<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
/X/ Filed by the Registrant
/ / Filed by a Party other than the Registrant
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
YOUTH SERVICES INTERNATIONAL, INC.
- - - --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
Not Applicable
- - - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(1)(2)
or Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rule 14a-6(i)(4) and
0-11.
1) Title of each class of securities to which transaction applies:
Not Applicable
----------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
Not Applicable
----------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
Not Applicable
----------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
Not Applicable
----------------------------------------------------------------------
5) Total fee paid:
Not Applicable
----------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by its registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
Not Applicable
----------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
Not Applicable
----------------------------------------------------------------------
3) Filing Party:
Not Applicable
----------------------------------------------------------------------
4) Date Filed:
Not Applicable
----------------------------------------------------------------------
<PAGE> 2
YOUTH SERVICES INTERNATIONAL, INC.
2 PARK CENTER COURT, SUITE 200
OWINGS MILLS, MARYLAND 21117
------------------------------
NOTICE OF ANNUAL MEETING
AND PROXY STATEMENT
------------------------------
NOTICE OF 1996 ANNUAL MEETING OF SHAREHOLDERS
The 1996 Annual Meeting of Shareholders of Youth Services International,
Inc. will be held at the Charles H. Hickey, Jr. School, Baltimore, Maryland
21234, on November 8, 1996, at 9:00 a.m., for the following purposes:
1. To elect eight directors to hold office until their successors are
elected and qualify.
2. To consider and act upon a proposal to approve and adopt the Youth
Services International, Inc. Fiscal Year 1997 Employee Stock Purchase Plan.
3. To consider and act upon a proposal to approve and adopt the Youth
Services International, Inc. 1997 Employee Stock Option Plan.
4. To consider and act upon a proposal to amend the Youth Services
International, Inc. 1995 Director Stock Option Plan to increase to 500,000
shares the number of shares which may be issued pursuant to the plan.
5. To consider and act upon a proposal to amend the Company's Charter
to increase the number of authorized shares of capital stock from 20
million shares to 70 million shares.
6. To ratify the selection of Arthur Andersen LLP as independent
public accountants for the Company for the fiscal year ending June 30,
1997; and
7. To transact such other business as may properly come before the
meeting or any adjournment or adjournments thereof.
The Board of Directors has fixed the close of business on September 12,
1996, as the record date for the determination of shareholders who are entitled
to notice of and to vote at the meeting or any adjournment or adjournments
thereof.
Please sign, date and return the enclosed Proxy, which is being solicited
by the Board of Directors of the Company, in the envelope provided, which
requires no postage if mailed in the United States.
By Order of the Board of Directors
Kendel Erhlich
Secretary
October [ ], 1996
<PAGE> 3
YOUTH SERVICES INTERNATIONAL, INC.
2 PARK CENTER COURT, SUITE 200
OWINGS MILLS, MARYLAND 21117
------------------------------
PROXY STATEMENT
------------------------------
The Notice of Annual Meeting of Shareholders, this Proxy Statement, and the
enclosed Proxy and Annual Report of Youth Services International, Inc. (the
"Company"), including the financial statements of the Company for the fiscal
year ended June 30, 1996, are first being mailed on or about October 3, 1996, to
shareholders of record at the close of business on September 12, 1996 (the
"Record Date"). The enclosed Proxy is being solicited by the Board of Directors
of the Company in connection with the 1996 Annual Meeting of Shareholders to be
held at the Charles H. Hickey, Jr. School, Baltimore, Maryland, on November 8,
1996, at 9:00 a.m. A shareholder giving a proxy may revoke it at any time prior
to its exercise by signing another proxy bearing a later date or by giving the
Secretary of the Company written notice prior to the meeting or oral or written
notice at the meeting.
The Company will supply proxies and proxy materials as requested to
brokerage houses and other custodians, nominees, and fiduciaries for
distribution to the beneficial owners of shares of the Company's capital stock
and will reimburse them for their expenses in so doing. In addition to the use
of the mails, proxy solicitations may be made by telephone, telecopy or
personally by officers of the Company.
The principal executive office of the Company is located at 2 Park Center
Court, Suite 200, Owings Mills, Maryland 21117 (telephone 410-356-8600).
VOTING SECURITIES
On the Record Date, there were outstanding and entitled to vote 9,164,722
shares of common stock of the Company, par value $0.01 per share (the "Common
Stock"), held by 461 shareholders of record. No shares of any other class of
capital stock are outstanding. Each share of Common Stock outstanding on the
Record Date is entitled to one vote on each matter submitted to the shareholders
for a vote at the meeting. The shares of Common Stock will vote together as a
single class on all matters submitted to the shareholders for a vote at the
meeting. The election of directors and all matters submitted to a vote at the
meeting, other than numbered proposal 5 concerning the amendment of the
Company's Charter, will be decided by the vote of a majority of all votes cast
in person or by proxy at the meeting. The proposal to amend the Company's
Charter will require the affirmative vote of at least a majority of all of the
shares of the Company's Common Stock entitled to be voted at the meeting.
Abstentions will be treated as shares present and entitled to vote for purposes
of determining the presence of a quorum but will not be considered as votes cast
in determining whether a matter has been approved by the shareholders. If a
broker or other record holder or nominee indicates on a proxy that it does not
have authority as to certain shares to vote on a particular matter, those shares
will not be considered as present and entitled to vote with respect to that
matter.
ELECTION OF DIRECTORS
Eight directors will be elected to hold office until their successors are
elected and qualify. Unless otherwise specified, the proxies received will be
voted for the election of the following persons:
W. JAMES HINDMAN. Mr. Hindman, who is 60 years old, founded the Company
and served as Chairman of the Board and Chief Executive Officer from its
inception to August 5, 1996. Effective August 5, 1996, Mr. Hindman resigned as
Chief Executive Officer but continues to serve as Chairman of the Board. In
1979, he founded Jiffy Lube International, Inc. and served as its Chairman and
Chief Executive Officer from 1979 to January 1990, at which time the company was
sold to Pennzoil Company. From 1967 to 1979, Mr. Hindman was involved in the
health care industry as an administrator, owner and operator of 25 nursing
facilities. From 1983 to 1992, Mr. Hindman served on the board of directors of
Morningside College in Iowa. Mr. Hindman served as a director of The Harbor Bank
of Maryland, a Baltimore banking institution, from
1
<PAGE> 4
June 1987 to June 1989, and as a director of Transcript International, a high
technology electronics manufacturer in Lincoln, Nebraska, from January 1991 to
June 1992. Mr. Hindman's daughter, Dr. Cynthia K. Hindman, also serves as a
director of the Company.
TIMOTHY P. COLE. Mr. Cole, who is 52 years old, has served as the Vice
Chairman of the Board and Chief Executive Officer since August 5, 1996. Mr. Cole
previously served as Chairman of the Board of Wackenhut Corrections Corporation,
Executive Vice President of The Wackenhut Corporation and as President of the
Government Services Group of The Wackenhut Corporation. Prior to joining
Wackenhut, he served as Program Director for Martin Marietta Corporation. Mr.
Cole is a graduate of the University of Oklahoma and received his MBA from
Pepperdine University. He is also a graduate of the Harvard University Graduate
School of Business Advanced Management Program.
HENRY D. FELTON. Mr. Felton, who is 53 years old, has served as a director
of the Company since its inception and is currently, President and Chief
Operating Officer. He previously served the Company as President of the
Company's Business Development Group and as Vice Chairman of the Board. Prior to
October 1990, he was an Executive Vice President at Maryland National Bank.
During his twenty-five year tenure at Maryland National Bank, he managed various
commercial lending departments, the planning division, the treasury/investment
divisions and the Institutional Bank. From 1986 to 1988, Mr. Felton served on
the board of directors of Jiffy Lube International, Inc. Currently, he serves on
the board of trustees for Villa Julie College in Baltimore, Maryland and the
Board of Directors of the Bank of Maryland, Towson, Maryland.
J. DONALD BLACK. Mr. Black, who is 61 years old, has been a director of
the Company since May 1993. Since 1985, Mr. Black has been President of R/B
Development Corporation, which operates Jiffy Lube Centers in Minneapolis. He is
also currently the managing partner of BT Properties, an apartment management
firm. From 1978 to 1991, Mr. Black served on the board of directors of the
Northside Child Development Center, a day care center providing services to
parents and children. From 1978 to 1990, Mr. Black served as President, Director
and Volunteer Counselor at the Bridge for Runaway Youth, a social service agency
which provides crisis and treatment services to runaway adolescents and their
families.
MAYER KANTER, ESQ. Mr. Kanter, who is 60 years old, has served as a
director of the Company since May 1993. He has practiced law for 30 years in
Sioux City, Iowa. Mr. Kanter has served as a Hospitalization Referee (Judge)
since 1981 and in 1984 served as a Juvenile Referee (Judge) in Woodbury County,
Iowa. He is currently a member of the Iowa Supreme Court Advisory Commission for
juvenile rules.
CYNTHIA K. HINDMAN, M.D. Dr. Hindman, who is 36 years old, has served as a
director of the Company since February 1994. Dr. Hindman serves as a consultant
for children with behavioral and developmental problems at the Pediatric Center
in Frederick, Maryland. Dr. Hindman completed her pediatric residency and
fellowship in Behavioral and Developmental Pediatrics at the University of
Maryland School of Medicine. Dr. Hindman received her B.S. Degree from Dickinson
College in Carlisle, Pennsylvania and her M.D. from the Medical College of
Pennsylvania. Dr. Hindman is the daughter of W. James Hindman, the Company's
Chairman.
MARTIN V. MARSHALL. Mr. Marshall, who is 74 years old, has served as a
director of the Company since November 1994. Mr. Marshall is the Henry R. Byers
Professor of Business Administration, Emeritus, Harvard University. Over the
years, he has taught in all the major programs of the Harvard Business School
and from 1981 through 1993 chaired the School's Owner/President Management
Program and in management schools in Europe, Mexico, and Asia. Also, he has
consulted or been a board member with a variety of domestic and international
companies in fields such as advertising, automobiles, banking, beer, soft
drinks, consumer and industrial paper products, financial funds, jewelry, health
care, mass merchandisers, specialty retailers, metals, packaging, petroleum,
publishing, and travel. He has written extensively on marketing and long-term
business planning.
JACQUES T. SCHLENGER, ESQ. Mr. Schlenger, who is 68 years old, has served
as a director of the Company since November 1994. Mr. Schlenger has been a
partner in the law firm of Venable, Baetjer and Howard since 1963, where he
founded and served as head of the tax department from 1963 to 1979 and as
managing partner from 1979 to 1986.
