<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED COMMISSION FILE NUMBER
MARCH 31, 1996 0-23284
- - ------------------- ----------------------
YOUTH SERVICES INTERNATIONAL, INC.
- - -------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 52-1715690
- - ------------------------ ---------------------------------------
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
2 PARK CENTER COURT, SUITE 200, OWINGS MILLS, MARYLAND 21117
- - -------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 410-356-8600
------------
NOT APPLICABLE
- - -------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR IF CHANGED
SINCE LAST REPORT)
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ON MARCH 31, 1995:
5,578,398
- - ---------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS) AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
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<PAGE> 2
YOUTH SERVICES INTERNATIONAL, INC.
INDEX - FORM 10-Q
MARCH 31, 1996
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
- - ------------------------------
Item 1. Financial Statements
Consolidated Statements of Income -
For the Three and Nine Month Periods Ended March 31,
1996 and 1995................................................................................. 2
Consolidated Balance Sheets - March 31, 1996 and
June 30, 1995................................................................................. 3
Consolidated Statements of Cash Flows -
For the Nine Month Periods Ended March 31,
1996 and 1995................................................................................. 5
Notes to Consolidated Financial Statements.................................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................................... 9
PART II - OTHER INFORMATION
- - ---------------------------
Item 1. Legal Proceedings...................................................................................... 14
Items 2 through 5 have been omitted since the items are either inapplicable
or the answer is negative.
Item 6. Exhibits and Reports on Form 8-K....................................................................... 14
Signatures.............................................................................................................. 15
</TABLE>
<PAGE> 3
YOUTH SERVICES INTERNATIONAL, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in 000's except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------- -------------------
1996 1995 1996 1995
--------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES $ 21,552 $13,818 $61,276 $37,416
--------- ------- ------- -------
OPERATING EXPENSES
Program 17,809 11,449 51,009 30,987
Amortization of goodwill 271 159 749 434
Program preopening and start-up cost 28 - 58 716
Selling, general and administrative 1,246 1,036 4,046 2,982
--------- ------- ------- -------
19,354 12,644 55,862 35,119
--------- ------- ------- -------
Income from operations 2,198 1,174 5,414 2,297
OTHER INCOME (EXPENSE)
Interest expense (691) (72) (1,335) (162)
Other 254 18 33 (18)
--------- ------- ------- -------
(437) (54) (1,302) (180)
--------- ------- ------- -------
INCOME BEFORE INCOME TAXES 1,761 1,120 4,112 2,117
PROVISION FOR INCOME TAXES 657 444 1,603 798
--------- ------- ------- -------
NET INCOME $ 1,104 $ 676 $ 2,509 $ 1,319
========= ======= ======= =======
EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE $ 0.18 $ 0.12 $ 0.42 $ 0.24
========= ======= ======= =======
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 6,233 5,687 5,967 5,582
========= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 4
Page 1 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in 000's)
ASSETS
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
--------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash & cash equivalents $ 14,970 $ 784
Cash held in escrow - 2,543
Restricted cash 517 656
Investments available for sale 9,811 -
Accounts receivable, net of allowance for doubtful
accounts of $703 and $175, respectively 15,136 8,804
Tax refund receivable 40 40
Notes receivable 4,273 -
Prepaid expenses, supplies and other 2,272 1,224
--------- --------
Total current assets 47,019 14,051
--------- --------
PROPERTY, EQUIPMENT AND IMPROVEMENTS:
Land 622 307
Leasehold improvements 4,166 2,280
Program equipment 3,392 1,135
Buildings 6,904 2,164
Office furniture and equipment 2,428 1,738
Vehicles 1,136 1,354
--------- --------
18,648 8,978
Accumulated depreciation (2,713) (1,726)
--------- --------
15,935 7,252
--------- --------
OTHER ASSETS:
Deposits 248 204
Other deferred charges 3,311 219
Goodwill, net 10,026 5,874
Consulting agreement 1,673 -
Non-compete agreements, net 303 116
Deferred tax asset 614 392
Management fee receivable 450 510
Other assets, net 213 432
--------- --------
16,838 7,747
--------- --------
Total assets $ 79,792 $ 29,050
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 5
Page 2 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in 000's)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
-------- --------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,190 $ 1,927
Accrued payroll 2,092 538
Other accrued expenses 4,109 1,121
Short-term borrowings 3,250 568
Current portion of long-term debt and
capital lease obligations 796 133
Deferred tax liability 60 38
-------- --------
Total current liabilities 11,497 4,325
DEFERRED REVENUE 47 102
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, net of current portion 8,019 5,981
12% SUBORDINATED DEBENTURES, net of
unamortized discount 981 974
7% CONVERTIBLE SUBORDINATED DEBENTURES 37,950 -
-------- --------
Total liabilities 58,494 11,382
-------- --------
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 20,000,000
authorized shares; issued and outstanding
5,578,398 at March 31, 1996 and
5,370,721 at June 30, 1995 56 54
Additional paid-in capital 17,664 16,364
Unrealized loss on investments (181) -
Retained earnings 3,759 1,250
-------- --------
Total shareholders' equity 21,298 17,668
-------- --------
Total liabilities and shareholders' equity $ 79,792 $ 29,050
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 6
Page 1 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in 000's)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-----------------------
1996 1995
------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,509 $ 1,319
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 2,255 1,296
Net change in operating assets and liabilities (1,574) (3,093)
Loss on disposal of assets 81 -
------- -------
Net cash provided by (used in) operating activities 3,271 (478)
------- -------
INVESTING ACTIVITIES:
Purchases of property, equipment and improvements, net (7,399) (2,931)
Purchase of available for sale securities (10,112) -
Purchase of notes receivable (4,273) -
Proceeds from sale of assets 378 -
Other deferred charges (3,269) (324)
Non-compete (250) -
Other assets (250) (267)
Purchase of goodwill (2,171) (1,584)
------- -------
Net cash used in investing activities (27,346) (5,106)
------- -------
FINANCING ACTIVITIES:
Proceeds from borrowings 8,206 2,050
Repayments of long-term debt and capital lease obligations (9,197) (168)
Proceeds from the issuance of convertible subordinated
debentures 37,950 -
Proceeds from the issuance of common stock under
the Employee Stock Option Plan and the Employee
Stock Purchase Plan, net 1,302 220
Other - (109)
------- -------
Net cash provided by financing activities 38,261 1,993
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 14,186 (3,591)
CASH AND CASH EQUIVALENTS, beginning of period 784 3,816
------- -------
CASH AND CASH EQUIVALENTS, end of period $14,970 $ 225
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 7
Page 2 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in 000's)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-----------------------
1996 1995
------- -------
<S> <C> <C>
CHANGE IN OPERATING ASSETS AND LIABILITIES:
Cash held in escrow $ 2,543 $ -
Restricted cash 139 (125)
Accounts receivable (6,387) (3,245)
Tax refund receivable - 126
Prepaid expenses, supplies and other (1,048) (772)
Deferred tax asset (222) (64)
Deposits (44) -
Management fee receivable 60 -
Deferred tax liability 142 -
Accounts payable and accrued expenses 1,800 1,124
Accrued payroll 1,443 (137)
------- -------
Net change in operating assets and liabilities $(1,574) $(3,093)
======= =======
SUPPLEMENTAL DISCLOSURES:
Noncash reduction of accounts receivable through
application of advance payments for services $ 55 $ 29
======= =======
Noncash asset acquisition through notes payable,
bank loan and mortgage assumption $ 9,315 $ 278
======= =======
Noncash unrealized loss on investments available for sale $ 302 $ -
======= =======
Cash paid for interest $ 887 $ 163
======= =======
Cash paid for taxes $ 1,589 $ 280
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 8
YOUTH SERVICES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL INFORMATION
In management's opinion, the accompanying interim unaudited
consolidated financial statements include all adjustments, consisting only of
normal, recurring adjustments, necessary for a fair presentation of Youth
Services International, Inc.'s (YSI's) financial position at March 31, 1996 and
the results of its operations for the three months and nine months ended March
31, 1996 and 1995 and its cash flows for the nine months ended March 31, 1996
and 1995. The accompanying consolidated balance sheet at June 30, 1995 is
presented herein as set forth in YSI's Annual Report on Form 10-KSB/A for the
year ended June 30, 1995. These statements are presented in accordance with
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in YSI's annual
consolidated financial statements have been omitted from these statements, as
permitted under the applicable rules and regulations. Readers of these
statements should refer to the consolidated financial statements and notes
thereto as of June 30, 1995 and 1994 and for the years then ended filed with
the Securities and Exchange Commission on Form 10-KSB/A.
