<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report -- October 17, 1996
YOUTH SERVICES INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Maryland 0-23284 52-1715690
- -------------- -------------- -------------------
(State of (Commission (IRS Employer
Incorporation) File Number) Identification No.)
</TABLE>
2 Park Center Court, Suite 200, Owings Mills, Maryland 21117
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(410) 356-8600
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former Address)
================================================================================
<PAGE> 2
On September 25, 1996, the Registrant filed a Current Report on Form
8-K to report its exercise of its option, pursuant to an Option Agreement, to
purchase all of the outstanding capital stock of Introspect Healthcare
Corporation. The audited financial statements for the year ended June 30,
1996, and the pro forma consolidated financial statements required by Item 7 of
Form 8-K were not available at the time of the original filing. This Form
8-K/A amends the original filing to include the audited financial statements
and pro forma information in Item 7 hereof.
Item 2. ACQUISITION OR DISPOSITION OF ASSETS
Youth Services International, Inc. ("YSI"), exercised its option,
pursuant to an Option Agreement dated as of June 30, 1995 and purchased all of
the outstanding capital stock of Introspect Healthcare Corporation
("Introspect") from Diversification Association, Inc. for a purchase price of
$4,000,000 in cash. YSI consummated its exercise of the option pursant to an
Option Exercise Agreement dated September 11, 1996.
Concurrent with this acquisition, YSI retired $9,693,000 of
Introspect's indebtedness. This indebtedness was retired utilizing funds drawn
against YSI's existing credit facilities which carry a lower rate of interest
than those of Introspect. In addition, unamortized costs related to the
purchase of the Option, notes and other receivables due to the Company from
Introspect and costs related to the exercise of the Option, in the aggregate
amount of approximately $3,000,000 million will be considered as part of the
purchase price.
On June 30, 1995, in conjunction with the Company's acquisition of
Desert Hills New Mexico from Introspect, the Company acquired the Option and
concurrently entered into a management agreement to manage Introspect for
a period of five years. As a result of the "early" exercise of the Option (the
Option was exercisable at any time during the five year period) and the
significant degree of Introspect's financial dependence on the Company,
accounting principles require that the operating results of Introspect be
consolidated with the Company's statement of income for the fiscal year 1996.
Upon consolidation of Introspect's operations, and after eliminating certain
intercompany transactions, the Company recorded additional revenues of
$16,131,000, expenses of $16,427,000 and a loss of $296,000 for the fiscal year
1996. This transaction will be recorded using the purchase method of
accounting with effect as of September 1996. As a result, the Company's
balance sheet for the fiscal year 1996 does not reflect the acquisition of
Introspect pursuant to the exercise of the Option.
Introspect is a provider of services to children and adolescents with
two campuses in Tucson, Arizona. Introspect operates a residential treatment
center for boys at the north campus, and a residential treatment center for
girls at the south campus, which is approximately five miles from the north
campus. These facilities have 90 beds in the aggregate and there is an
accredited school at each location. In addition, Introspect operates a
psychiatric hospital, a co-educational pediatric residential treatment center
(10 beds), a pediatric medical clinic (4 beds), a group home (6 beds) and
a partial hospitalization program. Introspect also operates Juvenile Justice
Programs, which include a 12-bed locked and transition female unit, a 10-bed
parole violator unit and a 14-bed male transition unit.
As a result of the exercise of the Option, the Management Agreement,
pursuant to which YSI had managed the Introspect operation since July 1, 1995
has been terminated.
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
(a)&(b) Financial Statements of Businesses Acquired and Pro
Forma Financial Information
Audited financial statements for the year ended June
30, 1996, and the pro forma financial statements required by Item 7(b) were not
available at the time of the original filing. Pursuant to Item 7(a)(4) and
7(b)(2) of Form 8-K, the following financial statements and pro forma financial
information are hereby filed on this Form 8-K/A:
Audited Financial Statements of Introspect Healthcare
Corporation and Subsidiaries as of and for the year ended June 30,
1996.
Pro Forma Consolidated Statement of Income for the year ended June 30,
1996, and Pro Forma Consolidated Balance Sheet as of June 30, 1996.