2
<PAGE> 5
BOARD OF DIRECTORS
Compensation of Directors. The Board of Directors is currently composed of
the individuals listed above. Directors of the Company who are salaried
employees of the Company do not receive any additional compensation for serving
as a director. Directors who are not officers of the Company receive a fee of
$500 for each Board meeting personally attended, and are reimbursed for expenses
incurred in connection with attendance. Under the Company's 1995 Director Stock
Option Plan (the "Director Option Plan"), non-employee directors of the Company
each year automatically receive, as of the anniversary date of his or her
election or appointment to the Board of Directors, an option to purchase 7,500
shares of the Company's Common Stock at the exercise price equal to the fair
market value of the Common Stock on the date of grant. Under the Company's Board
of Directors Compensation Plan, non-employee directors also receive quarterly an
award equal to the number of shares of the Company's Common Stock that equals
$3,750. Mr. Black, Dr. Hindman, Mr. Kanter, Mr. Marshall, Mr. Schlenger, Jeffrey
D. Davis, George M. Ferris, Jr. and Miles G. Harrison, Jr., each were granted
7,500 stock options during the fiscal year, which options were immediately
exercisable, at an exercise price equal to the fair market value of the
Company's Common Stock on the date of grant -- $9.17 per share for Messrs.
Marshall and Schlenger, $10.50 per share for Mr. Ferris and Dr. Hindman, $11.50
per share for Dr. Harrison and $28.25 per share for Messrs. Black, Davis and
Kanter. Messrs. Ferris, Harrison and Davis are not standing for election as
directors of the Company at this Annual Meeting.
Committees and Meetings. During the fiscal year ended June 30, 1996, the
Board of Directors held meetings, and all directors attended 75% or more of the
total number of meetings of the Board and Board committees on which they served.
The Board of Directors has four standing committees: Executive and Nominating,
Finance and Audit, Organization and Compensation, and Marketing and Program
Operations.
Executive and Nominating Committee. The Executive Committee, which is
composed of W. James Hindman, J. Donald Black, Mayer Kanter, Martin V. Marshall
and Jacques T. Schlenger, met 8 times during the fiscal year ended June 30,
1996. The Executive Committee generally has the authority to exercise all of the
powers of the Board of Directors in the management and direction of the affairs
of the Company, subject to specific directions of the Board of Directors and the
limitations of the Maryland General Corporation Law.
Finance and Audit Committee. The Finance and Audit Committee, which was
composed of George M. Ferris, Jr., J. Donald Black, Mayer Kanter and Henry D.
Felton, met 4 times during the fiscal year ended June 30, 1996. The Finance and
Audit Committee serves as the communication link between the Board of Directors
and the Company's independent auditors. The Committee has the responsibility of
reviewing major loan transactions to which the Company is a party, reviewing
transactions with related parties, monitoring management's implementation of
systems of control and recommendations contained in management letters from the
Company's independent accountants, and meeting with the Company's independent
accountants to review the scope of auditing procedures, financial information,
and accounting policies.
Organization and Compensation Committee. The Organization and Compensation
Committee is currently composed of Martin V. Marshall and Jacques T. Schlenger.
The Organization and Compensation Committee met 3 times during the fiscal year
ended June 30, 1996. The committee is responsible for considering and making
recommendations to the Board of Directors regarding the compensation and
benefits to be paid to officers of the Company, the employee benefits programs
for employees of the Company, the Company's 401(k) Plan, and matters pertaining
to the Company's stock option plans.
Marketing and Program Operations. The Marketing and Program Operations
Committee, which was composed of Jeffrey D. Davis, Cynthia K. Hindman, and Miles
G. Harrison, Jr., met 3 times during the fiscal year ended June 30, 1996. The
Committee oversees the marketing and operation of the Company's programs which
includes interface with the communities in which the Company operates its
programs.
Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a) of
the Securities Exchange Act of 1934 requires the Company's officers and
directors and persons who own more than 10% of a registered class of the
Company's equity securities to file reports of ownership and changes in
ownership with the Securities and Exchange Commission and the Company. Based
solely on its review of the copies of the forms received by it, or written
representations from certain reporting persons that they were not
3
<PAGE> 6
required to file a Form 5, the Company believes that, with respect to
transactions effected since the Company became subject to Section 16, all filing
requirements were complied with, except that during the fiscal year ended June
30, 1996, Mr. Black, Mr. Davis and Mr. Kanter each failed to file on a timely
basis a Statement of Changes in Beneficial Ownership on Form 4, with respect to
one transaction.
EXECUTIVE OFFICERS
In addition to Messrs. Hindman, Cole and Felton who are directors, the
following individuals serve as executive officers of the Company:
WILLIAM P. MOONEY. Mr. Mooney serves as Chief Financial Officer, Senior
Vice President-Finance and Treasurer of the Company, and previously served the
Company as Controller from November 1992 through March 1994. Mr. Mooney, who is
41 years old, has 20 years of financial and management experience. From 1981
until he joined the Company in November 1992, Mr. Mooney worked at ESPN, Inc.,
serving as Corporate Controller, Assistant Secretary, and after 1990, as
Director of new business financial and administrative operations. Prior to
joining ESPN, Mr. Mooney was as internal auditor and financial manager at Getty
Oil Company from 1976 to 1981 and a staff auditor with Arthur Andersen LLP,
where he began his career in 1975.
FLETCHER J. MCCUSKER. Mr. McCusker, who is 47 years old, serves as
Executive Vice President-Business Development. He joined the Company in June
1995 as Senior Vice President of Managed Care and Executive Director of Desert
Hills in Tucson. Mr. McCusker served as Chief Executive Officer of Introspect
Healthcare Corporation. Prior to joining Introspect, Mr. McCusker was the Chief
Operating Officer of the Tulsa, Oklahoma-based Century Healthcare Corporation, a
$60 million company which owned and operated adolescent psychiatric treatment
facilities for children and adolescents in ten states. Mr. McCusker holds a
master's degree in Organizational Communication from Arizona State University
and a bachelor's degree in Rehabilitation from the University of Arizona.
DAVID B. DOLCH. Dr. Dolch, who is 41 years old, serves as Executive Vice
President-Operations. He joined the Company in April, 1994 as Executive Director
of Victor Cullen Academy in Sabillasville, Maryland. In May, 1994, Dr. Dolch
received his doctorate in Education from La Salle University. Prior to joining
the Company, Dr. Dolch served as Athletic Director and Head Football Coach at
Morningside College from 1988 to 1994 and prior to that he was Head Football
Coach at Bowie State University from 1986 to 1988.
MARC MICHAELIS. Mr. Michaelis, who is 50 years old, serves as Senior Vice
President, Business Management. He joined the Company in August 1993 as Vice
President of Human Resources and as Deputy Director of the Charles H. Hickey,
Jr. School, a YSI Program. In February 1994, he assumed the duties as Vice
President of Program Support and Research and Development, with additional
duties as the Special Assistant to the Chairman. Prior to joining the Company,
Mr. Michaelis was Commander of the North Stuttgart Military Community and served
as the Director of Current Operations with the US Army Seventh Corps. Mr.
Michaelis retired after 24 years of military service in January 1993 as a
Lieutenant Colonel.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table presents information, as of the Record Date, about the
number of shares of Common Stock beneficially owned by each of the directors and
named executive officers of the Company, by beneficial owners of more than five
percent of the outstanding shares of Common Stock of the Company, and by all
current directors and executive officers of the Company as a group. These
figures include shares of Common Stock that directors and executive officers
have the right to acquire within 60 days pursuant to the exercise of stock
options and warrants.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
--------------------------
NAME NUMBER PERCENT
- - - ------------------------------------------------------------------ ------------- -------
<S> <C> <C>
W. James Hindman 2,179,943(1) 22.6%
2322 Nicodemus Road
Westminster, MD 21157
</TABLE>
4
<PAGE> 7
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
--------------------------
NAME NUMBER PERCENT
- - - ------------------------------------------------------------------ ------------- -------
<S> <C> <C>
Timothy P. Cole 0(2) *
39 Springhill Farm Road
Cockeysville, MD 21030
Henry D. Felton 632,535(3) 6.8%
13001 Dover Road
Glyndon, MD 21071
William P. Mooney 20,625(4) *
1434 Valley Forge Way
Abingdon, MD 21009
Fletcher J. McCusker 67,500(5) *
5076 East Fort Lowell Road
Tucson, AZ 85712
David B. Dolch 15,000(6) *
2651 Warren Way
Frederick, MD 21701
Marc Michaelis 24,889(7) *
2233 Wonderview Road
Timonium, MD 21093
J. Donald Black 102,411(8) 1.1%
680 N. Arm Drive
Orono, MN 55364
Mayer Kanter 146,163(9) 1.6%
608 32nd Street
Sioux City, IA 51104
Cynthia K. Hindman 62,508(10) *
315 W. College Terrace
Frederick, MD 21701
Martin V. Marshall 9,800(11) *
130 Mount Auburn Street, #309
Cambridge, MA 02138
Jacques T. Schlenger 111,634(12) *
408 Fox Chapel Drive
Lutherville, MD 21093
All current directors and executive officers as a group (12 3,272,536(13) 35.7%
persons)
OTHER 5% STOCKHOLDERS
BAMCO, Inc. 666,000(14) 7.3%
Baron Capital Management, Inc.
450 Park Avenue, Suite 2800
New York, New York 10022
</TABLE>
5
<PAGE> 8
- - - ------------------------------
* Represents beneficial ownership of less than 1% of outstanding Common
Stock.
(1) Includes 480,000 shares issuable pursuant to options granted to Mr. Hindman
that are exercisable within 60 days, 105,000 shares that are owned
beneficially by Mr. Hindman's wife, and 34,785 shares reserved for issuance
upon exercise of a Warrant issued to Mrs. Hindman in connection with the
purchase of a Subordinated Debenture.
(2) Mr. Cole was granted options to purchase 125,000 shares which vest as
follows: 50,000 options vest on February 5, 1997, an additional 50,000
options vest on February 5, 1998 and the remaining 25,000 will vest on July
5, 1998.
(3) Includes 162,500 shares issuable pursuant to options granted to Mr. Felton
that are exercisable within 60 days.
(4) Includes 20,625 shares issuable pursuant to options granted to Mr. Mooney
that are exercisable within 60 days.
(5) Includes 67,500 shares issuable pursuant to options granted to Mr. McCusker
that are exercisable within 60 days.
(6) Includes 15,000 shares issuable pursuant to options granted to Dr. Dolch
that are exercisable within 60 days.
(7) Includes 14,775 shares issuable pursuant to options granted to Mr.
Michaelis that are exercisable within 60 days.
(8) Includes 40,500 shares issuable pursuant to options granted to Mr. Black
that are exercisable within 60 days and 2,319 shares reserved for issuance
upon exercise of a Warrant issued to Mr. Black in connection with his
purchase of a Subordinated Debenture. 52,500 shares are held of record by
an individual retirement account, for the benefit of Mr. Black.