Operating results for the three months and nine months ended
March 31, 1996 and 1995 are not necessarily indicative of the results that may
be expected for a full fiscal year.
2. SIGNIFICANT AGREEMENTS
In January, 1996, YSI issued 7% Convertible Subordinated
Debentures due February 1, 2006, in the principal amount of $37.95 million.
Interest is payable semi-annually commencing August 1, 1996. The Debentures,
not callable for three years, are convertible into shares of the Company's
Common Stock at a conversion price of $18.70 per share.
In January, 1996, YSI commenced operation of a 45 bed juvenile
boot camp program in Walters, Virginia for youth who have committed crimes or
are considered at risk of being adjudicated.
Effective March 1, 1996, YSI acquired the business and certain
assets of Tampa Bay Academy, L.P. ("Tampa Bay Academy) and a management
agreement contract with a related entity for $973,000 in cash, a note payable
in the amount of $3.25 million and the assumption of liabilities in the amount
of $325,000. Tampa Bay Academy is primarily a residential treatment center
licensed for 104 youth.
3. PRO FORMA INFORMATION
The unaudited consolidated results of operations for the three
months and nine months ended March 31, 1996 include the operating results of
Desert Hills of New Mexico which was acquired as of the close of business June
30, 1995. Tampa Bay Academy was acquired effective March 1, 1996; accordingly,
the unaudited consolidated results of operations for the three months and nine
months ended March 31, 1996 include the operating results of Tampa Bay Academy
for the one month period ended March 31, 1996. Assuming the acquisition of
Desert Hills of New Mexico and Tampa Bay Academy had been consummated at the
beginning of fiscal year 1995, the unaudited pro forma consolidated results of
operations would have been as follows:
7
<PAGE> 9
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ---------------------------
March 31, March 31,
---------------------- ---------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $23,101 $17,441 $67,576 $48,182
Net Income 1,116 792 2,593 1,842
Net Income per share .18 .14 .43 .33
Weighted average common and common
equivalent shares outstanding 6,233 5,687 5,967 5,582
</TABLE>
The above information reflects adjustments, net of tax
effects, to recognize additional goodwill amortization expense, interest
expense, lease expense, and depreciation expense on fair market value write-up
of fixed assets, as well as reflect reduced amortization expense on deferred
assets not acquired.
The unaudited pro forma information presented above may not be
indicative of the results of operations which actually would have occurred if
the transaction had taken place as of the beginning of fiscal year 1995.
4. SUBSEQUENT EVENTS
On April 11, 1996, the Company entered into a binding letter
of intent to acquire Three Springs, Inc. Three Springs conducts outdoor
adventure programs and residential treatment centers for over 500 youth. The
letter of intent contemplates that the parties will enter into a definitive
agreement and close the acquisition by June 30, 1996, subject to the Company's
due diligence review and the acquisition qualifying as a "pooling of interests"
for the Company. The letter of intent provides that YSI will acquire Three
Springs, Inc. for 800,000 shares of YSI Common Stock (1,200,000 shares after
giving effect to the three-for-two stock split discussed below).
On April 30, 1996, the Company's Board of Directors declared a
three-for-two split of the Company's outstanding common stock. Shareholders
will receive a stock dividend on the outstanding shares of common stock in the
amount of one-half of one share of common stock for each share of common stock
held by the shareholder on the record date. Cash will be paid in lieu of
fractional shares based upon the price of common stock on the record date of
the split. The number of shares outstanding after the split will be
approximately 8,453,000 based on the number of shares of YSI common stock
currently outstanding.
8
<PAGE> 10
YOUTH SERVICES INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
Youth Services International, Inc. ("YSI" or the "Company")
currently manages or operates nineteen residential and community-based programs
in twelve states. The Company operates its programs through wholly-owned
subsidiaries pursuant to contracts directly with government agencies and third
party payors or, alternatively, with unaffiliated not-for-profit entities which
have contracts with government agencies.
The Company's programs are provided pursuant to fixed per diem
contracts based upon program occupancy, management contracts, including those
management contracts with not-for-profit entities and various third party payor
contractual reimbursement contracts. The Company recognizes revenues under all
contracts as the services are performed. Under certain contracts, some
contract costs, including indirect costs, are subject to audit and adjustment
by negotiations with government or third party payor representatives. Under
these contracts, contract revenues are recorded at amounts which are expected
to be realized.
"Program contribution margin" is defined by the Company as
revenues less direct program expenses, goodwill, depreciation and other
amortization expense, but before program preopening costs, selling, general and
administrative expenses, interest and income taxes. Program contribution
margin, in general, is lower in the initial stages of a program's development
due to staffing requirements to obtain licensing and other direct program
expenses necessary for the operation of the program. The Company earns greater
program contribution margins, as a percentage of revenue, under some
contractual arrangements with unaffiliated not-for-profit entities because, in
certain of these arrangements, the not-for-profit entity is responsible for
some elements of operating the program and, therefore, incurs some of the costs
which are reimbursed to the not-for-profit without margin. Accordingly, the
amount of program contribution margin earned by the Company depends in part on
the nature and extent of the program elements for which it is responsible.
RECENT DEVELOPMENTS
In January, 1996, YSI issued 7% Convertible Subordinated
Debentures due February 1, 2006, in the principal amount of $37.95 million.