(c) Exhibits
Exhibit No. Description of Exhibits
- ----------- -----------------------
2.1 Option Agreement, dated as of June 30, 1995,
by and among Youth Services International,
Inc., Diversification Association, Inc.,
<PAGE> 3
Introspect HealthCare Corporation, Desert
Hills Center for Youth and Families of
Nevada, Inc., Ocotillo Pediatric Services,
Inc., Desert Hills Center for Youth and
Families, Inc., Desert Hills Center for Youth
and Families of Hawaii, Inc., Anna Ash,
William Ash, Manuel G. Bracamonte, Tamatha
Bracamonte, Donald V. Campbell, Mary K.
Campbell, Donna Heidinger, Guy W. Heidinger,
Daniel R. Lopez, Nancy Lopez, Elizabeth
McCusker, Fletcher J. McCusker, Judy McKee,
and Michael McKee.*
2.2 Option Exercise Agreement, dated as of
September 11, 1996, by and among Youth
Services International, Inc., Diversification
Association, Inc., Introspect HealthCare
Corporation, Desert Hills Center for Youth
and Families of Nevada, Inc., Ocotillo
Pediatric Services, Inc., Desert Hills Center
for Youth and Families, Inc., Desert Hills
Center for Youth and Families of Hawaii,
Inc., Anna Ash, William Ash, Manuel G.
Bracamonte, Tamatha Bracamonte, Donald V.
Campbell, Mary K. Campbell, Donna Heidinger,
Guy W. Heidinger, Daniel R. Lopez, Nancy
Lopez, Elizabeth McCusker, Fletcher J.
McCusker, Judy McKee, and Michael McKee. **
The Exhibits to the Option Exercise Agreement
have been omitted from this filing. The
Company hereby undertakes to furnish these
materials to the Securities and Exchange
Commission upon request.
7.1 Audited Financial Statements of Introspect
Healthcare Corporation and Subsidiaries as of
and for the year ended June 30, 1996.
7.2 Pro Forma Consolidated Statement of Income
for the year ended June 30, 1996, and Pro
Forma Consolidated Balance Sheet as of June
30, 1996.
- 2 -
- -------------------
* Incorporated by reference to the Company's Current Report on Form 8-K
dated July 19, 1995 (as filed with the Commission on August 3, 1995).
The Exhibits to the Option Agreement (which contain certain information
called for by the terms of the representations and warranties contained
in the Option Agreement) were omitted from such Form 8-K and this
filing. The Company hereby undertakes to furnish these materials to
the Securities and Exchange Commission upon request.
** Previously Filed.
<PAGE> 4
YOUTH SERVICES INTERNATIONAL, INC.
S I G N A T U R E
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
YOUTH SERVICES INTERNATIONAL, INC.
By: /s/ William P. Mooney
---------------------------------
William P. Mooney
Chief Financial Officer
Date: October 17, 1996
- 3 -
<PAGE> 1
EXHIBIT 7.1
INTROSPECT HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1996
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
<PAGE> 2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Introspect HealthCare Corporation:
We have audited the accompanying consolidated balance sheet of INTROSPECT
HEALTHCARE CORPORATION and subsidiaries (an Arizona corporation) as of June 30,
1996, and the related consolidated statements of operations, changes in
stockholder's deficit and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Introspect
HealthCare Corporation and subsidiaries as of June 30, 1996, and the results of
their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
Tucson, Arizona,
September 6, 1996 (except with respect
to the matter discussed in Note 11, as to which
the date is September 11, 1996).