(9) Includes 40,500 shares issuable pursuant to options granted to Mr. Kanter
that are exercisable within 60 days.
(10) Includes 15,000 shares issuable pursuant to options granted to Dr. Hindman
that are exercisable within 60 days, 11,595 shares reserved for issuance
upon exercise of a Warrant issued to Dr. Hindman in connection with her
purchase of a Subordinated Debenture, and 5,250 shares owned by Dr. Hindman
as custodian for her son under the Uniform Gifts to Minors Act.
(11) Includes 7,500 shares issuable pursuant to options granted to Mr. Marshall
that are exercisable within 60 days.
(12) Includes 7,500 shares issuable pursuant to options granted to Mr. Schlenger
that are exercisable within 60 days.
(13) Includes 871,400 shares issuable pursuant to options granted to directors
and executive officers that are exercisable within 60 days and 13,914
shares reserved for issuance upon the exercise of Warrants issued to
directors, executive officers or their spouses in connection with purchases
of Subordinated Debentures.
(14) Based upon a Schedule 13G, dated June 19, 1996, filed by BAMCO, Inc. and
Baron Capital Management, Inc. as a group in accordance with Rule
13d-1(b)(1)(ii)(F) BAMCO, Inc. beneficially owns 555,750 shares and Baron
Capital Management, Inc. beneficially owns 110,250 shares, representing
6.1% and 1.2% of the outstanding Common Stock as of June 30, 1996,
respectively. According to Schedule 13G, BAMCO, Inc. and Baron Capital
Management, Inc. are investment advisers registered under the Investment
Adviser Act of 1940 and Baron Asset Fund, an investment company registered
under the Investment Company Act of 1940 and an advisory client of BAMCO,
Inc. owns 495,750 (5.4%) of the shares beneficially owned by BAMCO, Inc.
6
<PAGE> 9
EXECUTIVE COMPENSATION
The following tables and related text summarize, in accordance with the
regulations of the Securities and Exchange Commission, the Company's
compensation of certain of its executive officers.
SUMMARY COMPENSATION
The following table summarizes certain information regarding the Company's
compensation of its chief executive officer and its most highly compensated
executive officers during the fiscal years ended June 30, 1996, 1995 and 1994.
No other executive officer of the Company had salary and bonus which exceeded
$195,000 during the fiscal year ended June 30, 1996.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
-------------------------------- OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER GRANTED COMPENSATION
- - - ------------------------------ ---- ----------- ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
W. James Hindman 1996 $188,375 -- $24,000(a) -- $ 3,412(b)
Chairman and Chief 1995 137,535 -- 12,000(a) 150,000 2,409(b)
Executive Officer 1994 125,000 -- 10,500(a) -- 20,362(c)
Henry D. Felton 1996 $138,167 -- -- -- $ 1,356(b)
Vice Chairman of the 1995 114,643 -- -- 37,500 273(b)
Board, President and 1994 100,000 -- -- -- 5,645(d)
Chief Operating Officer
William P. Mooney 1996 $ 89,208 -- -- 21,000 --
Chief Financial 1995 75,000 -- -- 14,625 --
Officer(i) 1994 65,000 -- -- -- --
Fletcher J. McCusker 1996 $117,000(f) -- -- 97,500 --
Executive Vice President 1995 * -- -- -- --
Officer -- Behavioral 1994 *(f) -- -- -- --
Health Operations
David B. Dolch 1996 $ 78,169(g) -- -- 21,000 $ 1,071(b)
Executive Vice President 1995 55,000 -- -- 11,250 --
Officer -- Juvenile 1994 26,173 -- -- -- --
Justice Operations
</TABLE>
- - - ------------------------------
(a) Represents a non-accountable expense allowance.
(b) Represents amounts contributed by the Company pursuant to the Company's
401(k) Retirement Plan.
(c) Includes $2,833 contributed by the Company pursuant to the Company's 401(k)
Retirement Plan and $17,529 as special compensation for a personal
guarantee of a loan to a Company subsidiary from the Maryland Department of
Economic and Employment Development in the original principal amount of
$500,000 bearing interest at the rate of prime plus 1 1/2% per annum and
payable in 55 equal monthly installments of principal and interest (the
"DEED Loan"). Such compensation is based, in the aggregate, on 5% of the
average annual outstanding principal balance due on such loan.
(d) Includes $1,750 contributed by the Company pursuant to the Company's 401(k)
Retirement Plan and $3,895 as special compensation for a personal guarantee
of the DEED Loan.
(e) Represents deferred compensation payments of $110,000 in principal and
$2,464 in interest.
(f) Mr. McCusker became employed by the Company in July 1995.
(g) Dr. Dolch became employed by the Company in April 1994.
7
<PAGE> 10
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information with respect to the
grant of stock options to the Company's named executive officers during the
fiscal year ended June 30, 1996.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZED
------------------------------------------------------ VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS/SARS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS/SARS EMPLOYEES IN OR BASE EXPIRATION ------------------------
NAME GRANTED FISCAL YEAR PRICE DATE 5% 10%
- - - -------------------------- ------------ ------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
William P. Mooney 21,000(a) 9.2% $ 12.71 2/16/06 $ 167,858 $ 425,386
Fletcher J. McCusker 60,000(b) 26.2% $ 8.83 12/08/05 $ 333,188 $ 844,365
37,500(c) 16.4% $ 11.17 2/05/06 $ 263,428 $ 667,579
David B. Dolch 21,000(a) 9.2% $ 12.71 2/16/06 $ 167,858 $ 425,386
</TABLE>
- - - ------------------------------
(a) The options granted are exercisable over a three year period.
(b) 20,000 of the options were immediately exercisable on the date of grant, and
40,000 are exercisable over a two year period.
(c) 37,500 options are exercisable over a three year period.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
The following table sets forth certain information with respect to the
exercise of stock options by the Company's named executive officers during the
fiscal year ended June 30, 1996 and information concerning the number and value
of unexercised stock options at June 30, 1996. The value of shares acquired on
exercise is based on the fair market value per share of Common Stock on the date
of exercise, and the value of unexercised stock options is based on the closing
price per share of Common Stock of $17.75 on June 30, 1996.
<TABLE>
<CAPTION>
NO. OF SECURITIES UNDERLYING
SHARES UNEXERCISED OPTIONS AT VALUE OF UNEXERCISED IN THE
ACQUIRED 6/30/96 MONEY OPTIONS AT 6/30/96
ON VALUE ---------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - - ----------------------------- --------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
W. James Hindman -- -- 480,000 0 $ 7,518,900 --
Henry D. Felton -- -- 162,499 0 $ 2,613,108 --
William P. Mooney -- -- 20,625 26,001 $ 292,914 $ 160,840
Fletcher J. McCusker -- -- 67,500 30,000 $ 514,350 $ 267,600
David B. Dolch -- -- 15,000 28,500 $ 218,437 $ 188,340
</TABLE>
SEVERANCE BENEFITS AND OTHER AGREEMENTS
Severance Agreements. The Company has entered into non-competition and
change in control or severance benefits agreements with Messrs. Hindman, Felton
and McCusker. The agreements include provisions which restrict the executive
officer from engaging in activities which are competitive with the business
conducted by the Company for a three-year period commencing February 1, 1994 and
for a two-year period following any termination of the executive officer's
employment with the Company during that three-year period, regardless of whether
the termination arises in connection with any change in control.
8
<PAGE> 11
In exchange for the agreement not to compete with the Company, these
agreements also provide for the payment by the Company of certain specified
benefits in the event the employment of such executive officer terminates under
certain circumstances following any change in control of the Company. For
purposes of these agreements, a change in control is deemed to take place
whenever (i) a person, group of persons or other entities shall become the
beneficial owner, directly or indirectly, of securities of the Company having
20% or more of the combined voting power of the Company's then-outstanding
securities, (ii) there shall be certain significant changes in the composition
of the Company's Board of Directors, (iii) the Company enters into an agreement
that would result in a change in control, or (iv) the shareholders of the
Company approve certain extraordinary transactions.
Circumstances triggering payment of the specified benefits to an executive
officer under his agreement include (i) involuntary termination of employment
(for reasons other than death, disability, retirement or cause) or (ii)
voluntary termination by the employee in the event of certain significant
changes in the nature of his employment, including certain reductions made in
compensation and changes in responsibilities and authority. Benefits made
available to the executive employee under the terms of the agreements in the
event that his employment is terminated under the above-specified circumstances
may include (i) a lump sum severance payment equal to three times the sum of the
employee's annual base salary, (ii) maintenance of all life, disability,
accident and health insurance substantially similar to those benefits to which
the employee was entitled immediately prior to termination for a period of three
additional years, (iii) certain additional payments to cover any excise tax
imposed by Section 4999 of the Internal Revenue Code, and (iv) reimbursement of
legal fees and expenses, if any, incurred as a result of such termination.
The agreements may have the effect of discouraging takeovers and protecting
such officers from removal, since such agreements increase the cost that would
be incurred by an acquiring company seeking to replace current management.
Employment Agreement. On July 17, 1996, the Company entered into an
employment agreement with Timothy P. Cole. Pursuant to that agreement, Mr. Cole
was elected the Chief Executive Officer and Vice Chairman of the Company
effective August 5, 1996.
The initial term of the employment agreement is three years. Following the
first anniversary of the agreement, the period of Mr. Cole's employment is to be
extended by successive additional one-year terms unless the agreement is
terminated by the Company or Mr. Cole prior to any anniversary. In that case,
the employment agreement is to terminate two years from the anniversary of the
agreement immediately prior to the time at which a notice of termination is
given.
Mr. Cole is entitled to a base salary of at least $300,000 per year during
the term of the agreement. The agreement provides that he will be eligible to
receive an award under an incentive bonus program beginning with the Company's
fiscal year ending June 30, 1997. The incentive bonus program is to be designed
to enable Mr. Cole to earn annual bonuses of up to 60% of his base salary. Mr.
Cole will receive a bonus of not less than $100,000 for the fiscal year ended
June 30, 1997.
Pursuant to the employment agreement, Mr. Cole was granted options to
purchase 125,000 shares of the Company's common stock at $17.00 per share (the
fair market value of YSI common stock on August 5, 1996, the date of the
employment agreement). 50,000 of the options vest on February 5, 1997. An
additional 50,000 will vest on February 5, 1998 and the remaining 25,000 will
vest on July 5, 1998. The options have a five-year term and must be exercised by
the close of business on August 5, 2001.