Interest is payable semi-annually commencing August 1, 1996. The Debentures,
not callable for three years, are convertible into shares of the Company's
Common Stock at a conversion price of $18.70 per share.
In January, 1996, YSI commenced operation of a 45 bed juvenile
boot camp in Walters, Virginia.
Effective March 1, 1996, YSI acquired the business and certain
assets of Tampa Bay Academy, L.P. ("Tampa Bay Academy) and a management
agreement contract with a related entity for $973,000 in cash, a note payable
in the amount of $3.25 million and the assumption of liabilities in the amount
of $325,000. Tampa Bay Academy is primarily a residential treatment center
licensed for 104 youth.
On April 11, 1996, the Company entered into a binding letter
of intent to acquire Three Springs, Inc. Three Springs conducts outdoor
adventure programs and residential treatment centers for over 500 youth. The
letter of intent contemplates that the parties will enter into a definitive
agreement and close the acquisition by June 30, 1996, subject to the Company's
due diligence review and the acquisition qualifying as a "pooling of interests"
for the Company. The letter of intent provides that YSI will acquire Three
Springs, Inc. for 800,000 shares of YSI Common Stock (1,200,000 shares after
giving effect to the three-for-two stock split discussed in "Notes to
Consolidated Financial Statements").
9
<PAGE> 11
RESULTS OF OPERATIONS
The following table sets forth selected items from the
Company's consolidated financial statements expressed as a percent of revenues:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Program expenses . . . . . . . . . . . . . . . . 83.9% 84.0% 84.5% 83.9%
Program contribution margin . . . . . . . . . . . 16.1% 15.9% 15.5% 16.0%
Selling, general and administrative expenses . . 5.8% 7.5% 6.6% 8.0%
Total operating expenses . . . . . . . . . . . . 89.8% 91.5% 91.2% 93.9%
Income from operations . . . . . . . . . . . . . 10.2% 8.5% 8.8% 6.1%
Net income . . . . . . . . . . . . . . . . . . . 5.1% 4.9% 4.1% 3.5%
</TABLE>
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31, 1995
Revenues. Revenues increased $7,734,000, or 55.9%, to $21,552,000 for
the three months ended March 31, 1996 from $13,818,000 for the three months
ended March 31, 1995. This increase in revenues reflects the acquisition of
Developmental Behavioral Consultants (DBC) in June 1995, Desert Hills of New
Mexico as of the close of business on June 30, 1995, and Tampa Bay Academy in
March 1996; management agreements the Company entered into with respect to
Desert Hills of Arizona, Desert Hills of Nevada, and College Station as of the
close of business on June 30, 1995; the opening of Woodward Academy in July
1995 and the opening of Camp Washington, the Virginia boot camp, in January
1996; and an expanded student population at existing academies. Revenues
attributable to programs that existed during the three month period ended March
31, 1995 increased by $15,866,000, or 14.8% for the three months ended March
31, 1996 due to the increased student populations in these programs.
Program Expenses. Program expenses, including goodwill amortization,
increased $6,472,000, or 55.8%, to $18,080,000 for the three months ended March
31, 1996 from $11,608,000 for the three months ended March 31, 1995. The
increase in program expenses reflects the increase in the number of programs
operated by the Company and the number of students in the Company's existing
programs. Salaries and related employee benefits constituted approximately
67.6% of program expenses for the three months ended March 31, 1996 compared to
65.0% of program expenses for the three months ended March 31, 1995.
Substantially all other operating expenses consist of the cost of food, medical
care, insurance, rent, utilities, vehicles, supplies, depreciation and goodwill
and other amortization. Generally, until a program reaches maturity, program
expenses decrease as a percentage of the related revenues.
Program Contribution Margin. The program contribution margin earned
by the Company for the three months ended March 31, 1996 was $3,472,000, or
16.1% of revenues, compared to $2,210,000, or 15.9% of revenues, for the
comparable prior period.
Program Preopening Costs. Program preopening costs represent the
non-recurring staffing, training and other direct costs of developing a program
prior to the actual program start date. The Company has determined it is
prudent to reflect these costs as expenses when they are incurred instead of
amortizing such costs over a period of time. Program preopening costs for the
three months ended March 31, 1996 of $28,000 represent preopening costs related
to the opening of the Virginia boot camp. The Company incurred no preopening
costs for the three months ended March 31, 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses consist of salaries, travel and other overhead
expenses. For the three months ended March 31, 1996, selling, general and
administrative expenses increased $210,000 to $1,246,000, or 5.8% of revenues,
from $1,036,000, or 7.5% of
10
<PAGE> 12
revenues, for the comparable prior period. The most significant component of
these costs relates to the compensation expense associated with program and
business professionals necessary for the development and oversight of the
Company's programs and operations. The decrease as a percentage of revenues
between periods is primarily attributable to the outsourcing of new business
development and the increase in revenue between periods.
Interest Expense. Interest expense increased to $691,000 from $72,000
for the three months ended March 31, 1996 from the comparable period in 1995.
This increase primarily resulted from interest payable on the debt incurred in
connection with the acquisitions of DBC and Desert Hills of New Mexico,
interest payable on the financing of the Company's personal property, and
interest payable on the 7% Convertible Subordinated Debentures.
Income Taxes. The provision for income taxes was $657,000 for the
three months ended March 31, 1996 and $444,000 for the three months ended March
31, 1995.
Net Income. Net income increased $428,000 from $676,000 for the three
months ended March 31, 1995 to $1,104,000 for the same period this fiscal year.
NINE MONTHS ENDED MARCH 31, 1996 COMPARED TO NINE MONTHS ENDED MARCH 31, 1995
Revenues. Revenues increased $23,860,000, or 63.8%, to $61,276,000
for the nine months ended March 31, 1996 from $37,416,000 for the nine months
ended March 31, 1995. This increase in revenues reflects a full nine months of
operations for Parc Place, Promise House, and Tarkio Academy which were
acquired or opened during the nine months ended March 31, 1995; the operations
of DBC, Desert Hills of New Mexico, Woodward Academy, the Virginia boot camp
and Tampa Bay Academy which were acquired or opened subsequent to the nine
months ended March 31, 1995; management agreements with respect to Desert Hills
of Arizona, Desert Hills of Nevada, and College Station which the Company
entered into subsequent to the nine months ended March 31, 1995; and an
expanded student population at existing academies. Revenues attributable to
programs that existed during the nine month period ended March 31, 1995
increased by $47,261,000, or 26.3%, for the nine months ended March 31, 1996
due to the increased average student population in these programs.
Program Expenses. Program expenses, including goodwill amortization,
increased $20,337,000, or 64.7%, to $51,758,000 for the nine months ended March
31, 1996 from $31,421,000 for the nine months ended March 31, 1995. The
increase in program expenses reflects the increase in the number of programs
operated by the Company and the number of students in the Company's existing
programs. Salaries and related employee benefits constituted approximately
65.7% of program expenses for the nine months ended March 31, 1996 compared to
60.2% of program expenses for the nine months ended March 31, 1995.
