-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QiBODPr9rkFyFEHZl9AFW0bFCUm7FCLmLZVf9VpQTEFjrHQy07HWELc5CiwAel5d oclEEk4FRpaQScbiWqlShg== 0000950144-98-012904.txt : 19981118 0000950144-98-012904.hdr.sgml : 19981118 ACCESSION NUMBER: 0000950144-98-012904 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHILDRENS COMPREHENSIVE SERVICES INC CENTRAL INDEX KEY: 0000816247 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EDUCATIONAL SERVICES [8200] IRS NUMBER: 621240866 STATE OF INCORPORATION: TN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-16162 FILM NUMBER: 98751325 BUSINESS ADDRESS: STREET 1: 3401 WEST END AVENUE STREET 2: SUITE 500 STATE: TN ZIP: 37201 BUSINESS PHONE: 6153830376 MAIL ADDRESS: STREET 1: 3401 WEST END AVENUE STREET 2: SUITE 500 CITY: NASHVILLE STATE: TN ZIP: 37103 FORMER COMPANY: FORMER CONFORMED NAME: PRICOR INC DATE OF NAME CHANGE: 19920703 10-Q 1 CHILDRENS COMPREHENSIVE SERVICES INC 1 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 SEPTEMBER 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to ____________ Commission File Number 0-16162 CHILDREN'S COMPREHENSIVE SERVICES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Tennessee 62-1240866 - ------------------------------ ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 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 November 9, 1998 - 7,340,608 shares. 2 INDEX CHILDREN'S COMPREHENSIVE SERVICES, INC.
Page Number ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) Consolidated Balance Sheets -September 30, 1998 and June 30, 1998...............................................................................3 Consolidated Statements of Income -- Three month periods ended September 30, 1998 and 1997...........................................5 Consolidated Statements of Cash Flows -- Three months ended September 30, 1998 and 1997..................................................6 Notes to Consolidated Financial Statements -- September 30, 1998..............................................................................8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................................................11 Item 3. Quantitative and Qualitative Disclosures About Market Risk...............................................17 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K........................................................................18 SIGNATURES.......................................................................................................19
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CHILDREN'S COMPREHENSIVE SERVICES, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, June 30, (dollars in thousands) 1998 1998 -------- -------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 1,833 $ 20,067 Accounts receivable, net of allowance for doubtful accounts of $2,176 at September 30 and $1,865 at June 30 18,690 17,809 Prepaid expenses 1,131 634 Other current assets 4,456 2,102 -------- -------- TOTAL CURRENT ASSETS 26,110 40,612 -------- -------- PROPERTY AND EQUIPMENT, net of accumulated depreciation of $8,384 at September 30 and $7,831 at June 30 46,162 37,162 DEFERRED TAX ASSETS, net 910 785 COST IN EXCESS OF NET ASSETS ACQUIRED, net 6,427 1,180 OTHER ASSETS AND DEFERRED CHARGES, net 490 462 -------- -------- TOTAL ASSETS $ 80,099 $ 80,201 ======== ========
3 4 CHILDREN'S COMPREHENSIVE SERVICES, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) (CONTINUED)
September 30, June 30, (dollars in thousands) 1998 1998 -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 4,378 $ 1,901 Notes payable - bank 1,020 -0- Current portion - capital leases 45 44 Accrued employee compensation 3,850 5,192 Income taxes payable (631) 136 Accrued other expenses 3,630 3,300 Other liabilities and deferred revenue 1,334 172 -------- -------- TOTAL CURRENT LIABILITIES 13,626 10,745 LONG TERM DEBT AND CAPITAL LEASE OBLIGATIONS 11,600 11,611 DEFERRED TAXES PAYABLE 2,635 -0- OTHER LIABILITIES -0- 13 -------- -------- TOTAL LIABILITIES 27,861 22,369 -------- -------- SHAREHOLDERS' EQUITY Preferred stock, par value $1.00 per share-- 10,000,000 shares authorized -0- -0- Common stock, par value $.01 per share -- 50,000,000 shares authorized; issued and outstanding 7,340,608 shares at September 30 and 8,038,783 shares at June 30 73 80 Additional paid-in capital 51,567 57,820 Retained earnings (deficit) 598 (68) -------- -------- TOTAL SHAREHOLDERS' EQUITY 52,238 57,832 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 80,099 $ 80,201 ======== ========
See notes to consolidated financial statements. 4 5 CHILDREN'S COMPREHENSIVE SERVICES, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended September 30, ----------------------------- (In thousands, except per share amounts) 1998 1997 -------- -------- Revenues: Operating revenues $ 22,329 $ 19,706 Management fee income 871 935 -------- -------- TOTAL REVENUES 23,200 20,641 -------- -------- Operating expenses: Employee compensation and benefits 14,502 12,624 Purchased services and other expenses 6,956 6,319 Depreciation and amortization 635 476 Related party rent 29 25 -------- -------- TOTAL OPERATING EXPENSES 22,122 19,444 -------- -------- Income from operations 1,078 1,197 Other (income) expense: Interest expense 248 280 Interest income (214) (176) Other income (57) -0- -------- -------- TOTAL OTHER (INCOME) EXPENSE, NET (23) 104 -------- -------- Income before income taxes 1,101 1,093 Provision for income taxes 435 408 -------- -------- NET INCOME $ 666 $ 685 ======== ======== Basic earnings per common share $ .09 $ .09 Diluted earnings per common share $ .09 $ .08