Pursuant to the agreement, the Company also agreed that it would advance up
to $50,000 in construction costs Mr. Cole may incur in connection with
completing the construction of a home he had intended to occupy as his principal
residence in Florida prior to being employed by the Company. In addition, when
the construction of the home is completed, the Company will discharge the
construction loan Mr. Cole incurred in connection with the construction and
advance Mr. Cole the equity he has in the home to the extent that the principal
and accrued interest on the construction loan and Mr. Cole's equity does not
exceed $705,000 in the aggregate. The agreement provides that the house will be
listed for sale immediately upon its construction and that the Company will be
entitled to receive, out of the net proceeds Mr. Cole realizes from the sale of
the home, the costs it advanced Mr. Cole for completing the construction as well
as amounts
9
<PAGE> 12
relating to the construction loan and equity advances the Company has agreed to
make to Mr. Cole. In the event that the net proceeds Mr. Cole realizes from the
sale of the home are insufficient to reimburse the Company in full for the costs
it advances Mr. Cole for completing the construction and the amounts of the
construction loan and equity the Company advances to Mr. Cole, the Company has
agreed to forgive up to $100,000 of such costs and expenses in the aggregate.
The agreement provides that the Company may terminate Mr. Cole for certain
reasons which constitute cause. The agreement further provides that Mr. Cole
will not compete with the Company for a period of two years following any time
that his employment with the Company is terminated. In connection with Mr.
Cole's appointment as the Chief Executive Officer and Vice Chairman of the
Company, Mr. Cole was provided a Change-In-Control Agreement which provides Mr.
Cole with compensation and benefits upon a change in control of the Company on a
basis substantially similar to the basis on which Messrs. Hindman, McCusker and
Felton are to be compensated under the change-in-control agreements to which
they are a party described above.
CERTAIN RELATED PARTY TRANSACTIONS
In August 1995, the Company entered into a Lease with W. J. Hindman and
Dixie L. Hindman pursuant to which the Company leased from the Hindmans certain
property owned by the Hindmans and constructed on the leased property a
conference center and an apartment facility that is available for use by the
Company. The improvements on the property were constructed at the sole cost of
the Company. The Company is responsible for payment of all utilities used by the
Company on the leased premises and is required to keep in effect at its own
expense public liability insurance in an amount not less than $1,000,000 and
employer's liability insurance in an amount not less than $100,000. The Company
is authorized to use the leased premises for the operation of a conference and
meeting center for employees and guests of the Company. The term of the Lease is
five years from the time of completion of the improvements and may be extended
at the Company's option for an additional five-year period. During the original
five-year term of the Lease, the Company will not be required to pay any rent to
the Hindmans. However, the Hindmans will receive the benefit of the improvements
on their property, and the Company will surrender to the Hindmans, at the
expiration of the Lease, the leased premises as improved pursuant to the Lease.
The value of the improvements to the Hindmans property is approximately
$200,000.
Effective the close of business June 30, 1995, the Company entered into an
Asset Purchase Agreement pursuant to which it acquired certain assets and
assumed certain liabilities of Desert Hills Center for Youth and Families of New
Mexico, Inc., a New Mexico corporation and a wholly owned subsidiary of
Introspect Health Care Corporation ("Introspect"). The purchase price for the
acquisition was approximately $2.2 million in cash and the assumption of
liabilities not to exceed $2.5 million. In connection with the transaction, the
Company and one of its subsidiaries, Southwestern Children's Health Services,
Inc. ("SWCHS"), were granted an option for a period of five years to purchase
all of the outstanding capital stock of Introspect for a purchase price of $4.1
million in cash, approximately $3.8 million in Company Common Stock and the
assumption of up to $1.5 million in liabilities, subject to certain reductions.
Further, SWCHS agreed to manage the business of Introspect and certain of its
affiliates for a period of five years for an initial management fee of $600,000
and additional management fees equal to the pre-tax income of certain Introspect
affiliates, subject to adjustments. The Company also entered into a $1,000,000
Discretionary Line of Credit Agreement with Introspect pursuant to which the
Company in its discretion may extend credit to Introspect at an annual interest
rate of prime plus 2%. The Company extended $266,243 to Introspect at the
closing of the acquisition transactions. Fletcher J. McCusker, who is the
Executive Vice President -- Behavioral Health Operations, was the chief
executive officer and a director of Introspect and is a stockholder of
Diversification Association, Inc., the parent company of Introspect. Mr.
McCusker joined the Company in connection with the transactions described above
and was not a director, officer or otherwise affiliated with the Company at the
time of the closing of the transactions.
During the fiscal year ended June 30, 1996, V. Joel Nicholson and Joel
Smith resigned as executive officers of the Company. In connection with that
resignation, the Company entered into an agreement with Evergreen National
Development, Inc. ("Evergreen"), a corporation that was formed and organized by
Messrs. Smith, Nicholson and certain other former employees of the Company.
Under the terms of the
10
<PAGE> 13
agreement, the Company agreed to compensate Evergreen for services Evergreen
provided to the Company relating to property and facility development, mergers
and acquisitions, business development and general consulting matters on a basis
set forth in the agreement.
The agreement is non-exclusive and does not obligate the Company to retain
Evergreen to provide any services. The agreement was approved by the Company's
board of directors in a manner consistent with the Company's related-party
transaction policy. In connection with considering and approving the terms of
the agreement, the board of directors obtained an opinion from an independent
investment banking firm to the effect that the agreement between the Company and
Evergreen was fair to the Company from a financial point of view and its terms
were generally as favorable to the Company as the terms that would have been
available to the Company from unaffiliated third parties. During fiscal year
1996, the Company paid $275,000 to Evergreen for services it provided to the
Company under the agreement.
The Company believes that the terms of the transactions it has engaged in
with directors and officers are no less favorable to the Company than the terms
that would have been available to the Company from unaffiliated third parties.
These transactions were ratified by the independent outside members of the
Company's Board of Directors who do not have an interest in such transactions.
In connection with this ratification, the Board of Directors determined that
such transactions were fair and reasonable to the Company and confirmed the
Company's policy that any future related party transactions may be consummated
only if such transactions are on terms as favorable to the Company as terms that
could be obtained from unaffiliated third parties and if such transactions are
approved by a majority of the independent outside members of the Board of
Directors who do not have an interest in the transaction.
ORGANIZATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Organization and Compensation Committee is responsible for considering
and making recommendations to the Board of Directors for approval regarding the
compensation and benefits to be paid to the officers of the Company, the
employee benefits programs for employees of the Company, the Company's 401(k)
plan, and matters pertaining to the Company's stock option plan. The Board of
Directors did not reject or modify in any material way any of the
recommendations of the Organization and Compensation Committee during the fiscal
year ended June 30, 1996.
Philosophy and Objectives. The Company seeks to attract and retain top
quality executives by providing a competitive, performance-based executive
compensation program. The fixed compensation element of the program is intended
to be, in the aggregate with other compensation, competitive with the market.
The incentive compensation element, in the form of the Company's bonus plan, is
designed to focus management on annual financial and operational performance.
Finally, through its stock option and stock award programs, management's goals
are aligned with shareholders based on long-term stock price performance. The
program reflects the Company's pay-for-performance philosophy and is intended to
provide pay commensurate with performance.
Payouts under the bonus plan are expected to vary with the Company's annual
performance against the objectives and targets established under those plans and
with the Committee's and the Board of Directors' subjective evaluation of
individual performance. The Committee's evaluation process and the ultimate
level of annual incentive compensation for an individual executive officer is
not based solely on a mechanical or mathematical formula. Instead, once it is
determined that a participant is eligible for payment under the Company's bonus
plan because the Company reached its financial performance threshold, a
participant's bonus is recommended to the Organization and Compensation
Committee of the Board of Directors based upon the Company's performance and the
individual's personal performance. In arriving at its decision, the Committee
also may consider both internal and external changes that occurred during the
year and the extent to which the participant responded to those changes. This
process, which is not constrained by fixed formulas, gives the Committee the
flexibility necessary to respond to the continually changing and competitive
environment in which the Company operates.
Competitive Compensation Survey. From time to time, the Committee reviews
competitive data from recognized national surveys concerning executive
compensation levels and practices as part of the process of establishing an
appropriate level of overall executive compensation. These surveys are weighted
towards
11
<PAGE> 14
those companies that are included in the Peer Group used by the Company in the
comparison of five-year cumulative total return set forth below. However, the
Committee has chosen not to limit the survey information to companies in the
Peer Group because the search to attract new executives is not limited to
companies within the same industry, and the competition the Company faces to
retain existing executives comes from companies in many different industries.
After reviewing the available competitive data, the Committee evaluates the
executive's performance and considers the particular needs of the Company to
arrive at individual compensation decisions, which involve an overall appraisal
of the executive.
Principal Components of Executive Compensation. The principal components
of the executive compensation program are base salary, the bonus plan, and stock
option incentives.
The Company's objective is to pay its executive officers base salaries that
are sufficient to attract and retain individuals with the qualities believed to
be necessary for the long-term financial success of the Company and otherwise
are competitive in the marketplace. The Committee reviews, from time to time,
surveys prepared by national compensation consultants to determine the range of
salaries being paid in the industry. An individual executive officer's salary
level generally is based on tenure, the level of responsibility that such
officer maintains, an evaluation of the executive officer's performance during
the period in which he or she has been employed by the Company or its
subsidiaries, and other special circumstances.
Historically, under the Company's bonus plan, the Committee approved annual
bonuses based upon a number of factors, including but not limited to the
financial performance of the Company and the performance of the individual.
Because in each of the last three years the Company has failed to meet the
threshold performance targets established by the Committee, no bonuses have been
paid out under the bonus plan. In order for bonus awards to be paid, the Company
generally must attain certain objective performance thresholds based upon
corporate financial performance (as measured by net income threshold levels
determined by the Committee).
Finally, the Committee recommends annual stock option awards under the
Company's stock option programs to executive officer's based upon the seniority
of the particular executive officer, the level of responsibility of that officer
and a comparison of stock option awards to executives similarly situated in
corporations that compete in the market in which the Company competes. The
Committee believes that stock options are a critical element for implementing
the Company's pay-for-performance philosophy.
Compensation of the Chief Executive Officer. Mr. Hindman's base salary for
the fiscal year ended June 30, 1996 of $195,000 represented a 30% increase over
the prior year. The Committee reviewed Mr. Hindman's performance and the
Company's results in recent years at its meeting immediately following the
annual meeting of shareholders. The Committee recommended and the Board of
Directors approved the increase to Mr. Hindman's annual salary. In doing so, the
Committee and the Board of Directors considered the Company's improved
performance in fiscal year 1995 and the first quarter in fiscal year 1996, its
prospects for the full year, and Mr. Hindman's individual performance. The
Committee also considered that Mr. Hindman had not received a bonus under the
Company's bonus plan in any of the last three years and was unlikely to receive
one for the 1996 fiscal year.
In view of the award of 150,000 stock options to Mr. Hindman in fiscal year
1995 and Mr. Hindman's ownership interest in the Company which exceeds 23%, the
Committee determined that the grant of additional stock options to Mr. Hindman
was not necessary to ensure that his interests were thoroughly aligned with the
interests of shareholders. Accordingly, the Committee did not grant any stock
options to Mr. Hindman in fiscal year 1996. During the fiscal year ended June
30, 1996 Mr. Hindman did not exercise any stock options.