Program Contribution Margin. The program contribution margin earned
by the Company for the nine months ended March 31, 1996 was $9,518,000, or
15.5% of revenues, compared to $5,995,000, or 16.0% of revenues, for the
comparable prior period. The decrease is primarily due to the programs at
College Station, Texas, the Virginia boot camp and Woodward which were in the
early stages of operation during the period.
Program Preopening Costs. Program preopening costs for the nine
months ended March 31, 1996 of $58,000 represent preopening costs related to
the opening of the Virginia boot camp. Program preopening costs for the nine
months ended March 31, 1995 of $716,000 represent preopening costs related
primarily to the opening of Tarkio Academy.
Selling, General and Administrative Expenses. For the nine months
ended March 31, 1996, selling, general and administrative expenses increased
$1,064,000 to $4,046,000, or 6.6% of revenues, from $2,982,000, or 8.0% of
revenues, for the comparable prior period. The most significant component of
these costs relates to the compensation expense associated with program and
business professionals necessary for the development and oversight of the
11
<PAGE> 13
Company's programs and operations. The decrease as a percentage of revenues
between periods is primarily attributable to the outsourcing of new business
development and the increase in revenue between periods.
Interest Expense. Interest expense increased to $1,335,000 from
$162,000 for the nine months ended March 31, 1996 from the comparable period in
1995. This increase primarily resulted from increases in borrowings on the
Company's revolving line of credit to fund working capital needs, interest
payable on the debt incurred in connection with the acquisitions of DBC and
Desert Hills New Mexico, interest payable on the financing of the Company's
personal property, and interest payable on the 7% Convertible Subordinated
Debentures.
Income Taxes. The provision for income taxes was $1,603,000 for the
nine months ended March 31, 1996 and $798,000 for the nine months ended March
31, 1995.
Net Income. Net income increased $1,190,000 from $1,319,000 for the
nine months ended March 31, 1995 to $2,509,000 for the same period this fiscal
year.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had $24,781,000 in cash, cash
equivalents and investments available for sale and working capital of
$35,522,000. Net cash provided by operating activities was $3,271,000 for the
nine months ended March 31, 1996 compared to net cash used in operating
activities of $478,000 for the nine months ended March 31, 1995.
Approximately $27,346,000 was invested during the nine months ended
March 31, 1996 of which approximately $10,112,000 was invested in liquid
securities, $4,246,000 was used to fund the Tampa Bay Academy acquisition and
the purchase of a related mortgage note receivable, $3,400,000 was used to fund
the acquisition of Desert Hills New Mexico and the transactions with Introspect
with respect to Desert Hills Arizona and Desert Hills Nevada (including costs
incurred therewith), $2,827,000 of deferred financing costs were incurred in
connection with the 7% Convertible Subordinated Debt Offering and $1,000,000 was
advanced under the line of credit facility provided to Introspect. The
remaining approximately $5,761,000 of investments were made in leasehold
improvements, vehicles, computer equipment and other capital expenditures in
support of operating activities of existing programs compared to $5,106,000
invested during the prior year. Capital expenditures during the nine months
ended March 31, 1996 include approximately $758,000 of costs incurred in the
construction of 116 additional beds at Clarinda Academy, approximately $285,000
of costs incurred in the construction and renovation of additional beds and
classrooms at Tarkio Academy, approximately $123,000 of costs incurred in the
construction of additional beds at Woodward Academy, approximately $114,000 of
costs incurred in the renovation of the Virginia boot camp, approximately
$249,000 of costs incurred in the construction and renovation of additional beds
and classrooms at various other facilities, and approximately $261,000 of costs
incurred in renovations to the corporate conference center and offices.
The Company funded its cash needs with short-term and long-term
borrowings, cash generated from existing programs and funds raised from the 7%
Convertible Subordinated Debt Offering. As of March 31, 1996, the Company had
approximately $8,500,000 of credit available on its existing bank revolving
line of credit.
Total debt of $50,996,000 on March 31, 1996 consisted primarily of
$37,950,000 of 7% Convertible Subordinated Debentures, $3,250,000 for a note
payable in connection with the Tampa Bay acquisition, $2,200,000 for a capital
lease for the Company's personal property, $2,200,000 for a capital lease
assumed in the acquisition of Desert Hills of New Mexico, $1,731,000 for a
consulting note payable in connection with the Desert Hills transaction and
$981,000 of 12% subordinated debentures.
The Company believes the funds raised in its recent 7% Convertible
Subordinated Debt Offering and funds available under its revolving line of
credit, together with existing capital resources and cash flow from its
existing operations, will be sufficient to meet all indebtedness payments, to
make all planned capital additions and improvements and meet other working
capital needs for the next twelve months.
The Company had restricted cash of $517,000 as of March 31, 1996, of
which $389,000 was restricted pursuant to the Victor Cullen Academy contract
which provides for the payment of $5.00 per student per day to be
12
<PAGE> 14
deposited equally into a facility renewal and equipment fund and an aftercare
fund uses of which are subject to the advance budgetary approval of the State
of Maryland Department of Juvenile Justice. Any residual funds, as well as any
fixed assets or capital improvements purchased from these funds, revert to the
State of Maryland Department of Juvenile Justice upon contract termination.
The Company's collection experience on accounts receivable continues
to be favorable. The Company receives monthly payments in advance under the
Hickey School contract.
The increase in net accounts receivable of $6,332,000, as well as the
increase in accounts payable and accrued expense of $2,251,000, from June 30,
1995 to March 31, 1996 is primarily attributable to the addition of the Desert
Hills, Woodward, Virginia and Tampa Bay programs, the expansion of the Tarkio
program and the increased number of students in the Company's other programs.
The increase in notes receivable of $4,273,000 from June 30, 1995, to
March 31, 1996, is attributable to the purchase of a $3,273,000 mortgage note
receivable in connection with the acquisition of Tampa Bay Academy and the
advancing of $1,000,000 under the line of credit facility provided to
Introspect Healthcare Corporation.
13
<PAGE> 15
YOUTH SERVICES INTERNATIONAL, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings other than routine
litigation which the Company does not believe is significant to its future
financial position or results of operations.
ITEMS 2 THROUGH 5 have been omitted since the items are either inapplicable or
the answer is negative.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10 Letter of Intent Regarding the Acquisition of Three Springs, Inc.
11 Computation of Weighted Average Common and Common Equivalent Shares Outstanding
27 Financial Data Schedule
</TABLE>
(b) The registrant filed a Current Report on Form 8-K on April 10,
1996 to report its acquisition of certain assets and contractual rights and the
assumption of certain liabilities and contractual obligations from The Tampa
Bay Academy, Ltd. The financial statements filed included Audited Financial
Statements of The Tampa Bay Academy, Ltd. for the years ended December 31,
1995, 1994 and 1993; Audited Financial Statements of American Residential
Centers, Inc. for the years ended December 31, 1995, 1994, and 1993; Audited
Financial Statements of Desert Hills Center for Youth and Families of New
Mexico, Inc. for the year ended December 31, 1995 and unaudited financial
statements of Desert Hills Center for Youth and Families of New Mexico, Inc. as
of December 31, 1994; Pro Forma Financial Information of the Company for the
year ended June 30, 1995; and Pro Forma Financial Information for the six-month
period ended December 31, 1995.