See notes to consolidated financial statements. 5 6 CHILDREN'S COMPREHENSIVE SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended September 30, ---------------------------- (dollars in thousands) 1998 1997 -------- ------- OPERATING ACTIVITIES Net income $ 666 $ 685 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation 553 463 Amortization 82 13 Amortization of deferred loan costs 4 6 Provision for bad debts 102 12 Changes in operating assets and liabilities; net of effects from the purchase of Ameris: Accounts receivable 506 (484) Prepaid expenses (435) (189) Other current assets 150 (86) Accounts payable 1,601 427 Accrued employee compensation (1,913) 46 Accrued other expenses 1,186 (54) Income taxes payable (958) (1,431) -------- ------- NET CASH PROVIDED (USED)BY OPERATING ACTIVITIES 1,544 (592) INVESTING ACTIVITIES Purchase of assets of Vendell Healthcare -0- (710) Purchase of Ameris (11,652) -0- Purchase of note receivable (2,500) -0- Purchase of property and equipment (334) (525) Proceeds from sale of property and equipment -0- -0- (Increase) in other assets (42) (78) -------- ------- NET CASH (USED) BY INVESTING ACTIVITIES $(14,528) $(1,313) -------- -------
6 7 CHILDREN'S COMPREHENSIVE SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
Three Months Ended September 30, ---------------------------- (dollars in thousands) 1998 1997 -------- ------- FINANCING ACTIVITIES Principal payments on revolving lines of credit, long- term borrowings and capital lease obligations $ (1,763) $ (10) Proceeds from revolving lines of credit and long-term borrowings 2,773 -0- Common Stock repurchased (6,263) -0- Proceeds from issuance of Common Stock, net 3 45 -------- -------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (5,250) 35 -------- -------- (DECREASE) IN CASH AND CASH EQUIVALENTS (18,234) (1,870) Cash and cash equivalents at beginning of period 20,067 13,649 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,833 $ 11,779 ======== ======== SUPPLEMENTAL INFORMATION Income taxes paid $ 1,227 $ 1,856 Interest paid $ 237 $ 196
See notes to consolidated financial statements. 7 8 CHILDREN'S COMPREHENSIVE SERVICES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) September 30, 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. Operating results for the three month period ended September 30, 1998 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 -- 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 the three months ended September 30, 1997. 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. 8 9 The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended September 30, -------------------------------- 1998 1997 ---------- ---------- BASIC: Average shares outstanding 7,698,959 7,930,606 ========== ========== Net income $ 666,000 $ 685,000 ========== ========== Per share amount $ .09 $ .09 ========== ========== DILUTED: Average shares outstanding 7,698,959 7,930,606 Net effect of dilutive stock options and warrants 60,123 288,025 ---------- ---------- TOTAL 7,759,082 8,218,631 ========== ========== Net income $ 666,000 $ 685,000 ========== ========== Per share amount $ .09 $ .08 ========== ==========
NOTE D -- MERGER AND 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. Revenue increased by $274,000 and net income by $47,000 for the three month period ended September 30, 1997 due to the restatement for the Ventures transaction. In September 1998, the Company announced its acquisition of Ameris Health Systems ("Ameris") for net consideration of approximately $11.7 million in cash. Assets acquired at fair value totaled $16.1 million and liabilities assumed totaled $4.4 million. Pursuant to this transaction, the Company also purchased a note receivable for $2.5 million in cash. The payment of this note 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 and Alabama with an aggregate capacity of 168 licensed beds. In addition, Ameris has 60 beds under development in Pennsylvania, a state in which CCS has not previously operated. 9 10 NOTE E - 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 quarter of fiscal 1999 and 1998, the Company had no items of other comprehensive income. 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 financial statements for the period ended September 30, 1997 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, 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 September 30, 1998, the Company was providing education, treatment and juvenile justice services to approximately 3,100 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. 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. In September 1998, the Company announced its acquisition of Ameris Health Systems ("Ameris") for net consideration of approximately $11.7 million in cash. Assets acquired at fair value totaled $16.1 million and liabilities assumed totaled $4.4 million. Pursuant to this transaction, the Company also purchased a note receivable for $2.5 million in cash. The payment of this note 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 and Alabama with an aggregate capacity of 168 licensed beds. In addition, Ameris has 60 beds under development in Pennsylvania, a state in which CCS has not previously operated. 