Compensation of Other Executive Officers. With the exception of executive
officers who received salary increases in connection with their election as
executive officers or substantial promotions in 1996, the named and other
executive officers of the Company received salary increases ranging from 5% to
30% during fiscal year 1996.
The named and other executive officers of the Company did not receive any
bonus awards during the fiscal year. This was based on the fact that, despite
the strong performance of the Company's stock price, the Company's performance
did not meet the minimum thresholds under the bonus plan.
12
<PAGE> 15
A number of named and other executive officers of the Company (other than
Messrs. Hindman and Felton) received stock option grants during the 1996 fiscal
year. The level of the stock option grants was determined based on the Company's
long term incentive compensation philosophy described above. Generally, the
options have a 10-year term, are exercisable at the fair market value of the
shares of Common Stock on the date of grant, and become exercisable ratably over
a three-year period.
Section 162(m) of the Internal Revenue Code. In 1993, the United States
Internal Revenue Code was amended to limit deductions for certain compensation
in excess of $1 million annually paid to executive officers of public companies
such as the Company. The legislation imposing this change was unclear on a
number of important issues, and the ultimate effect of the change on the Company
and other public companies depends to a significant extent on the final
implementing regulations, which were issued in December 1995 (the "Section
162(m) Regulations"). The legislation and the Section 162(m) Regulations exclude
from the $1 million limitation compensation payable under a written binding
contract that was in effect on February 17, 1993. Based on its review of the
legislation and the Section 162(m) Regulations, the Company believes that it has
yet to approach the $1 million deduction limitation for any of its executive
officers. Accordingly, the Committee has not formulated a formal policy relating
to Section 162(m). The Committee intends to continue to monitor its executive
compensation plans and policies with a view toward preserving the deductibility
of executive compensation while maintaining an ability to attract and retain
those executives necessary to assist the Company in reaching its goals and
objectives.
Martin V. Marshall
Jacques T. Schlenger
COMPARISON OF CUMULATIVE TOTAL RETURN
The following graph compares the cumulative total shareholder return on the
Common Stock of the Company since the date the Company consummated its initial
public offering with the cumulative total return on the S&P 500 Index and a Peer
Group of companies that provide services to youths identified below during the
same period. The graph assumes that $100 is invested initially and all dividends
are reinvested.
<TABLE>
<CAPTION>
Youth Ser-
vices
Measurement Period Interna-
(Fiscal Year Covered) tional, Inc. Peer Group Broad Market
<S> <C> <C> <C>
1993 100.00 100.00 100.00
1994 91.46 71.70 93.44
1995 103.66 84.05 117.79
1996 259.62 180.22 148.43
</TABLE>
The Peer Group consists of the following companies: Children's
Comprehensive Services, Community Psychiatric Centers, Correctional Services
Company, Corrections Corp. America, Education Alternative, Residential-Care,
Inc., and Wackenhut Corrections Company.
13
<PAGE> 16
PROPOSAL TO APPROVE AND ADOPT THE YOUTH SERVICES INTERNATIONAL, INC.
FISCAL YEAR 1997 EMPLOYEE STOCK PURCHASE PLAN
The Board of Directors of the Company, on September 8, 1996, adopted
resolutions declaring it advisable to adopt the Youth Services International,
Inc. Fiscal Year 1997 Employee Stock Purchase Plan (the "Stock Purchase Plan"),
recommending to the shareholders the Stock Purchase Plan, and directing that the
Stock Purchase Plan be submitted to the shareholders for their approval at the
Annual Meeting.
In the opinion of the Board of Directors, the grant of stock options to
employees of the Company and its subsidiaries is a vital factor in the Company's
ability to attract and retain effective and capable employees who contribute to
the growth and success of the Company. The Board of Directors believes that
absent shareholder approval of the Stock Purchase Plan, the Company's ability to
continue to attract and retain effective and capable employees will be adversely
affected.
Proceeds received by the Company upon the exercise of stock options granted
under the Stock Purchase Plan will be available to the Company for general
corporate purposes. With limited exceptions described below, the Stock Purchase
Plan is available to all employees of the Company and its subsidiaries. As of
the date of this Proxy Statement, the Company has approximately 2,900 employees.
It is not possible at this time to determine the number of persons employed by
the Company and its subsidiaries who will elect to participate in the Stock
Purchase Plan or the amount of shares that will be awarded to any individual
employee under the Stock Purchase Plan. Furthermore, it is not possible to
determine the amount of shares that would be awarded to any individual employee
for the last fiscal year had the Stock Purchase Plan been in effect for such
year.
Set forth below is a summary of certain of the provisions of the Stock
Purchase Plan and the tax consequences to the Company and employees who receive
stock options under the Stock Purchase Plan.
SUMMARY OF THE STOCK PURCHASE PLAN
ADMINISTRATION. The Stock Purchase Plan is administered and interpreted by
a Committee (the "Committee") selected by the Board of Directors of the Company.
The Committee shall consist of at least three members who are members of the
Board and who are not participants in the plan. The members of the Committee
serve at the request of the Board of Directors and have no stated term of
office. The Committee may adopt such rules and regulations for carrying out the
plan as it deems proper. The Board of Directors may terminate the plan or amend
its terms. The Stock Purchase Plan specifies that the members of the Board of
Directors and the Committee, with respect to their activities under the plan,
shall, to the maximum extent permitted by law, have no liability and shall be
indemnified by the Company. The costs of administering the plan will be paid by
the Company.
ELIGIBILITY. Any employee of the Company or of a designated subsidiary of
the Company is eligible to participate in the plan unless (1) the employee is
scheduled to work less than 20 hours per week or less than 5 months during an
option period, or (2) the employee would own stock possessing 5% or more of the
total combined voting power or value of all classes of stock of the Company or a
subsidiary, treating the employee as constructively owning both stock the
employee has options to buy (including options then being granted under the
plan) and stock owned, directly or indirectly, by a brother, sister, spouse,
ancestor or lineal descendant of the employee. Stock owned, directly or
indirectly, by a corporation, partnership, estate or trust will be considered as
owned proportionately by an employee who is a shareholder, partner or
beneficiary thereof. Eligibility to participate in the plan continues only as
long as an employee continues to meet the eligibility requirements and remains
an employee of the Company.
ACQUIRING STOCK: GRANT DATES, EXERCISE DATES AND THE GRANT PERIOD. The
Stock Purchase Plan operates on successive 12-month periods called grant
periods. Each grant period begins on July 1 and ends on June 30 of the next
year. Options to purchase common stock will generally be granted on four days
("grant dates") during each grant period: July 1, October 1, January 1 and April
1. To the extent an employee elects to be granted less than his entire allotment
for a grant period on the first grant date of the grant period, the employee may
elect to be granted the balance on one or more of the subsequent grant dates
within the grant period. Likewise, a participant may generally elect to exercise
an option during a grant period on one or more
14
<PAGE> 17
of the following four exercise dates: September 30, December 31, March 31 and
June 30. Options may be exercised only within the same grant period as they are
granted.
PARTICIPANTS. An eligible employee may become a participant in the Stock
Purchase Plan by submitting an enrollment form to the Company's payroll office
prior to any grant date. An enrollment form allows an eligible employee to elect
to authorize the Company to make payroll deductions of not less than $5 per pay
period and not more than 15% of the employee's base income. An eligible employee
may also elect to become a participant by electing on the enrollment form to
make a lump sum cash payment any day before any exercise date prior to the end
of a grant period. Participants may make contributions through a combination of
payroll deductions and lump sum cash payments. All amounts so received by the
Company will be credited to the participant's stock purchase account and may be
used for any corporate purpose. No interest shall be paid on the amount credited
to any participant's stock purchase account.
GRANTS OF OPTIONS. Participants who are eligible employees on a grant date
may elect to be granted options to purchase shares of the Company's common stock
(par value $.01 per share) directly from the Company at a price equal to 85% of
the fair market value of the common stock on the date the options are granted
(the "exercise price"). Fair market value is defined as the fair market value of
the Company's common stock as determined by reference to the selling price or
the bid and ask price for shares of the Company's common stock on the applicable
market. The mean between the bid and ask prices of the Company's common stock as
of September 12, 1996 was $16.00. Subject to the limitations set forth below,
the maximum number of whole shares for which a participant may elect to be
granted options during a grant period is determined pursuant to the following
formula: Divide 15% of the participant's base income on the first grant date in
a grant period in which the participant is an eligible employee by 85% of the
fair market value of a share of common stock on such grant date. The total
number of shares of common stock for which an employee may elect to be granted
options on any grant date is reduced by the number of shares for which options
have been granted to the employee on any prior grant date in the same grant
period. Although the Stock Purchase Plan is subject to shareholder approval,
options may be granted prior to such shareholder approval provided that the
grant of each such option is expressly subject to shareholder approval of the
plan. No option shall be exercisable prior to such shareholder approval.
Furthermore, both the grant and the exercise of any options under the Stock
Purchase Plan are expressly conditioned on the effective and continuing
registration of the plan under the Securities Act of 1933 and effective
registration (or available exemption from registration) of the plan under
applicable state securities laws.
LIMITATIONS ON GRANTS. The total amount of common stock for which options
may be granted under the Stock Purchase Plan is four hundred and fifty thousand
(450,000) shares, subject to adjustment for stock splits, stock dividends, and
similar capital stock transactions. No participant may accrue the right to
acquire more than $25,000 of stock (determined when granted) in any one calendar
year under all employee stock purchase plans of the Company.
EXERCISE OF OPTION AND WITHDRAWAL. Unless a participant's employment with
the Company terminates or the participant withdraws from the Stock Purchase
Plan, the participant may elect to purchase directly from the Company on any
exercise date within a grant period the number of whole shares for which the
participant's stock purchase account then has sufficient credit. The participant
will be deemed to have exercised an option to purchase such number of whole
shares of common stock as there are funds available in the participant's stock
purchase account to purchase on the last exercise date of a grant period. Any
funds insufficient to purchase a whole share of common stock will be refunded to
the participant at the end of the grant period. No fractional shares will be
issued. No fees, commissions or other charges shall be charged in connection
with the purchase of shares under the plan. A participant may withdraw from the
Stock Purchase Plan at any time by written notice to the Company's payroll
office, and the amount credited to the participant's stock purchase account will
be promptly refunded. A participant will be ineligible to again participate in
the plan or any similar plan which has been adopted by the Company for a period
of six months following the date of withdrawal.