14
<PAGE> 16
YOUTH SERVICES INTERNATIONAL, INC.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
YOUTH SERVICES INTERNATIONAL, INC.
By: /s/ William P. Mooney
-------------------------------------
William P. Mooney
Chief Financial Officer and Treasurer
Date: May 15, 1996
15
<PAGE> 17
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
YOUTH SERVICES INTERNATIONAL, INC.
-----------------
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1996
<PAGE> 18
YOUTH SERVICES INTERNATIONAL, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- - ----------- -----------
<S> <C>
10 Letter of Intent Regarding the Acquisition of
Three Springs, Inc.
11 Computation of Weighted Average Common and Common
Equivalent Shares Outstanding
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10
April 11, 1996
Mr. Thomas Michael Watson
President and Chief Executive Officer
Three Springs, Inc.
247 Chateau Drive, Suite A
Huntsville, Alabama 35801
Each of the Stockholders of Three Springs, Inc.
Three Springs, Inc.
247 Chateau Drive, Suite A
Huntsville, Alabama 35801
Dear Mr. Watson and Stockholders:
The purpose of this letter is to set forth the agreements of the parties
concerning Youth Services International, Inc.'s ("YSI") acquisition of the
business of Three Springs, Inc. and its subsidiaries ("Three Springs"). For
purposes of the preceding sentence, reference to Three Springs' subsidiaries
shall include, but not be limited to, Three Springs of North Carolina and the
Psychology Center of Atlanta (whether or not a "subsidiary"). The parties
agree as follows, subject to the conditions set forth herein:
1. YSI shall pay an aggregate of 800,000 shares (the "Shares") of
Common Stock, par value $.01 per share of YSI (the "Common Stock"), as
currently constituted (such number to be proportionately adjusted to account
for any YSI stock dividend, stock split or reorganization prior to closing),
for all of the outstanding stock and stock issuable pursuant to outstanding
options and warrants of Three Springs, Inc.("Three Springs") As used herein,
the term stockholder shall mean a holder of outstanding stock, and a holder of
any option or right to acquire, convert into or otherwise receive stock on a
tax-free basis. Such transaction shall be structured as a reverse triangular
merger whereby a subsidiary of YSI will merge with and into Three Springs with
Three Springs the surviving corporation . The parties agree that such
transaction (the "Transaction") shall qualify for treatment as a "pooling of
interests" under generally accepted accounting principles and the guidelines
and regulations of the U.S. Securities and Exchange Commission (the "SEC").
YSI agrees that the holder of options may exercise such option prior to closing
and that Three Springs may accept a personal note from the holder in a
principal amount equal to the aggregate exercise price (and such other terms
reasonably satisfactory to YSI) as consideration for such exercise, provided
such exercise or the acceptance of such note would not cause the Transaction to
not qualify as a pooling of interest. In the event the holder does not
exercise such option prior to closing, such option shall automatically convert
as of closing into an incentive option to acquire that portion of the Shares
equal to the ratio that the number of shares of Three Springs stock into which
such option is currently exercisable bears to the total number of shares of
Three Springs securities outstanding and issuable upon exercise
<PAGE> 2
Mr. Thomas Michael Watson
Stockholders of Three Springs, Inc.
April 11, 1996
Page 2
or conversion of any outstanding option, warrant, conversion right or other
right to receive Three Springs securities. YSI will obtain, or assist in
having obtained, releases of all personal guarantees that have been provided by
any stockholder to any person on behalf of any contract, debt or business of
Three Springs or to otherwise have such guarantees terminated and of no further
force and effect.
2. The Shares of YSI Common Stock shall be delivered to the
stockholders of Three Springs at Closing. YSI will issue the Shares to Three
Springs stockholders in transactions that are exempt from registration under
the Securities Act of 1933 and applicable state securities laws. Accordingly,
the Shares of YSI Common Stock issued to the Three Springs stockholders will
not be freely tradable. The stockholder's agree that they will not resell the
Shares without registration under the Securities Act of 1933 or an exemption
from registration therefrom. YSI will, at YSI's expense, provide the Three
Springs stockholders (or their donees, devisees, legatees or heirs) with demand
and "piggyback registration rights" . The demand rights may be exercised for
no more than three registrations, no two of which shall occur within any nine
month period, and only upon the request of stockholders who are demanding
registration with respect to at least 100,000 shares, provided that no demand
right may be exercised within 90 days of the effectiveness of any registration
conducted by YSI pursuant to which the shares registered thereby are to be sold
in an underwritten offering. The registration rights shall terminate on the
third anniversary of the closing. YSI will indemnify the selling stockholders
for all losses incurred as a result of any untrue statement of a material fact
in any prospectus or registration statement in connection with the registration
or omission to state a material fact necessary to make the statements contained
therein, in light of the circumstances under which such statements were made,
not misleading (except as a result of information supplied by Three Springs
stockholders for which such stockholders will indemnify YSI to the same
extent). YSI agrees to remain a reporting company under the 1934 Act and to
timely file all 1934 Act reports with the SEC so as to give full effect to the
registration rights and the public information requirements of Rule 144(c)
under the Securities Act of 1933. If any stockholder notifies YSI of its
desire to demand registration, YSI will notify all other Three Springs
stockholders and give them an opportunity to participate in the demand
registration or to otherwise meet the 100,000 share requirement. YSI will
"blue sky" the offering in states requested by the selling stockholders. YSI
agrees to prepare and file a registration statement pursuant to the demand
registration rights (within 30 days) following the receipt of a demand notice
for at least 100,000 shares and agrees to keep the registration effective for a
period of not less than four months (in the case of selling stockholders
requesting a shelf registration). In connection with these registration
rights, the only expenses required to be paid by Three Springs selling
stockholders shall be limited to
<PAGE> 3
Mr. Thomas Michael Watson
Stockholders of Three Springs, Inc.
April 11, 1996
Page 3
underwriters' discounts and commissions and applicable stock transfer taxes.
The registration rights provisions will contain other customary terms and
provisions including, without limitation, indemnification, "lock-ups,"
underwriter "cutbacks" and other such provisions.