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 September 30, 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 periods reported herein, the Company recognized all 11 12 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. As of September 30, 1998, unpaid management fees, lease payments and advances, plus interest, due the Company from Helicon totaled approximately $7,576,000. The Company has fully reserved this amount. Future payments received from Helicon on this amount, if any, will be recognized by the Company on the cash basis. At September 30, 1998, the Company has also guaranteed Helicon's obligations under a bank line of credit in the amount of $1,000,000. See "Liquidity and Capital Resources." Employee compensation and benefits include facility and program payrolls and related taxes, as well as employee benefits, including insurance and worker's compensation coverage. Employee compensation and benefits also includes general and administrative payroll and related benefit costs. 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 September 30, 1998, the Company: - Completed the acquisition of a company with 168 beds in Tennessee and Alabama and 60 beds under development in Pennsylvania; - Signed a management contract for a 40 bed residential treatment center in El Paso, Texas, 14 beds of which are currently operational; - Signed a management contract for a 24 bed residential program in Hawaii; and - Signed contracts with three school districts in Kentucky to provide a 30-chair alternative school. 12 13 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 September 30, -------------------------- 1998 1997 ------ ------ Operating revenues 96.2% 95.5% Management fee income 3.8 4.5 ------ ------ TOTAL REVENUES 100.0 100.0 ------ ------ Employee compensation and benefits 62.5 61.2 Purchased services and other expenses 30.0 30.6 Depreciation and amortization 2.8 2.3 Related party rent 0.1 0.1 ------ ------ TOTAL OPERATING EXPENSES 95.4 94.2 ------ ------ Income from operations 4.6 5.8 Other (income) expense: Interest expense 1.0 1.4 Interest income (0.9) (0.9) Other income (0.3) (0.0) Provision for income taxes 1.9 2.0 ------ ------ NET INCOME 2.9% 3.3% ====== ======
Three Months Ended September 30, 1998 versus September 30, 1997 Operating revenues for the three months ended September 30, 1998 increased $2,623,000 or 13.3%, to $22,329,000 as compared to $19,706,000 for the three months ended September 30, 1997. The increase in operating revenues is primarily attributable to new programs and to the acquisitions of Chad Youth Enhancement Center and Ameris consummated in February and September of 1998, respectively. The increase is also due to increased utilization in certain programs. Management fee income decreased $64,000 for the three months ended September 30, 1998 to $871,000 from $935,000 for the three month period ended September 30, 1997. Management fee income recognized under the Helicon Agreement for the three months ended September 30, 1998 increased $12,000 to $335,000 from $323,000 for the three months ended September 30, 1997. Other management fee income declined primarily as the result of one contract acquired from Vendell which was not renewed. 13 14 Total revenues for the three months ended September 30, 1998 increased $2,559,000, or 12.4%, to $23,200,000 as compared to $20,641,000 for the three months ended September 30, 1997 as a result of the factors described above. Employee compensation and benefits for the three months ended September 30, 1998 increased $1,878,000, or 14.9%, to $14,502,000, as compared to $12,624,000 for the three months ended September 30, 1997. As a percentage of total revenues, employee compensation and benefits increased from 61.2% for the three months ended September 30, 1997 to 62.5% for the three months ended September 30, 1998. 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 primarily from the effect of a reduction in revenue days in California and intentional overstaffing at the Montana facility. Purchased services and other expenses for the three months ended September 30, 1998 increased $637,000, or 10.1%, to $6,956,000, as compared to $6,319,000 for the three months ended September 30, 1997. As a percentage of total revenues, purchased services and other expenses decreased to 30.0% for the three months ended September 30, 1998 from 30.6% for the three months ended September 30, 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 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 three months ended September 30, 1998 increased $159,000, or 33.4%, to $635,000 as compared to $476,000 for the three months ended September 30, 1997. The increase in depreciation and amortization compared to the same period in the prior year is primarily attributable to the Company's acquisitions. Income from operations for the three months ended September 30, 1998 decreased $119,000, or 9.9%, to $1,078,000 as compared to $1,197,000 for the three months ended September 30, 1997, and decreased as a percentage of total revenues to 4.6% for the three months ended September 30, 1998 from 5.8% for the three months ended September 30, 1997 as a result of the factors described above. Interest expense for the three months ended September 30, 1998 decreased $32,000 to $248,000 as compared to $280,000 for the three months ended September 30, 1997. The decrease in interest expense over the same period in the prior year is attributed principally to a reduction in the Company's effective interest rate. Interest income increased $38,000 to $214,000 for the three months ended September 30, 1998 as compared to $176,000 for the three months ended September 30, 1997. The increase in interest income over the same period in the prior year is attributable primarily to the increase in cash available for investment during the period. 