<PAGE> 3
INTROSPECT HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash $ 236,795
Restricted cash (Note 3) 1,145,154
Accounts receivable, less allowance of $211,000 for
doubtful accounts (Note 5) 2,313,133
Prepaid expenses, deposits and other 288,851
-----------
Total current assets 3,983,933
-----------
PROPERTY AND EQUIPMENT (Notes 2, 4 and 7):
Land and improvements 464,930
Buildings and improvements 5,882,984
Equipment and furniture 1,787,913
-----------
Total property and equipment, at cost 8,135,827
Less: Accumulated depreciation (2,971,728)
-----------
Net property and equipment 5,164,099
-----------
OTHER ASSETS:
Deferred financing costs and other, net (Note 2) 173,476
-----------
Total assets $ 9,321,508
===========
</TABLE>
LIABILITIES AND STOCKHOLDER'S DEFICIT
<TABLE>
<S> <C>
CURRENT LIABILITIES:
Line of credit (Notes 3 and 5) $ 1,136,346
Accounts payable 595,794
Accounts payable to related party (Note 6) 610,695
Accrued liabilities 1,027,922
Patient refunds 852,971
Current portion of long-term debt (Note 4) 2,857,856
Current portion of obligations under capital lease (Note 7) 50,369
Property taxes payable 523,615
-----------
Total current liabilities 7,655,568
LONG-TERM DEBT, less current portion (Note 4) 8,163,618
OBLIGATIONS UNDER CAPITAL LEASE, less current portion (Note 7) 4,673
-----------
Total liabilities 15,823,859
-----------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 9)
STOCKHOLDER'S DEFICIT:
Common stock, $1 par value, 100,000,000 shares
authorized, 52,500 shares issued and outstanding 52,500
Additional paid-in capital 225,743
Accumulated deficit (6,780,594)
-----------
Total stockholder's deficit (6,502,351)
-----------
Total liabilities and stockholder's deficit $ 9,321,508
===========
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
<PAGE> 4
INTROSPECT HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1996
<TABLE>
<S> <C>
REVENUE:
Net patient service revenue (Note 9) $ 15,928,987
Other revenue 239,975
-------------
Total revenue 16,168,962
-------------
OPERATING EXPENSES:
Salaries and wages 6,469,544
Employee benefits 902,509
Supplies and purchased services 4,487,458
Professional fees 1,256,342
Insurance and taxes 302,157
Utilities 272,032
Lease (Note 7) 373,971
Marketing 67,922
General and administrative 496,509
Provision for bad debts 71,634
Interest expense 1,299,272
Depreciation and amortization 534,559
-------------
Total expenses 16,533,909
-------------
NET LOSS $ (364,947)
=============
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
<PAGE> 5
INTROSPECT HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S DEFICIT
FOR THE YEAR ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Paid-in Accumulated
Shares Amount Capital Deficit Total
--------- ----------- ------------ ---------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1995 52,500 $ 52,500 $ 225,743 $ (5,840,552) $ (5,562,309)
Write-off of capitalized
option costs (Note 10) - - - (312,761) (312,761)
Write-off of related party
notes (Note 6) - - - (262,334) (262,334)
Net loss - - - (364,947) (364,947)
------- ------------ ----------- ------------- -------------
BALANCE, June 30, 1996 52,500 $ 52,500 $ 225,743 $ (6,780,594) $ (6,502,351)
======= ============ =========== ============= =============
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
<PAGE> 6
INTROSPECT HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (364,947)
Adjustments to reconcile net loss to net cash provided by
operating activities-
Depreciation and amortization 534,559
Provision for bad debts 71,634
Loss on disposal of assets 8,514
Changes in operating assets and liabilities:
Accounts receivable (112,561)
Prepaid expenses, deposits and other (34,711)
Deferred financing costs and other, net (43,687)
Accounts payable (280,500)
Accounts payable to related party 610,695
Accrued liabilities (74,796)
Patient refunds 15,829
Property taxes payable 60,130
--------------
Net cash provided by operating activities 390,159
--------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (132,096)
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in related party advances 21,691
Increase in restricted cash (906,728)
Net payments on line of credit (560,406)
Principal payments under capital lease obligations (43,643)
Net proceeds from long-term borrowings 1,420,241
--------------
Net cash used in financing activities (68,845)
--------------
INCREASE IN CASH 189,218
CASH, beginning of year 47,577
--------------
CASH, end of year $ 236,795
==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 1,242,630
==============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
During 1996, the Company forgave amounts due from related parties totaling
$262,334.
During 1996, the Company wrote off $312,761 of costs capitalized in
connection with developing the purchase option agreement further
discussed in Note 10.
The accompanying notes are an integral part of this consolidated financial
statement.
<PAGE> 7
INTROSPECT HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(1) DESCRIPTION OF BUSINESS:
Introspect HealthCare Corporation (the Company), an Arizona corporation, is a
wholly owned subsidiary of Diversification Association, Inc. (DAI), an Arizona
corporation. The Company is the sole shareholder of Desert Hills Center for
Youth and Families, Inc. and Ocotillo Pediatric Services, Inc. Desert Hills
Center for Youth and Families, Inc. (Desert Hills), located in Tucson, Arizona,
is a behavioral health and diversified youth services company for children and
adolescents. Ocotillo Pediatric Services, Inc. provides medical services to
Desert Hills patients.