TERMINATION OF EMPLOYMENT AND OPTION TO REACQUIRE COMMON STOCK. When a
participant's employment with the Company terminates by reason of voluntary
resignation, death or by retirement pursuant to normal Company policies, the
retired employee or personal representative of the deceased employee may
15
<PAGE> 18
elect to have the amount credited to the participant's stock purchase account
used to purchase full shares of common stock at the fair market value as of the
date of such event or to have said amount promptly refunded. If no election is
received within 90 days, the amount credited to the participant's stock purchase
account will be promptly refunded.
If a participant's employment terminates for any other reason, the
participant's participation in the Stock Purchase Plan immediately terminates
and the Company will promptly refund the amount credited to the participant's
account. The Company will have a 90-day option to reacquire any common stock
acquired by such participant under the plan at the fair market value of such
common stock.
TRANSFER AND ASSIGNMENT. The Stock Purchase Plan expressly provides that
options are not transferable other than by will or under the laws of descent and
distribution.
SUMMARY OF TAX CONSEQUENCES OF THE STOCK PURCHASE PLAN. The following is a
brief summary of the principal federal income tax consequences to participants
and the Company of stock options granted under the Stock Purchase Plan. The
summary is based on the provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), on the date of this Proxy Statement and on existing and
proposed regulations and rulings thereunder, all of which are subject to change.
As long as the Stock Purchase Plan and options granted under the Stock
Purchase Plan meet the requirements of Section 423 of the Code, a participant
will not recognize income upon the grant or the exercise of an option to
purchase common stock of the Company under the plan. A participant's initial
basis in any common stock acquired under the plan will be the exercise price,
85% of the fair market value of the common stock on the grant date. In the event
of any disposition of the common stock after two years from the date the option
was granted and after one year from the date the common stock is transferred to
a participant, or in the event of the participant's death at any time while
owning such common stock (a "qualified disposition"), the participant's gross
income for the taxable period including the qualified disposition will
generally, if there is a gain, include a compensation element and a capital gain
element (see discussion below of capital gains and losses). The participant's
gross income will include compensation income equal to the lesser of (1) the
excess of the fair market value of the common stock upon the qualified
disposition over the exercise price, or (2) 15% of the fair market value of the
common stock on the grant date. The amount included in the participant's gross
income as compensation income will be added to the basis of the participant's
common stock (except in the case of death, where the basis of the common stock
is adjusted to its fair market value). The participant will then recognize
capital gain income to the extent the proceeds from the disposition of the
common stock exceed the basis of the common stock.
In the event a participant disposes (excluding disposition by death) of
common stock acquired under the Stock Purchase Plan within two years or less
from the grant date or within one year or less from the date the common stock is
transferred to the participant (a "disqualifying disposition"), the
participant's gross income for the taxable period including such disqualifying
disposition will include compensation income equal to the difference between the
common stock's fair market value on the exercise date and the exercise price.
The compensation income is added to the basis of the stock to determine if any
gain or loss is recognized on the disqualifying disposition. As discussed above,
the Company can reacquire stock from any participant whose employment terminates
for any reason other than death or retirement pursuant to normal Company
policies. Thus, such a participant may be required by the Company to make a
disqualifying disposition of common stock.
Any loss recognized upon a qualifying or disqualifying disposition of
common stock will be a capital loss, which may only be deducted to the extent of
capital gains plus up to $3,000 per year.
The Company will not be entitled to a deduction upon the grant or exercise
of an option to purchase common stock of the Company under the Stock Purchase
Plan or upon disposition of common stock unless the common stock is disposed of
(excluding disposition by death) within two years or less from the grant date or
within one year or less from the date on which the common stock is transferred
to the disposing participant. If common stock is sold within either said period,
the Company will be entitled to a deduction at the same time and in the same
amount as the compensation income recognized by the disposing participant.
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It is intended that all options granted under the Stock Purchase Plan will
qualify for the tax treatment set forth above with respect to stock options
granted under Section 423 of the Code. In the event, however, that an option or
the plan fails to so qualify, options will be treated as nonqualified stock
options, with the consequences set forth below. A participant's gross income for
the taxable period including the exercise date will include compensation income
equal to the excess of the fair market value of the common stock on the exercise
date over the exercise price. A participant's basis in common stock received
upon exercise of a nonqualified option is the sum of the exercise price paid and
the compensation income recognized as a result of exercising the nonqualified
option. Any gain or loss recognized upon a subsequent disposition of the common
stock will be capital gain or loss.
The Company would be entitled to a deduction for federal income tax
purposes with respect to the exercise of a nonqualified stock option at the same
time and in the same amount as the compensation income recognized by the
participant, provided the Company satisfies all applicable withholding
requirements.
The maximum federal tax rate applicable to long-term capital gains
currently is 28%. Capital gain recognized upon the disposition of common stock
acquired under the Stock Purchase Plan will be long-term if disposed of more
than 1 year from the date acquired (not the date options are granted) and
short-term capital gain if disposed of in 1 year or less. To the extent capital
loss is recognized upon the disposition of common stock acquired under the plan,
it may be deducted only to the extent of capital gains plus $3,000 per year.
The IRS has publicly ruled that the compensation income recognized upon a
disqualifying disposition of stock acquired under an employee stock purchase
plan is not subject to withholding or FICA and FUTA taxes. The ruling should
apply equally to any compensation income recognized upon a qualifying
disposition of common stock. Note, however, that the IRS is reconsidering this
position. The Company would have a duty to withhold and be subject to FICA and
FUTA payments with respect to any options granted under the plan that fail to
qualify as options granted under an employee stock purchase plan under Section
423 of the Code. The Company's compensation deduction is conditioned upon
compliance with these duties.
VOTE REQUIRED. The adoption of the Stock Purchase Plan requires approval
by a majority of the votes cast at the meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ADOPTION OF THE YOUTH SERVICES
INTERNATIONAL, INC. FISCAL YEAR 1997 EMPLOYEE STOCK PURCHASE PLAN.
PROPOSAL TO APPROVE AND ADOPT THE YOUTH SERVICES INTERNATIONAL, INC.
1997 EMPLOYEE STOCK OPTION PLAN
The Board of Directors of the Company, at its meeting held on September 8,
1996, adopted resolutions declaring it advisable to adopt the Youth Services
International, Inc. 1997 Employee Stock Option Plan (the "Stock Option Plan"),
recommending to the shareholders the Stock Option Plan, and directing that the
Stock Option Plan be submitted to the shareholders for their approval at the
Annual Meeting.
In the opinion of the Board of Directors, the grant of stock options to
officers and key individuals of the Company and its subsidiaries is a vital
factor in the Company's ability to attract and retain effective and capable
individuals who contribute to the growth and success of the Company.
The Board of Directors determined that it was appropriate to propose a new
stock option plan. Proceeds received by the Company upon the exercise of stock
options granted under the Stock Option Plan will be available to the Company for
general corporate purposes. It is not possible at this time to determine the
number of persons who will be eligible for the grant of stock options under the
Stock Option Plan on or prior to September 8, 2006 or to determine the benefits
or amounts that will be received by or allocated to any individual or group.
Set forth below is a summary of certain of the provisions of the Stock
Option Plan and the tax consequences to the Company and individuals who receive
stock options under the Stock Option Plan.
SUMMARY OF THE STOCK OPTION PLAN. The Stock Option Plan is administered by
a Committee comprised of members of the Board of Directors. Five hundred
thousand (500,000) shares of the Company's Common
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<PAGE> 20
Stock will be reserved for issuance under the Stock Option Plan. The maximum
aggregate number of shares of Common Stock that may be issued upon the exercise
of Options pursuant to the Stock Option Plan to any individual may not exceed
150,000 shares. No member of the Committee and no member of the Board of
Directors who is not also an officer of the Company is eligible to participate
in the Stock Option Plan.
The Committee may grant options under the Stock Option Plan in its sole and
absolute discretion. The option price shall be the fair market value at the time
of the grant. Fair market value is defined as the fair market value of the
Company's Common Stock as determined by reference to the selling price or the
bid and asked price for shares of the Company's Common Stock on the applicable
market. Options under the Stock Option Plan may not be granted after September
8, 2006. Options may extend for a period of up to 10 years from the date of
grant with the actual term to be established by the Committee at the time of
grant. The Committee may provide in the Option agreement that each option
holder's right to exercise the Option shall vest in the option holder over such
period of time as the Committee shall determine in its discretion. In the event
an option holder voluntarily or involuntarily terminates employment or otherwise
ceases providing services to the Company or any of its subsidiaries, his Option
shall terminate as of such date, except that the Committee may determine in its
discretion that an option holder's Option should not terminate immediately and
may take such action in respect of the Option as the Committee may deem
appropriate, including extending the time during which the option holder is
entitled to purchase the shares of Common Stock subject to his Option. In the
event the option holder terminates due to retirement, the option holder shall
have the right, within ninety days of such termination, to exercise to purchase
the number of shares of Common Stock that the option holder was entitled to
purchase as of the date of termination. In no event may any Option be exercised
after the expiration of its term. Options are nontransferable and nonassignable
except by inheritance.
The purchase price for shares of Common Stock on the exercise of options
generally may be paid in cash, by delivering to the Company shares of Common
Stock already owned by the option holder that, together with any cash tendered
with the shares, will equal in value the full purchase price, or by other
cashless exercise methods specified in the Stock Option Plan. Permitting
stock-for-stock payments or other cashless exercises allows option holders to
acquire shares of Common Stock without incurring the costs that may arise when
the exercise price must be paid in cash. To the extent that stock-for-stock
payments or other cashless exercises make options granted under the Stock Option
Plan more financially attractive to option holders, the Stock Option Plan will
more effectively achieve its objectives.
Stock-for-stock payments or other cashless exercises reduce the cash
available to the Company as a result of option exercises. The Stock Option Plan,
however is not intended to be a capital-raising device, and it is anticipated
that the amounts of cash that the Stock Option Plan will produce, compared with
the Company's anticipated requirements for and other sources of capital, will
not be material.
The Committee has the discretion to grant either incentive stock options or
nonqualified stock options under the Stock Option Plan. In addition to the
general terms and conditions of the Stock Option Plan, incentive stock options
granted pursuant to the Stock Option Plan shall be subject to the following
additional terms and conditions: (i) incentive stock options may be granted only
to individuals who are employees of the Company or its subsidiaries; (ii) no
employee who beneficially owns more than 10% of the combined voting power of all
classes of stock of the Company shall be granted an incentive stock option; and
(iii) such other terms and conditions as are necessary to qualify the Option as
an "incentive stock option" under Section 422 of the Internal Revenue Code.
