financial statements for fiscal years beginning after
December 15, 1998, and will, therefore, be adopted by the Company effective July
1, 1999. At March 31, 1999 the Company had approximately $851,000 of deferred
start up costs.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein:
(10.1) First Amendment to Credit Agreement by and among the Company
and SunTrust Bank, Nashville, N.A. as agent and lender dated
December 1, 1998
(10.2) Second Amendment to Credit Agreement by and among the Company
and SunTrust Bank, Nashville, N.A. as agent and lender dated
April 20, 1999
(10.3) Employment Agreement between the Company and William
J Ballard, effective as of August 19, 1998
(10.4) Employment Agreement between the Company and Amy S. Harrison,
effective as of August 19, 1998
(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 17, 1999 /s/ WILLIAM J BALLARD
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William J Ballard
Chairman and Chief Executive Officer
Date: May 17, 1999 /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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