As is further discussed in Note 10, effective July 1, 1995, the Company entered
into an agreement with Youth Services International, Inc. (YSI) to manage the
Company. YSI also acquired an option to purchase the common stock of the
Company. YSI exercised this option in September 1996 (see Note 11).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All material intercompany transactions and
accounts have been eliminated in consolidation.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Land improvements 30 years
Buildings and improvements 30 years
Equipment and furniture 5 years
</TABLE>
Equipment held under capital leases is depreciated over the term of the lease
or the economic life of the related asset, whichever is shorter.
Expenditures for major renewals and betterments are capitalized while repairs
and maintenance are charged to expense as incurred. The cost and related
accumulated depreciation of assets retired or disposed of are removed from the
asset and accumulated depreciation accounts with any gain or loss recognized
currently.
<PAGE> 8
- 2 -
FINANCING AND TRANSACTION COSTS
Deferred financing costs are amortized on a straight-line basis over the term
of the related debt. At June 30, 1996, accumulated amortization totaled
$414,147.
INCOME TAXES
The Company computes its income taxes in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS No. 109).
Deferred income taxes arise from temporary differences resulting from certain
expenses reported for financial reporting purposes in periods other than those
in which they are reportable for income tax purposes.
The components of the provision for income taxes are as follows:
<TABLE>
<S> <C>
Current income tax provision (benefit) $ -
Deferred income tax provision (benefit) (144,519)
Valuation allowance 144,519
------------
Total income tax provision (benefit) $ -
============
</TABLE>
Deferred income tax assets and liabilities at June 30, 1996, are as follows:
<TABLE>
<S> <C>
Deferred income tax assets $ 144,519
Deferred income tax liabilities -
Valuation allowance (144,519)
------------
Total $ -
============
</TABLE>
The Company, its subsidiaries and its parent file consolidated federal and
state income tax returns. The Company does not possess an intercompany tax
sharing agreement and does not recognize benefits for losses which may be
utilized by the parent. At June 30, 1996, the Company had no federal or state
net operating loss carryforwards.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at June 30, 1996, and the reported amounts of
revenues and expenses during the year then ended. Actual results could differ
from those estimates.
<PAGE> 9
- 3 -
(3) RESTRICTED CASH:
The Company maintains a lockbox account at a financial institution. The cash
deposited in this account is restricted for payments on the Company's line of
credit (see Note 5). The Company also maintains a $1,000,000 certificate of
deposit with a financial institution as collateral for outstanding debt.
(4) LONG-TERM DEBT:
Long-term debt consists of the following as of December 31:
<TABLE>
<S> <C>
Note payable to Meditrust Mortgage, Inc., interest at
12.5%, payable in monthly installments of $74,354 including
interest, maturing on July 1, 2000, collateralized by
equipment and real property. $ 7,862,087
Note payable to Meditrust Mortgage, Inc., interest at
9%, matured in 1994, collateralized by equipment and
real property. 216,483
Note payable to Century HealthCare Corporation, interest
at 8%, payable in monthly principal and interest installments
of $16,452 through maturity on June 30, 1995. Interest at 18%
on all past due principal and accrued interest amounts. 363,754
Note payable to YSI, interest imputed at 21%, payable in
quarterly installments of $30,000 through October 2000,
unsecured. 305,219
Note payable to YSI, interest at the prime rate plus 2%,
(10.75% as of June 30, 1996), payable in monthly interest
only installments, due on demand, but in no event later
than the earlier of June 30, 2000 or termination of the
Purchase Option and Management Agreement further
discussed in Note 10, secured by certificate of deposit. 1,000,000
Note payable to DAI, varying interest based on various
money market accounts and payable on demand,
maturing the earlier of June 30, 2000, or upon YSI's
exercise of its purchase option further discussed in Note 10. 1,000,000
Note payable to DAI, interest at 10%, payable in quarterly
interest only installments, maturing the earlier of June 30,
2000, or upon YSI's exercise of its purchase option further
discussed in Note 10. 100,000
</TABLE>
<PAGE> 10
- 4 -
<TABLE>
<S> <C>
Notes payable to DAI, interest at 10%, payable in monthly
principal and interest installments of $3,965, maturing in
June 2000, unsecured (Note 6). 156,323
Note payable to Ford Motor Credit, interest at 7.9%, payable
in monthly installments of $620 including interest, secured
by automobile. 17,608
-----------
11,021,474
Less: Current portion (2,857,856)
-----------
Long-term debt, net of current portion $ 8,163,618
===========
</TABLE>
The Company is renegotiating its note payable to Century HealthCare
Corporation, which matured in June 1995. The Company is also in default of its
$216,483 note payable from Meditrust, which matured in 1994. Additionally, the
$1,000,000 and $100,000 notes payable to DAI became due and payable upon YSI's
exercise of its purchase option as disclosed in Note 11. Accordingly, all
amounts due under these notes have been classified as current liabilities in
the accompanying consolidated balance sheet.