14 15 Other income for the three months ended September 30, 1998 was $57,000, consisting of the recognition of previously deferred gain on the sale of property concurrent with the collection of the note receivable related to the sale. Provision for income tax expense for the three months ended September 30, 1998 increased $27,000 to $435,000 from $408,000 for the three months ended September 30, 1997. The increase in provision for income tax expense compared to the same period in the prior year results primarily from an 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 the three months ended September 30, 1997. Liquidity and Capital Resources Cash provided by operating activities for the three months ended September 30, 1998 was $1,547,000 on net income of $666,000 as compared to cash used of $592,000 on net income of $685,000 for the three months ended September 30, 1997. Working capital at September 30, 1998 was $12,484,000, as compared to $29,867,000 at June 30, 1998. Cash used by investing activities was $14,531,000 for the three months ended September 30, 1998 as compared to $1,313,000 for the three months ended September 30, 1997, due primarily to the Ameris acquisition. Cash of $5,250,000 was used by financing activities for the three months ended September 30, 1998, due primarily to the repurchase of 700,000 shares of the Company's Common Stock, offset by a net increase in the amount outstanding under the Company's line of credit. Cash of $35,000 was provided by financing activities for the three months ended September 30, 1997. 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. In September 1998, availability under the Company's line of credit was expanded to $23,000,000. The $10,000,000 expansion matures in January 1999. The credit facility bears interest at either (i) the one, two or three month LIBOR rate plus an applicable margin, which ranges between 1.35% and 2.10% and is dependent on the ratio of funded debt to operating earnings or (ii) FANB's index rate, at the Company's option. The line of credit is secured primarily by the Company's accounts receivable and equipment. At September 30, 1998, the outstanding balance under the line of credit was $12,470,000. 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 15 16 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. Helicon has also entered into a $1 million line of credit with FANB which expired on October 31, 1998. This line of credit has been expanded to $1.5 million and renewed until October 31, 1999. As a condition to this line of credit, the Company agreed to guarantee Helicon's performance under such line of credit. At September 30, 1998, the outstanding amount under Helicon's line of credit was $458,000. 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 also may consider other possible strategic acquisitions, including acquisitions of existing programs and other companies engaged in youth services or related businesses. Current obligations, typically due within thirty days or less, are expected to be funded with cash flow from operations and borrowings under the Company's line of credit. Management believes that operations, cash on hand, amounts available under its line of credit and outside financing sources will provide sufficient cash flow for the next twelve months and that long-term liquidity requirements will be met from cash flow from operations and outside financing sources. 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 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 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 recently begun an initial assessment of the Y2K readiness of its payors and other third parties with whom it does business, and expects to more fully focus on this aspect of its Y2K compliance during fiscal 1999. The Company expects to contact all material payors and other third 16 17 parties during calendar 1998 in an attempt to minimize the effect of any Y2K issues that may arise. 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 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 intends to develop a contingency plan to address this scenario, and expects that such a plan would involve assuring the Company's access to additional capital through, for example, a line of credit. The Company expects to develop this contingency plan during fiscal 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 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. At September 30, 1998, the Company had only cash equivalents, invested in high grade, very short term securities, which are not typically subject to material market risk. 17 18 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: Form 8-K Reporting Date -- August 12, 1998 Items reported - Item 5. Other Events. The Company reported approval of a plan to repurchase up to 500,000 shares of the Company's common stock. Form 8-K Reporting Date -- September 24, 1998 Items reported - Item 2. Acquisition or disposition of assets. The Company reported the acquisition of Ameris Health Systems, Inc. for cash and assumption of liabilities. 18 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHILDREN'S COMPREHENSIVE SERVICES, INC. (Registrant) Date: November 16, 1998 /s/ WILLIAM J BALLARD -------------------------------------------- William J Ballard Chairman and Chief Executive Officer Date: November 16, 1998 /s/ DONALD B. WHITFIELD -------------------------------------------- Donald B. Whitfield Vice President of Finance, Chief Financial Officer (Principal Financial and Accounting Officer) 19 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF CHILDRENS COMPREHENSIVE SERVICES INC FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JUN-30-1999 JUL-01-1998 SEP-30-1998 1,833 0 20,866 2,176 0 26,110 54,546 8,384 80,099 13,626 11,600 0 0 73 52,165 80,099 0 23,200 0 0 22,122 0 248 1,101 435 666 0 0 0 666 .09 .09
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