The Stock Option Plan is not qualified under Section 401(a) of the Code and
is not subject to any of the provisions of the Employee Retirement Income
Security Act of 1974. The Stock Option Plan contains provisions to prevent
dilution in case of stock dividends, stock splits and changes in the structure
of shares of the Common Stock. The Stock Option Plan may be amended, modified or
discontinued at any time by the Committee, except that the Committee does not
have the power to (i) revoke or alter the terms of any valid option previously
granted pursuant to the Stock Option Plan, (ii) increase the number of shares of
Common Stock to be reserved for issuance and sale pursuant to options granted
pursuant to the Stock Option Plan, (iii) change the maximum aggregate number of
shares of Common Stock that may be issued upon the exercise of options granted
pursuant to the Stock Option Plan to any single individual, (iv) decrease the
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exercise price of options granted pursuant to the Stock Option Plan, (v) change
the class of employee to whom options may be granted pursuant to the Stock
Option Plan, or (vi) provide for options exercisable more than 10 years after
the date granted.
SUMMARY OF TAX CONSEQUENCES OF THE STOCK OPTION PLAN. The following
discussion of the Federal tax consequences of the Stock Option Plan is based on
the Code provisions in effect on the date of this Proxy Statement, current
regulations thereunder, and existing administrative rulings of the Internal
Revenue Service. The discussion is limited to the tax consequences on United
States citizens and the tax consequences may vary depending upon the personal
circumstances of individual holders of options.
An option holder will not recognize income upon the grant of an option
under the Stock Option Plan, or at any other time prior to the exercise of the
option. Upon exercise of a nonqualified option, the option holder will recognize
compensation taxable as ordinary income in an amount equal to the excess of the
fair market value of the Common Stock on the date the option is exercised over
the option price of the Common Stock. This income is subject to withholding and
other employment taxes, if applicable. The Company then will be entitled to a
deduction in a like amount for compensation paid to the option holder. The
ordinary income recognized upon exercise of the option will constitute personal
service income for purposes of Federal income taxes. Participants will be
advised to consult their personal tax advisors concerning the tax consequences
of their participation in the Stock Option Plan and their exercise of options
granted to them.
A subsequent taxable disposition of shares of Common Stock acquired upon
exercise of a nonqualified option and held as a capital asset will result in a
capital gain or loss measured by the difference between the fair market value of
the stock on the date the option was exercised and the amount realized on later
disposition. The gain or loss will be long-term if the shares of Common Stock
are held for more than one year.
An option holder will not recognize income upon the grant or exercise of an
incentive stock option under the Stock Option Plan if (i) no disposition of the
Common Stock acquired pursuant to the option is made by the option holder within
two years from the date of the granting of the option or within one year after
the transfer of such Common Stock to the option holder and (ii) at all times
during the period beginning on the date the option was granted and ending on the
day three months before the date of such exercise, the option holder was an
employee of the Company. The difference between the fair market value of the
Common Stock on the date of exercise and the option price, however, is an item
of tax preference for purposes of the alternative minimum tax.
If an option holder who has acquired shares of Common Stock by the exercise
of an incentive stock option makes a taxable disposition of such Common Stock
after satisfying the above holding period requirements, the option holder
generally will recognize long-term capital gain or loss measured by the
difference between the option price and the selling price.
If an option holder who has acquired shares of Common Stock by the exercise
of an incentive stock option makes a taxable disposition of such Common Stock
within two years from the date of the granting of the option or within one year
after the transfer of such Common Stock to the option holder, a disqualifying
disposition occurs. In that event the option holder recognizes ordinary income
equal to the lesser of (i) the actual gain or (ii) the difference between the
exercise price and the fair market value of the Common Stock on the date of
exercise. This income is subject to withholding and other employment taxes. If a
loss is sustained on such a disposition, the loss will generally be treated as a
capital loss. If the amount received on the disqualifying disposition exceeds
the fair market value of the Common Stock on the date of exercise, the excess
will generally be either long- or short-term capital gain.
VOTE REQUIRED. The adoption of the Stock Option Plan requires approval by
a majority of the votes cast at the meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ADOPTION OF THE YOUTH SERVICES
INTERNATIONAL, INC. 1997 EMPLOYEE STOCK OPTION PLAN.
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PROPOSAL TO AMEND THE YOUTH SERVICES INTERNATIONAL, INC.
1995 DIRECTOR STOCK OPTION PLAN
The Board of Directors of the Company, at a meeting held on September 28,
1994, adopted resolutions declaring it advisable to adopt the Youth Services
International, Inc. 1995 Director Stock Option Plan (the "Director Plan"),
recommending to the shareholders the Director Plan, and directing that the plan
be submitted to the shareholders for their approval at the next annual
shareholder meeting. At the Annual Meeting of Shareholders held on November 14,
1994, the shareholders of the Company approved the Director Plan.
In the opinion of the Board of Directors, the grant of stock options to
members of the Board of Directors of the Company who are not officers or
employees of the Company (a "Non-Employee Director") is a vital factor in the
Company's ability to attract and retain effective and capable individuals who
contribute to the growth and success of the Company as members of the Board of
Directors. The Director Plan currently has only 75,000 shares of the Company's
Common Stock reserved and eligible for issuance under the plan. The Board of
Directors believes it is in the Company's best interest to amend the terms of
the Plan in order to increase from 75,000 to 500,000 the number of shares of the
Company's Common Stock reserved and eligible for issuance under the Director
Plan. Cynthia Hindman and Messrs. Ferris, Harrison, Black, Kanter and Davis
received options to purchase 7,500 shares of the Company's Common Stock during
the fiscal year 1996 under the plan. These options have been granted subject to
shareholder approval of the proposed amendment and, accordingly, such options
will become effective if the proposed amendment is approved at the Annual
Meeting.
Proceeds received by the Company upon the exercise of stock options granted
under the Director Plan will be available to the Company for general corporate
purposes. It is not possible at this time to determine the number or identity of
all of individuals who will be eligible for the grant of stock options under the
Director Plan on or prior to September 27, 2004.
Set forth below is a summary of the provisions of the Director Plan and the
tax consequences to the Company and the Directors who receive stock options
under the Director Plan.
SUMMARY OF THE DIRECTOR PLAN. The Director Plan is administered by a
Committee comprised of members of the Board of Directors.
Seventy-five thousand shares of the Company's Common Stock are reserved
currently for issuance under the Plan. If the proposed amendment is approved by
the shareholders, the number of shares reserved for issuance will be increased
from 75,000 shares to 500,000 shares. Each year, as of the anniversary date of
his appointment as a member of the Board of Directors, each Non-Employee
Director will automatically receive an option for 7,500 shares of the Company's
Common Stock.
The option price shall be the fair market value at the time of the grant.
Fair market value is defined as the fair market value of the Company's common
stock as determined by reference to the selling price or the bid and asked
prices for shares of the Company's common stock on the applicable market.
Options under the Director Plan may not be granted after September 27, 2004.
Options will extend for a period of 10 years from the date of grant.
Options may be exercised by the option holder at any time while he is
serving as a Non-Employee Director. If the option holder ceases to be a
Non-Employee Director for any reason other than death or retirement, the option,
to the extent it has not yet been exercised and has not yet expired, may be
exercised at any time within one year after the individual ceases to be a
Non-Employee Director. If the option holder ceases to be a Non-Employee Director
by reason of retirement or death, the option, to the extent it has not yet been
exercised and has not yet expired, may be exercised at any time within five
years after the option holder ceases to be a Non-Employee Director. If an option
holder who ceased being a Non-Employee Director for reasons other than death
shall die while holding an option which has not yet been fully exercised and has
not yet expired, his personal representatives, heirs or distributees may
exercise the option within the greater or (i) one year after the date of death,
or (ii) the remainder of the period that the option holder could have exercised
the option had he not died (but in no event after the option would have expired
by its terms).
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The purchase price for shares of Common Stock on the exercise of options
generally may be paid in cash, by delivering to the Company shares of Common
Stock already owned by the option holder that, together with any cash tendered
with the shares, will equal in value the full purchase price, or by other
"cashless" exercise methods specified in the Director Plan. Permitting
stock-for-stock exercises or other cashless exercises allows option holders to
acquire shares of Common Stock without incurring the costs that may arise when
the exercise price must be paid in cash. To the extent that stock-for-stock
payments or other cashless exercises make options granted under the Director
Plan more financially attractive to option holders, the Director Plan will more
effectively achieve its objectives.
Stock-for-stock payments reduce the cash available to the Company as a
result of option exercises. The Director Plan, however is not intended to be a
capital-raising device, and it is anticipated that the amounts of cash that the
Director Plan will produce, compared with the Company's anticipated requirements
for and other sources of capital, will not be material.
The Director Plan is not qualified under Section 401(a) of the Internal
Revenue Code and is not subject to any of the provisions of the Employee
Retirement Income Security Act of 1974. The Director Plan contains provisions to
prevent dilution in case of stock dividends, stock splits and changes in the
structure of shares of the Common Stock. The Director Plan may be amended,
modified or discontinued at any time by the Board of Directors, except that the
Board of Directors does not have the power to (i) revoke or alter the terms of
any valid option previously granted pursuant to the Director Plan, (ii) increase
the number of shares of Common Stock to be reserved for issuance and sale
pursuant to options granted pursuant to the Director Plan, (iii) decrease the
exercise price of options granted pursuant to the Director Plan, (iv) change the
class of persons eligible to receive options under the Director Plan, (v)
increase the maximum number of shares of Common Stock as to which options may be
granted under the Director Plan, (vi) increase the number of shares subject to
an option, or (vii) provide for options exercisable more than 10 years after the
date granted.
SUMMARY OF TAX CONSEQUENCES OF DIRECTOR PLAN. The following discussion of
the Federal tax consequences of the Director Plan is based on the Tax Code
provisions in effect on the date of this Proxy Statement, current regulations
thereunder, and existing administrative rulings of the Internal Revenue Service.
The discussion is limited to the tax consequences on United States citizens and
the tax consequences may vary depending upon the personal circumstances of
individual holders of options.
An option holder will not recognize income upon the grant of an option
under the Director Plan, or at any other time prior to the exercise of the
option. Upon exercise of an option, the option holder will recognize
compensation taxable as ordinary income in an amount equal to the excess of the
fair market value of the Common Stock on the date the option is exercised over
the option price of the Common Stock. The Company will be entitled to a
deduction in like amount for compensation paid to the option holder. The
ordinary income recognized upon exercise of the option will constitute "personal
service income" for purposes of Federal income taxes. Participants will be
advised to consult their personal tax advisors concerning the tax consequences
of their participation in the Director Plan and their exercise of options
granted to them.
A subsequent taxable disposition of shares of Common Stock acquired upon
exercise of an option and held as a capital asset will result in a capital gain
or loss measured by the difference between the fair market value of the stock on
the date the option was exercised and the amount realized on later disposition.
The gain or loss will be long-term if the shares of Common Stock are held for
more than one year.
VOTE REQUIRED. The amendment of the Director Plan requires approval by a
majority of the votes cast at the meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AMENDMENT OF THE YOUTH
SERVICES INTERNATIONAL, INC. 1995 DIRECTOR STOCK OPTION PLAN DESCRIBED ABOVE.