Maturities of long-term debt as of June 30, 1996, are as follows:
<TABLE>
<CAPTION>
Year Ending
June 30,
---------------
<S> <C>
1997 $ 2,857,856
1998 259,375
1999 291,735
2000 327,847
2001 195,112
Thereafter 7,089,549
-------------
$ 11,021,474
=============
</TABLE>
(5) LINE OF CREDIT:
In May 1994, the Company and Congress Financial Corporation (Congress) entered
into a lending agreement under which Congress agreed to advance funds to the
Company on eligible patient accounts receivable up to 80% of the net value of
the receivables. Eligible accounts receivable and the net value of the
receivables were determined by Congress. Interest on the line of credit is at
prime plus 2.5% and is payable as the accounts receivable are collected (see
Note 3), and the line is secured by the accounts receivable. In August 1996,
this agreement, which expired May 5, 1996, was extended through December 31,
1996.
<PAGE> 11
- 5 -
(6) RELATED PARTY TRANSACTIONS:
During 1996, the Company forgave amounts due from DAI and its subsidiaries
totaling $262,334. These transactions were treated as dividends and were
recorded as direct charges against accumulated deficit in the accompanying
consolidated statement of changes in stockholder's deficit.
As is further discussed in Note 4, the Company has three notes payable to DAI.
Total amounts outstanding under these notes payable was $1,256,323 as of June
30, 1996. Interest expense incurred on notes payable to DAI totaled $27,421 in
1996.
YSI's fee for managing the Company is based upon a formula defined in the
management agreement discussed in Note 10. No management fees were earned
under this agreement in 1996.
As is further discussed in Note 4, the Company has a note payable to YSI for
consulting services received in 1995. Total amounts outstanding under this
note payable were $305,219 as of June 30, 1996. Interest expense incurred on
this note payable in 1996 totaled $69,219.
The Company borrowed $1,000,000 from YSI during 1996 to fund operating
deficits. Interest expense incurred on this note payable was $83,064 in 1996
and accrued interest payable was $41,064 as of June 30, 1996. Additionally,
during 1996, YSI advanced funds used to pay operating costs of the Company,
which are reflected as accounts payable to related party in the accompanying
consolidated balance sheet.
(7) COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is a defendant in various actions related to its healthcare service
activities. It is the opinion of management that resolution of these actions
will not have a materially adverse effect on the Company's financial position.
OPERATING LEASES
The Company leases a building, medical and office equipment and vehicles under
operating leases with terms expiring through April 2000. Most of the lease
agreements provide for renewal options and require payment of property taxes,
maintenance and insurance. Rent expense on these leases was $373,971 in 1996.
Future minimum payments under the leases are for the years ending June 30 as
follows:
<TABLE>
<S> <C>
1997 $ 68,927
1998 8,644
1999 5,726
2000 2,511
---------
$ 85,808
=========
</TABLE>
<PAGE> 12
- 6 -
CAPITAL LEASE OBLIGATIONS
The Company leases computer equipment under agreements expiring in 1998.