3. At closing, Three Springs shall enter into a lease agreement with
Woodland Development Group, an Alabama General Partnership ("Woodland") for the
properties currently leased by Three Springs from Woodland pursuant to a lease
dated October 1, 1992 between Three Springs and Woodland on substantially the
terms of the October 1, 1992 lease except that (a) the term shall be twenty
years with four five-year renewal periods each at the option of Three Springs,
and (b) the annual rent shall be an amount equal to (i) an amount equal to the
current 1996 annual debt service payments (principal and interest) of Woodland
on such leased property (regardless of whether such debt is paid or continues
to be outstanding), plus (ii) an amount equal to a 10% annual return on the
original capital of Woodland in the leased property (the original capital shall
mean the cost of the property less the current 1996 outstanding debt secured by
the property regardless of whether such debt is paid or continues to be
outstanding), plus (iii) 44.6% of the "profit" to Woodland from the lease,
which annual rent shall be adjusted at the tenth and fifteenth anniversary
thereof and at each renewal based on the increase, if any, of the Consumer
Price Index at such time over, in the case of the first such adjustment, the
Consumer Price Index as of the date of the lease, and in the case of all
subsequent adjustments, the Consumer Price Index at the time of the prior
adjustment. For purposes hereof, the term "profit" shall mean the total rent
under clauses (i), (ii) and (iii) above less the total of the interest portion
of the debt service payments and the depreciation on the leased property
(calculated on a straight line basis).
4. YSI and Michael Watson must agree upon mutually acceptable
employment agreements for Michael Watson, Chris Burns and four (4) additional
Three Springs managers with a term of three years. YSI agrees that management
of the Three Springs division (i.e., the "executive" officers but not the board
members or other officers or employees) for a reasonable period following the
closing (not less than two years) will be constituted substantially as is
constituted as of the date hereof (as disclosed by Three Springs to YSI),
subject to termination for cause. YSI agrees that the employment agreements
referred to above will provide that such individuals will not be required to
move from Huntsville, Alabama as a condition to their continued employment
during the term of such agreement. YSI agrees that the Three Springs
management team will participate in YSI's stock purchase or stock option plans
that YSI may have from time to time and in which other employees of YSI holding
positions similar to those of such management team are eligible to participate.
<PAGE> 4
Mr. Thomas Michael Watson
Stockholders of Three Springs, Inc.
April 11, 1996
Page 4
5. Following the execution and delivery of this letter, Three Springs
and its stockholders shall provide YSI with access to the books and record of
Three Springs and shall assist YSI and its representatives who have a need to
know (including any prospective underwriter of YSI securities and its
representatives) in order to evaluate the transactions contemplated hereby
(whether such evaluation is for purposes of consummating these transactions or
otherwise) (the "YSI Representatives"), in their review of Three Springs, which
review shall be completed by May 31, 1996. All information provided by Three
Springs to YSI and the YSI Representatives and which is confidential and
proprietary to Three Springs is referred to herein as the "Three Springs
Confidential Information."
6. Except as required by law (including the press release referred to
in paragraph 8 below) or by the order of a court or governmental agency or
authority, without the prior written consent of Three Springs (or as permitted
by or consistent with the terms of the next sentence) YSI and the YSI
Representatives shall not use (except in connection with evaluating or
consummating the Transaction) or disclose to any person (a) the contents of any
Three Springs Confidential Information or summaries of such materials, (b) the
fact that the Three Springs Confidential Information has been made available to
YSI or that YSI has inspected any portion of the Three Springs Confidential
Information, and (c) any of the terms or conditions or other facts with respect
to the transactions contemplated hereby. Notwithstanding the foregoing, YSI
shall not be so restricted with respect to any Three Springs Confidential
Information if (a) YSI possessed such information prior to the time the
information was disclosed by Three Springs to YSI or the YSI Representatives,
(b) YSI or the YSI Representatives demonstrate that they have independently
developed such information subsequent to such time, or (c) such information
becomes available in the public domain by or through persons other than YSI or
the YSI Representatives or is disclosed to or made available to YSI or YSI
Representatives by a person who is not breaching any obligations concerning
confidentiality of such information to Three Springs.
7. Three Springs understands that YSI and YSI Representatives may
also provide Three Springs, its stockholders and their representatives, with
information concerning YSI and its operations which may be confidential and
proprietary to YSI (the "YSI Confidential Information") in connection with the
drafting of the definitive agreement. Except as required by law or by the
order of a court or governmental agency or authority, without the prior written
consent of YSI (or as permitted by or consistent with the terms of the next
sentence), Three Springs, its stockholders, and their representatives shall not
disclose to any person (a) the contents of any YSI Confidential Information or
summaries of such materials, (b) the fact that YSI Confidential Information has
been made available to Three Springs or that Three Springs has inspected any
portion of the YSI Confidential Information, (c) any of the terms, conditions,
or
<PAGE> 5
Mr. Thomas Michael Watson
Stockholders of Three Springs, Inc.
April 11, 1996
Page 5
other facts with respect to the transactions contemplated hereby. In addition,
Three Springs agrees that it and such persons shall not use any YSI
Confidential Information that is provided by YSI to Three Springs, its
stockholders or their representatives during the course of the drafting of the
definitive agreement and the progression to the closing of the transactions
contemplated hereby, for a competitive advantage against YSI or its
subsidiaries and affiliates without the prior written consent of YSI unless (a)
Three Springs possessed such information prior to the time the information was
disclosed by YSI to Three Springs, its stockholders or their representatives,
(b) Three Springs, its stockholders or their representatives demonstrate that
they have independently developed such information subsequent to such time, or
(c) such information becomes available in the public domain by or through
persons other than Three Springs, its stockholders or their representatives by
a person who is not breaching any obligations concerning confidentiality of
such information to YSI.
8. Notwithstanding anything contained herein to the contrary, YSI
shall be entitled to issue press releases or make any other public disclosure
if it reasonably determines it must do so to satisfy its obligations under
applicable securities laws and consults with Three Springs prior to making the
disclosure. Until a press release has been issued with respect to this letter
agreement, no party shall disclose the fact that this letter agreement has been
entered into and, after the issuance of such release, shall not disclose any
terms or agreements contained herein or with respect to the transactions
contemplated hereby other than those set forth in the release.
9. Three Springs acknowledges that YSI will be expending its
resources in conjunction with its due diligence process. In consideration of
this, Three Springs and each of its stockholders agrees that it will not
negotiate with any other party or offer or solicit any offer with respect to
(i) the sale of any of Three Springs' assets, (ii) the sale of any of its
capital stock, or (iii) any merger, share exchange or similar transactions
involving the acquisition of all or a material portion of Three Springs assets
or its business prior to the termination of this agreement pursuant to
paragraph 14 below.
10. During the period prior to Closing, Three Springs shall conduct
its affairs in the ordinary and usual course of business, shall not (i) pay any
bonuses or extraordinary compensation, (ii) pay any dividends or other
distributions to stockholders other than consistent with past ordinary and
usual practices as to timing and amount, (iii) incur any debt for moneys
borrowed, (iv) incur any substantial liability other than performance
obligations incurred in the ordinary and usual course of business or change in
the affairs of its business, (v) issue any stock or other securities or
options, warrants or other rights to acquire, convert into or otherwise receive
any securities of Three Springs or any of its subsidiaries, (v) amend the
articles of
<PAGE> 6
Mr. Thomas Michael Watson
Stockholders of Three Springs, Inc.