PROPOSED AMENDMENT TO THE CHARTER
The Board of Directors of the Company, at its meeting held on September 8,
1996, adopted resolutions declaring it advisable and in the best interest of the
Company to amend Article FIFTH of its Charter to increase the number of shares
of Common Stock that the Company has authority to issue from 20,000,000 to
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70,000,000, recommending to the shareholders the amendment of the Charter, and
directing that the amendment be submitted to the shareholders for their approval
at the annual meeting.
The Company is now authorized to issue 20,000,000 shares of Common Stock,
of which 9,164,722 shares were issued and outstanding at the close of business
on September 12, 1996. At that date, the Company had (i) 1,717,524 shares of
Common Stock reserved for issuance pursuant to outstanding options granted under
the Company's employee stock option and stock purchase plans, (ii) 171,733
shares of Common Stock reserved for issuance pursuant to Warrants to purchase
Common Stock which were issued in connection with the Company's 1992 private
placement of its 12% Subordinated Debentures due 2002, and (iii) 2,582,198
shares of Common Stock reserved for issuance pursuant to the Company's 7%
Convertible Subordinated Debentures due 2006 issued by the Company in January,
1996.
If the proposed amendment to the Company's Charter is approved, the
additional shares of Common Stock will be available for issuance at any time and
from time to time by the Board of Directors without the necessity of further
shareholder approval, except to the extent otherwise required by the rules and
regulations of the Nasdaq. The additional shares of Common Stock may be used by
the Company to raise additional capital funds through public or private
offerings, to acquire other companies or assets, to satisfy commitments under
the Company's stock option and stock purchase plans and convertible debenture
offerings and to enhance or expand the Company's business.
If the proposed amendment to the Company's Charter is approved, the
additional shares of Common Stock, when properly issued, will have the same
voting and other rights as the Company's presently authorized shares of Common
Stock. Holders of shares of Common Stock do not and will not have preemptive
rights to subscribe for any additional shares of capital stock of the Company
that may be approved for issuance. The Board of Directors will continue to have
the power to classify or reclassify any unissued stock by setting or changing
the preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption of stock.
Shareholders are urged to read carefully the text of the proposed amendment
to the Company's Charter as set forth in Exhibit A to this Proxy Statement. The
affirmative vote of at least a majority of the shares of Common Stock entitled
to vote at the meeting is required for the approval of the proposed amendment.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSED AMENDMENT OF THE
COMPANY'S CHARTER TO INCREASE THE AUTHORIZED NUMBER OF SHARES OF COMMON STOCK.
RATIFICATION OF THE SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
It is the practice of the Board of Directors of the Company to designate
the accounting firm that will serve as independent public accountants for the
Company. The Board of Directors has recommended that Arthur Andersen LLP, who
served during the past fiscal year be selected to audit the Company's books for
fiscal year ending June 30, 1997. Unless a contrary vote is indicated, the
Proxies solicited hereby will be voted for the ratification of the selection of
Arthur Andersen LLP as independent public accountants for fiscal year ending
June 30, 1997. If the selection of Arthur Andersen LLP is not ratified at the
meeting, the Board of Directors will consider the selection of other independent
public accountants for the fiscal year ending June 30, 1998.
A representative of Arthur Andersen LLP is expected to be present at the
1996 Annual Meeting of Shareholders, will be given the opportunity to make a
statement if he or she so desires, and will be available to respond to
appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE
SELECTION OF ARTHUR ANDERSEN LLP AS INDEPENDENT PUBLIC ACCOUNTANTS FOR THE
COMPANY FOR FISCAL YEAR ENDING JUNE 30, 1997.
SHAREHOLDER PROPOSALS FOR THE 1997 ANNUAL MEETING OF SHAREHOLDERS
Proper subjects for and the form of shareholder proposals are regulated by
Rule 14a-8, promulgated pursuant to Section 14(a) of the Securities Exchange Act
of 1934. Each shareholder proposal submitted to the Company must be received in
a timely fashion and should indicate the full and correct registered name
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and address of the shareholder making the proposal, the number of shares of
Common Stock owned by the proponent and the dates on which he or she acquired
such shares. If beneficial ownership is claimed, documentary proof of ownership
should be submitted with the proposal. In addition, a proponent must notify the
Company in writing of his or her intention to appear personally or by proxy at
the meeting to present the proposal for action.
Shareholder proposals to be considered for inclusion in the proxy statement
for the 1997 Annual Meeting of Shareholders must be received by the Company on
or before June 27, 1997. It is expected that the 1997 Annual Meeting of
Shareholders will be held on October 30, 1997.
OTHER MATTERS
Management does not know of any other matters that will come before the
meeting. If any other matters should come properly before the meeting or if any
of the persons named above as nominees for election as directors should decline
or be unable to serve as a director, the holders of the proxies are authorized
to vote the shares as they deem advisable. It is intended that the holders of
the proxies will act according to their best judgment.
By Order of the Board of Directors
Kendel Erhlich
Secretary
October 3, 1996
Owings Mills, Maryland
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EXHIBIT A
ARTICLES OF AMENDMENT
OF
YOUTH SERVICES INTERNATIONAL, INC.
Youth Services International, Inc., a Maryland corporation (the
"Corporation"), certifies as follows:
FIRST: The Articles of Incorporation of the Corporation are hereby amended
by deleting Article FIFTH in its entirety and replacing it with the following:
"FIFTH: The total number of shares of stock of all classes which
the Corporation has authority to issue is seventy million (70,000,000)
shares, of the par value of one cent ($0.01) each, all of which shares
are of one class and are designated Common Stock. The aggregate par
value of all shares of all classes of stock is seven hundred thousand
dollars ($700,000)."
SECOND: The total number of shares of stock of all classes that the
Corporation had authority to issue immediately before the foregoing amendment
was twenty million (20,000,000), of the par value of one cent ($0.01) each, all
of which shares were of one class designated common stock. The aggregate par
value of all shares of all classes of stock was two hundred thousand dollars
($200,000).
THIRD: The total number of shares of stock of all classes that the
Corporation has authority to issue after the foregoing amendment is seventy
million (70,000,000), of the par value of one cent ($0.01) each, all of which
shares are of one class designated common stock. The aggregate par value of all
shares of all classes of stock is seven hundred thousand dollars ($700,000).
FOURTH: This amendment was advised by the Board of Directors of the
Corporation and was approved by the stockholders of the Corporation.
IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment
to be signed in its name and on its behalf as of the day of
, 1996 by its Chief Executive Officer who acknowledges that these
Articles of Amendment are the act of the Corporation and that to the best of his
knowledge, information and belief and under penalties for perjury, all matters
and facts set forth in these Articles of Amendment are true in all material
respects.
ATTEST: YOUTH SERVICES INTERNATIONAL, INC.
By: (SEAL)
- - - --------------------------------- ---------------------------------
Kendel Ehrlich Timothy P. Cole
Secretary Chief Executive Officer
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HAVE YOU MOVED?
YOUTH SERVICES INTERNATIONAL, INC. 2 PARK CENTER COURT, SUITE 200
OWINGS MILLS, MARYLAND
21117
Please change my address on the books of Youth Services International, Inc.
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Name of Owner: (Print name exactly as it appears on Stock Certificate)
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From (Old Address): (Please Print)
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To (New Address): Street Address
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City or Town State Zip Code
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Date: Signature:
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Owner should sign name exactly as it appears on Stock Certificate.
If this form is signed by a representative, evidence of authority should be
supplied.
MAY BE ENCLOSED IN ENVELOPE WITH PROXY CARD
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YOUTH SERVICES INTERNATIONAL, INC.
P
2 PARK CENTER COURT, SUITE 200, OWINGS MILLS,MARYLAND 21117
R
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
O
The undersigned hereby appoints W. James Hindman and Timothy P. Cole,
X and each of them, Proxies of the undersigned, with power of substitution, to
vote all shares of capital stock of the Company that the undersigned could
Y vote if present at the 1996 Annual Meeting of Shareholders to be held
November 8, 1996, and at any adjournment or adjournments thereof. The
undersigned further gives the Proxies authority to vote according to their
best judgment in respect of any other matters properly coming before the
meeting.
Election of Directors. Nominees: W. James Hindman, Timothy P. Cole, Henry D.
Felton, J. Donald Black, Mayer Kanter, Esq.,
Cynthia K. Hindman, M.D., Martin V. Marshall,
and Jacques T. Schlenger
YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICES BY MARKING THE APPROPRIATE BOXES,
SEE REVERSE SIDE, BUT YOU NEED NOT MARK ANY BOXES IF YOU WISH TO VOTE IN
ACCORDANCE WITH THE BOARD OF DIRECTORS' RECOMMENDATIONS. PLEASE MARK, SIGN, DATE
AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED ENVELOPE.
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THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN. IF NO DIRECTION IS
Please mark your GIVEN, THIS PROXY WILL BE VOTED FOR ALL OF THE BOARD OF DIRECTORS' NOMINEES, FOR THE FISCAL YEAR 1997
/X/ vote as in this EMPLOYEE STOCK PURCHASE PLAN, FOR THE 1997 EMPLOYEE STOCK OPTION PLAN, FOR THE AMENDMENT OF THE
example. DIRECTOR STOCK OPTION PLAN, FOR THE AMENDMENT TO THE CHARTER OF THE COMPANY, AND FOR THE APPOINTMENT
OF ARTHUR ANDERSEN LLP AS INDEPENDENT ACCOUNTANTS.
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The Board of Directors recommends a vote FOR its nominees, FOR the Fiscal Year
1997 Employee Stock Purchase Plan, FOR the 1997 Employee Stock Option Plan, FOR
the Amendment of the Director Stock Option Plan, FOR the Amendment to the
Charter of the Company, FOR the Appointment of Arthur Andersen LLP as
Independent Accountants.
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1. Election of Directors / / FOR / / WITHHELD Vote for all nominees, except:
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(SEE REVERSE SIDE)
(CONTINUED FROM FRONT)
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2. Approval of the Fiscal Year 1997 Employee Stock Option Plan / / FOR / / AGAINST / / ABSTAIN
3. Approval of the Fiscal Year 1997 Employee Stock Option Plan / / FOR / / AGAINST / / ABSTAIN
4. Approval of Amendment of the 1995 Director Stock Option Plan / / FOR / / AGAINST / / ABSTAIN
5. Approval of Amendment to the Charter / / FOR / / AGAINST / / ABSTAIN
6. Approval of Appointment of Arthur Andersen, LLP as Independent / / FOR / / AGAINST / / ABSTAIN
Accountants
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Signature(s)
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Date
Please sign name(s) exactly as
printed hereon. If signing as
attorney, administrator,
executor, guardian, or trustee,
please give full title as such.