Future payments under the leases are as follows:
<TABLE>
<S> <C>
1997 $ 57,024
1998 4,752
---------
61,776
Less: Amount representing interest (6,734)
--------
55,042
Less: Current portion (50,369)
---------
$ 4,673
=========
</TABLE>
(8) RETIREMENT AND BENEFIT PLANS:
The Company has a 401(k) salary deferral plan which allows eligible employees
to defer up to 10% of their salaries. At the Board of Directors' discretion,
employee contributions may be matched by the Company. The Company may also
make additional voluntary contributions, subject to certain limitations, at the
discretion of the Board of Directors. The Company's contribution expense was
$50,665 in 1996.
(9) NET PATIENT SERVICE REVENUE:
The Company provides services to the beneficiaries of CHAMPUS, the Arizona
Health Care Cost Containment System (AHCCCS), Medicaid program, and certain
other payors at contracted amounts unrelated to customary charges. Net patient
service revenue is reported at the estimated realizable amounts, net of charity
allowances and contractual discounts, under reimbursement agreements with
third-party payors. Third-party payor adjustments are accrued in the period
the related services are rendered and adjusted in future periods as final
settlements are determined.
The following table reflects the estimated percentage of total patient service
revenue by payor for the year ended June 30, 1996.
<TABLE>
<CAPTION>
Net Patient
Service Revenue
------------------------
Amount Percent
-------------- -------
<S> <C> <C>
CHAMPUS $ 5,455,932 34%
State, including but not limited
to, AHCCCS and Medicaid 3,617,323 23
Community Partnership of
Southern Arizona 3,615,191 23
Commercial and other third 2,692,530 17
party contracts
Self pay and other 548,011 3
-------------- ----
$ 15,928,987 100%
============== ====
</TABLE>
<PAGE> 13
- 7 -
The Company provides services free of charge or at reduced rates to individuals
who meet certain criteria. Amounts determined to qualify as charity are not
reported as revenue in the accompanying consolidated statement of operations.
(10) PURCHASE OPTION AND MANAGEMENT AGREEMENT:
Effective July 1, 1995, YSI acquired an option to purchase the outstanding
stock of the Company for a period expiring June 30, 2000. The amount paid to
DAI by YSI in 1996 to acquire the option was $350,000. This amount offset
$312,761 of costs capitalized in connection with developing the purchase option
agreement. These costs are recorded as direct charges against accumulated
deficit in 1996 in the accompanying consolidated statement of changes in
stockholder's deficit. The exercise price of the option is based on a formula
which considers, among other things, the "Average Consolidated Revenues" (as
defined) and the debt and other liabilities of the Company.
Concurrent with the purchase of the option, the Company and YSI entered into a
management agreement whereby YSI will manage the Company's operating entities
through June 30, 2000. During this period, YSI may, but is not required to,
make loans to the Company to fund operating deficits. As further discussed in
Note 6, the Company borrowed $1,000,000 from YSI in 1996 under the provisions
of the management agreement.
(11) SUBSEQUENT EVENT:
On September 11, 1996, YSI exercised its option to purchase the Company and
concurrently retired approximately $9.6 million of outstanding debt.
<PAGE> 1
EXHIBIT 7.2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following pro forma consolidated financial statements include the unaudited
pro forma consolidated statement of income for the year ended June 30, 1996
(the "Pro Forma Consolidated Statement of Income") and the unaudited pro forma
consolidated balance sheet as of June 30, 1996 (the "Pro Forma Consolidated
Balance Sheet"). The unaudited Pro Forma Consolidated Statement of Income is
adjusted to give effect to the consummation of the acquisition of Introspect
Healthcare Corporation ("Introspect") as if such acquisition had occurred on
July 1, 1995. The unaudited Pro Forma Consolidated Balance Sheet is adjusted
to give effect to the consummation of the acquisition of Introspect as if such
acquisition had occurred on June 30, 1996.
The pro forma adjustments are based upon available information and certain
assumptions that the Company believes are reasonable. The pro forma
consolidated financial statements should be read in conjunction with the
Company's Consolidated Financial Statements and related notes thereto and the
financial statements and related notes of Introspect Healthcare Corporation
included elsewhere in this Form 8-K/A. The unaudited pro forma consolidated
financial statements do not purport to represent what the Company's results of
operations or financial position would have been had the acquisition of
Introspect occurred on July 1, 1995 or June 30, 1996, or to project the
Company's results of operations or financial position for or at any future
period or date.
<PAGE> 2
Youth Services International, Inc.