April 11, 1996
Page 6
incorporation or bylaws of Three Springs or any subsidiary, (vi) enter into,
terminate or amend any contract for the provision of services, any lease, or
any service contract without the consent of YSI (other than entering into
Material contracts for the provision of services in the ordinary and usual
course of business), (vii) enter into any new employee welfare or benefit plan
or arrangement or (viii) apply for any new, or amend or apply to amend any
existing, license, permit or other authorization to conduct its business, which
consent shall not be unreasonably withheld or delayed.
11. Three Springs shall promptly provide YSI with audited consolidated
financial statements of Three Springs for the fiscal years ending in 1992,
1993, 1994 and 1995 (and, at the sole expense of YSI, for such additional
periods as may be required by the Securities and Exchange Commission rules and
regulations) in the event that YSI determines it must include such financial
statements in any registration statement it may file with the Securities and
Exchange Commission covering YSI securities and as may be required thereafter
(but only so long as the terms of this letter remain in effect). Three Springs
and its stockholders shall also provide YSI with unaudited financial statements
of Three Springs for any applicable interim period. Three Springs and its
stockholders agree that YSI shall be entitled to include such audited and
unaudited financial statements in any filings YSI may make with the Securities
and Exchange Commission (including filings made by YSI prior to the time that a
definitive agreement is executed) if YSI reasonably determines that such
financial statements must be included in Securities and Exchange Commission
filings. Accordingly, Three Springs and its stockholders agree to provide
Three Springs' auditors with such information as may be necessary so that the
auditors will provide their consent or their opinion to be used by YSI in its
public filings with the Securities and Exchange Commission and shall otherwise
cause the auditors to provide any consents that may be required by the
Securities and Exchange Commission and any "comfort letters" (in each case, at
the expense of YSI) or other assurance with respect to audited and unaudited
Three Springs financial statements which may be reasonably requested by any
underwriter of YSI securities.
12. Three Springs and its stockholders understand and acknowledge that
YSI is a public company and that its equity securities are traded publicly.
Accordingly, Three Springs and its stockholders understand and acknowledge that
it would be unlawful for Three Springs and its stockholders to purchase or sell
YSI securities or to provide relatives or any other third parties with
information concerning YSI or the transactions contemplated hereby until such
time as full and complete disclosure of the transactions has been made to the
public in accordance with applicable securities laws and regulations.
13. The parties covenant and agree to use good faith efforts to enter
into a definitive merger agreement together with
<PAGE> 7
Mr. Thomas Michael Watson
Stockholders of Three Springs, Inc.
April 11, 1996
Page 7
applicable employment agreements, leases and other related agreements,
certificates and documents that contain terms consistent with the agreements of
this letter, as well as customary provisions for transactions of this nature.
In that regard, the stockholders will severally provide certain
indemnifications to YSI, including indemnification with respect to breaches of
representations and warranties which shall expire if a claim has not been made
in respect of the representation and warranty by no later than the first
anniversary of closing (except for the indemnity with respect to the
representation regarding title to their respective stock of Three Springs).
The selling stockholders' indemnification obligations shall be net of the tax
effects to YSI or the Three Springs subsidiary as a result of the indemnified
matter and net of insurance proceeds provided that any indemnity payment shall
be grossed up for any tax that would be incurred by YSI on such payment, if
any. Each Three Springs selling stockholder's pro rata portion of the
indemnification obligation shall be satisfied first by the delivery of YSI
Common Stock held by such stockholder, if any, and the remainder, subject to
the maximum set forth below, in cash. YSI will indemnify the stockholders
against losses from breaches of representations, warranties and covenants in a
manner consistent for transactions of this type with customary terms and
limits. The party or parties required to provide the indemnification shall
have the right to control and defend all third party proceedings for which
indemnification is sought. YSI will not seek indemnification against the Three
Springs stockholders until the aggregate of all claims for indemnification
exceed $250,000 and then only to the extent the indemnification exceeds
$250,000. In addition, each selling stockholder's liability for
indemnification shall be limited to the purchase price payable to him or her at
closing. Indemnification shall be the sole and exclusive remedy of the
parties in the event of any breach of representation or warranty. YSI agrees to
cause Three Springs to continue to indemnify and defend the present and former
directors, officers, employees and agents of Three Springs against all
liabilities and expenses arising out of actions or omissions occurring at or
prior to the effective time to the full extent permitted under the Alabama
Business Corporation Act and the Articles of Incorporation of Three Springs, as
amended. The parties agree that they shall proceed in good faith efforts to
negotiate and execute definitive agreements in connection with the Transaction
(including employment agreements and other agreements contemplated hereby) by
May 31, 1996 and to consummate the transactions that are the subject of this
letter. The definitive agreement shall supersede this agreement and all of the
terms hereof shall become null and void upon the execution of the definitive
agreement. Notwithstanding the foregoing, the parties hereby agree and
acknowledge that the obligations of this letter are intended to create legally
binding obligations between the parties (and shall be binding upon their
successors and donees, devisees, legatees and heirs), provided that (a) the
covenants of YSI are subject to (i) the completion of due diligence by YSI
without discovery that
<PAGE> 8
Mr. Thomas Michael Watson
Stockholders of Three Springs, Inc.
April 11, 1996
Page 8
the audited financial statements for the years ended December 31, 1992, 1993
and 1994 of Three Springs previously delivered to YSI fail to fairly present
the financial condition, results of operation or cash flows of Three Springs
for the dates or periods covered thereby, or any material misstatement or
misrepresentation of the business or prospects of Three Springs or its
subsidiaries by any employee, agent or representative of Three Springs, which
condition will be deemed to be satisfied if YSI does not raise any such
discovery on or prior to May 31, 1996, (ii) the transaction qualifying for
treatment as a "pooling of interest" under generally accepted accounting
principles and SEC regulations and guidelines, (iii) no discovery of any fact,
circumstance or event that has had or could reasonably be expected to have a
material adverse effect on the financial condition, business or prospects of
Three Springs, (iv) obtaining all material consents, approvals and
authorizations required to be obtained in order to continue the effectiveness
or enforceability of any license, permit or material contract of Three Springs
after the Transaction, and (v) the execution of the employment agreements
referenced in paragraph 4 above; and (b) the covenants of Three Springs are
subject to (i) the Transaction qualifying as a tax-free exchange under the
Internal Revenue Code, provided that such condition shall not fail solely by
reason of any action taken by Three Springs or any stockholder since the date
of this letter and provided further that the condition will be deemed to be
satisfied if Three Springs or the stockholders do not notify YSI of any failure
of this condition prior to April 22, 1996, and (ii) no event occurring since
December 31, 1995 that has had or could reasonably be expected to have a
material adverse effect on the financial condition, business or prospects of
YSI.