Pro forma Consolidated Statement of Income
For the Year Ended June 30, 1996 (1)
<TABLE>
<CAPTION>
YSI Pro Forma Adjusted
Historical(2) Adjustments(2) Total
------------- -------------- --------------
<S> <C> <C> <C>
Revenues $100,353,000 ($391,000) (3) $99,962,000
Program Expenses:
Program 85,822,000 (693,000) (3,4,6,7) 85,129,000
Amortization of goodwill 1,039,000 812,000 (4) 1,851,000
Program start-up costs 58,000 58,000
------------- -------------- --------------
Contribution from operations 13,434,000 (510,000) 12,924,000
Other Operating Expenses:
Selling, general and administrative 5,760,000 5,760,000
Costs of attempted acquisitions 569,000 569,000
------------- -------------- --------------
Income from operations 7,105,000 (510,000) 6,595,000
------------- -------------- --------------
Other (Income) Expense:
Interest expense 3,160,000 (391,000) (5) 2,769,000
Interest income (645,000) (645,000)
Other, net 463,000 463,000
------------- -------------- --------------
2,978,000 (391,000) 2,587,000
------------- -------------- --------------
Income before income tax expense 4,127,000 (119,000) 4,008,000
Income tax expense 1,856,000 72,000 (8) 1,928,000
------------- -------------- --------------
Net Income $2,271,000 ($191,000) $2,080,000
============= ============== ==============
Earnings per common and common
equivalent share $0.25 $0.22
============= ==============
Weighted average common and
common equivalent share outstanding 9,267,458 9,267,458
============= ==============
</TABLE>
The accompanying notes to pro forma consolidated statement of income are an
integral part of this pro forma statement of income.
<PAGE> 3
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED JUNE 30, 1996
(1) The fiscal year ended June 30, 1996 is comprised of the twelve month
period July 1, 1995 through June 30, 1996.
(2) As discussed in the notes to the Company's consolidated financial
statements, the revenues and expenses of Introspect have been included
in the Company's consolidated statement of income for the fiscal year
ended June 30, 1996.
(3) To eliminate revenues and expenses of Introspect site location that
was closed during fiscal 1996 as follows:
Revenues $ 391,000
Expenses (730,000)
------------------
$ (339,000)
==================
(4) To record goodwill amortization and depreciation expense as follows:
Goodwill (10 year life) $ 812,000
Depreciation expense 166,000
------------------
$ 978,000
==================
(5) To eliminate interest expense related to Introspect debt retired
concurrent with the acquisition and to add interest expense on
short-term borrowings utilized to retire Introspect's debt as follows:
Total interest expense $ 1,146,000
Debt not retired (98,000)
Short-term borrowings (657,000)
------------------
Interest expense related to
retired debt, net $ 391,000
==================
(6) To eliminate amortization expense of deferred debt issue costs related
to retired debt as follows:
Amortization of deferred debt
issue costs $ 107,000
==================
(7) To eliminate acquisition related transaction costs recorded by
Introspect as follows:
Transaction costs $ 22,000
==================
(8) To record tax impact of pro forma adjustments.
(9) Amounts have been retroactively restated to reflect the three-for-two
stock split in the form of a stock dividend which was effected May 24,
1996.
<PAGE> 4
Youth Services International, Inc.
Pro Forma Consolidated Balance Sheet
As of June 30, 1996
<TABLE>
<CAPTION>
YSI Introspect Pro Forma Adjusted
Historical Historical Adjustments Total
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Cash $7,046,000 $237,000 ($3,404,000) (1) $3,879,000
Restricted cash 500,000 1,145,000 (1,145,000) (1) 500,000
Investments available-for-sale 9,798,000 0 9,798,000
Accounts receivable, net 16,683,000 2,313,000 (529,000) (2) 18,467,000
Due from Introspect 784,000 0 (784,000) (2) 0
Refundable income taxes 1,046,000 0 1,046,000
Current portion of notes receivable 113,000 0 113,000
Deferred tax asset 78,000 0 78,000
Prepaid expenses, supplies and other 1,918,000 289,000 (106,000) (2) 2,101,000
------------- ------------- ------------- -----------
Total current assets 37,966,000 3,984,000 (5,968,000) 35,982,000
------------- ------------- ------------- -----------
Property, equipment and improvements, net 17,135,000 5,164,000 2,978,000 (2) 25,277,000
------------- ------------- ------------- -----------
Deposits 160,000 0 160,000
Organization costs, net 38,000 0 38,000
Deferred debt issue costs, net 2,613,000 174,000 (174,000) (2) 2,613,000
Goodwill, net 9,613,000 0 8,118,000 (3) 17,731,000
Notes receivable, Introspect 1,000,000 0 (1,000,000) (2) 0
Notes receivable, net of current portion 3,133,000 0 3,133,000
Non-compete agreements, net 277,000 0 277,000
Deferred tax asset 750,000 0 750,000
Management fee receivable 154,000 0 (154,000) (2) 0
Other assets, net 1,800,000 0 (306,000) (2) 1,494,000
------------- ------------- ------------- -----------
19,538,000 174,000 6,484,000 26,196,000
------------- ------------- ------------- -----------
Total assets $74,639,000 $9,322,000 $3,494,000 $87,455,000
============= ============= ============= ===========
Accounts payable $1,465,000 $595,000 ($105,000) (2) $1,955,000
Accrued payroll and other accrued
expenses 5,752,000 1,511,000 (236,000) (2,4) 7,027,000
Due to YSI 0 1,957,000 (1,957,000) (2) 0
Short-term borrowings 0 1,136,000 8,631,000 (2,5,6) 9,767,000
Current portion of long-term debt
and capital lease obligations 788,000 1,603,000 (1,175,000) (2,5) 1,216,000
Patient refunds 0 853,000 3,000 (2) 856,000
Deferred tax liability 0 0 0
------------- ------------- ------------- -----------
Total current liabilities 8,005,000 7,655,000 5,161,000 20,821,000
Deferred revenue 38,000 0 38,000
Long-term debt and capital lease
obligations, net of current portion 4,212,000 8,169,000 (8,169,000) (2,5) 4,212,000
7% Convertible subordinated debentures 37,950,000 0 37,950,000
12% Subordinated debentures 983,000 0 983,000
------------- ------------- ------------- -----------
Total liabilities 51,188,000 15,824,000 (3,008,000) 64,004,000
------------- ------------- ------------- -----------
Common stock 86,000 53,000 (53,000) (2) 86,000
Additional paid-in-capital 20,099,000 226,000 (226,000) (2) 20,099,000
Accumulated earnings 3,521,000 (6,781,000) 6,781,000 (2) 3,521,000
Unrealized loss on investments
available-for-sale (255,000) 0 (255,000)
------------- ------------- ------------- -----------
Total shareholders' equity 23,451,000 (6,502,000) 6,502,000 23,451,000
------------- ------------- ------------- -----------
Total liabilities and shareholders' equity $74,639,000 $9,322,000 $3,494,000 $87,455,000
============= ============= ============= ===========
</TABLE>
The accompanying notes to pro forma consolidated balance
sheet are an integral part of this pro forma balance sheet.
<PAGE> 5
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1996
(1) To adjust cash for the following:
Cash used to purchase Introspect $ 3,927,000
Change in cash balance at acquisition date 622,000
Reclass restricted cash in conjunction with
retirement of debt (1,145,000)
------------------
$ 3,404,000
==================
(2) To adjust balances to fair market value at date of acquisition and
allocate purchase price.
(3) To record goodwill resulting from purchase price allocation as
follows:
<TABLE>
<S> <C>
Fair market value of assets acquired $ 11,567,000
Fair market value of liabilities assumed (12,706,000)
---------------
(1,139,000)
---------------
Purchase price 4,000,000
Estimated acquisition costs 200,000
Purchase option, net 306,000
Receivables due from Introspect, net 2,473,000
----------------
6,979,000
----------------
Goodwill $ 8,118,000
================
</TABLE>
(4) To record estimated acquisition costs as follows:
Estimated acquisition costs $ 200,000
===================
(5) To record retirement of Introspect debt and related accrued interest
payable as follows:
Notes payable to Meditrust $ 8,006,000
Notes payable to DAI (parent of
Introspect) 1,252,000
Congress Financial line of credit 435,000
-------------------
$ 9,693,000
===================
(6) To record short-term borrowings incurred in connection with the
acquisition of Introspect and retirement of Introspect debt as
follows:
Signet Bank $ 9,766,000
===================