14. Unless a definitive agreement has been entered into, upon the
earlier to occur of June 30, 1996 or the determination by either party to not
proceed with the consummation of the transactions contemplated hereby due to a
failure of a condition to such party's obligations set forth in paragraph 13
above, this agreement shall terminate except as to any obligations relating to
confidentiality, which shall survive such a termination, and except for
breaches of the binding terms of this letter prior to the termination. In the
event this letter agreement terminates and the parties do not enter into a
definitive agreement, YSI will promptly return any and all written Three
Springs Confidential Information to Three Springs and Three Springs will
promptly return any and all written YSI Confidential Information to YSI
including, in each case, any summaries thereof.
15. The stockholders and officers of Three Springs who are
"affiliates" shall enter into standard "affiliates agreements" containing
standard and customary terms for such agreements entered into in connection
with transactions to be treated as "pooling of interests." In this regard, the
stockholders and officers of Three Springs who are affiliates agree that they
<PAGE> 9
Mr. Thomas Michael Watson
Stockholders of Three Springs, Inc.
April 11, 1996
Page 9
shall not purchase or sell YSI Common Stock from the date hereof through the
date YSI discloses financial results for a period of thirty days of combined
operations of YSI and Three Springs following closing and during such period
such affiliates shall not purchase, sell, encumber or otherwise transfer any
interest in any Three Springs equity securities and Three Springs shall not
issue any equity securities or any debt or other securities convertible into
equity securities or any options, warrants or other rights to purchase equity
securities. YSI agrees that it will not take any action from the date of this
letter, including after the Closing, that will cause the Transaction to not
qualify as a Tax-Free Exchange and does not know of any action taken or failed
to be taken by YSI that would cause the Transaction to not qualify as a
tax-free exchange.
16. YSI and Three Springs each hereby represents and warrants that it
has full corporate power and authority to enter into this letter agreement and
that upon the execution hereof, this letter shall be a binding obligation of
such party enforceable in accordance with its terms. Each of the Stockholders
agrees that he or she has full capacity and authority to enter into this
agreement and that he or she will vote all of his/her shares of Three Springs,
Inc. in favor of this letter agreement, the definitive agreement and/or the
Transaction in any vote of the stockholders of Three Springs, Inc. on any such
matters brought before any meeting, or written consent, of the stockholders of
Three Springs, Inc. Three Springs and the stockholders warrant that the
undersigned individuals executing this agreement as stockholders of Three
Springs constitute all of the stockholders of Three Springs and there are no
other persons that own equity securities of Three Springs or options, warrants
or other rights to acquire or receive such equity securities.
<PAGE> 10
Mr. Thomas Michael Watson
Stockholders of Three Springs, Inc.
April 11, 1996
Page 10
17. Each party agrees to pay its own expenses in connection with the
Transaction provided that Three Springs agrees (a) that it will not pay any
fees, commissions and expenses of any finder, financial advisor or investment
banker engaged by the stockholders or Three Springs for purposes of evaluating
or advising with respect to this Transaction or any similar transaction except
for the fees and expenses of J.C. Bradford & Co. under and in accordance with
its engagement letter with Three Springs dated , and (b) all
legal and accounting fees and expenses incurred in contemplation or in
connection with this Transaction that are paid by Three Springs shall not
exceed $100,000.
If the foregoing accurately sets forth our agreements, so indicate by
signing below.
Very truly yours,
YOUTH SERVICES INTERNATIONAL, INC.
By: /s/ W.J. HINDMAN
-------------------------------
W. J. Hindman, Chairman & CEO
Agreed and Accepted this ___ day of April, 1996.
THREE SPRINGS, INC.
By: /s/ THOMAS MICHAEL WATSON
-------------------------------------
Thomas Michael Watson
President and Chief Executive Officer
STOCKHOLDERS
/s/ SUSAN PROCTOR
- - -----------------
Name:
/s/ ROBERT FALLON
- - -----------------
Name:
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
<PAGE> 11
Mr. Thomas Michael Watson
Stockholders of Three Springs, Inc.
April 11, 1996
Page 11
[SIGNATURES CONTINUED FROM PREVIOUS PAGE]
/s/ JAMES H. PAYNE
- - ----------------------------
Name:
/s/ ALLEN COLEMAN SHARP *
- - ----------------------------
Name:
/s/ KAREN SHARP MULKEY *
- - ----------------------------
Name:
/s/ MARJORIE I. SHARP Trustee Sharp Trust
- - ----------------------------
Name:
/S/ BARBARA S. BUICE-WATSON
- - ----------------------------
Name:
/s/ WILLIAM W. CAMPBELL Trustee Campbell Trust
- - ----------------------------
Name:
/s/ STANLEY MINKINOW
- - ----------------------------
Name:
/s/ STEVE KOSLOW Trustee Koslow Family Trust
- - ----------------------------
Name:
- - ----------------------------
Name:
<PAGE> 1
EXHIBIT 11
COMPUTATION OF PRIMARY WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT SHARES OUTSTANDING
YOUTH SERVICES INTERNATIONAL, INC.
<TABLE>
<CAPTION>
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
3/31/96 3/31/95 3/31/96 3/31/95
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average shares
outstanding 5,504,607 5,104,887 5,444,351 5,071,720
Weighted average common stock
equivalents outstanding:
Common stock
Stock options 979,113 847,850 925,017 751,366
Employee stock purchase options 97,572 81,817 103,875 53,528
Warrants 154,600 154,600 154,600 154,600
----------- ---------- ---------- ----------
Total 1,231,285 1,084,267 1,183,491 959,494
----------- ---------- ---------- ----------
Assumed treasury stock repurchases:
Common stock
Stock options 364,587 331,129 497,870 298,771
Employee stock purchase options 97,572 69,363 103,875 46,204
Warrants 40,641 102,034 58,744 103,886
----------- ---------- ---------- ----------
Total 502,800 502,526 660,488 448,861
----------- ---------- ---------- ----------
Net weighted average common stock
equivalents 728,485 581,741 523,003 510,633
----------- ---------- ---------- ----------
Total fully diluted weighted average
common stock and common stock
equivalents outstanding 6,233,093 * 5,686,628 5,967,354 * 5,582,353
=========== ========== ========== ==========
</TABLE>
* Note: The fully-diluted calculation has not been presented as the amount of
dilution is less than 3%.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 14,970
<SECURITIES> 9,811
<RECEIVABLES> 15,839
<ALLOWANCES> 703
<INVENTORY> 0
<CURRENT-ASSETS> 47,019
<PP&E> 18,648
<DEPRECIATION> 2,713
<TOTAL-ASSETS> 79,792
<CURRENT-LIABILITIES> 11,497
<BONDS> 46,950
0
0
<COMMON> 56
<OTHER-SE> 21,242
<TOTAL-LIABILITY-AND-EQUITY> 79,792
<SALES> 0
<TOTAL-REVENUES> 61,276
<CGS> 0
<TOTAL-COSTS> 51,067
<OTHER-EXPENSES> 4,795
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,335
<INCOME-PRETAX> 4,112
<INCOME-TAX> 1,603
<INCOME-CONTINUING> 2,509
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,509
<EPS-PRIMARY> .42
<EPS-DILUTED> 0
</TABLE>
