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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-23284
YOUTH SERVICES INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MARYLAND 52-1715690
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2 PARK CENTER COURT, SUITE 200 21117
OWINGS MILLS, MARYLAND (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (410) 356-8600
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
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(NAME ON EACH EXCHANGE
(TITLE OF EACH CLASS) WHICH REGISTERED)
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None None
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SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act 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____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates as of
September 12, 1996 was $108,439,984.
The registrant had shares of common stock outstanding as of September 12,
1996 of 9,164,722.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information from the registrant's definitive Proxy Statement for
the fiscal year ended June 30, 1996 to be filed with the Securities and Exchange
Commission pursuant to Rule 14(a) no later than October 28, 1996 is incorporated
by reference into Parts II and III of this Form 10-K.
Certain information from the registrant's Registration Statement on Form
SB-2 (registration number 33-71958) filed with the Securities and Exchange
Commission on November 19, 1993, as amended is incorporated by reference into
Part IV of this Form 10-K.
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YOUTH SERVICES INTERNATIONAL, INC.
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INDEX -- FORM 10-K
FOR THE YEAR ENDED JUNE 30, 1996
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PAGE
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PART I
ITEM 1. Business.................................................................... 1
ITEM 2. Properties.................................................................. 10
ITEM 3. Legal Proceedings........................................................... 11
ITEM 4. Submission of Matters to a Vote of Security Holders......................... 11
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Shareholder Matters... 11
ITEM 6. Selected Consolidated Financial Data........................................ 12
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation.................................................. 13
ITEM 8. Financial Statements and Supplementary Data................................. 18
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................ 20
PART III
ITEM 10. Directors and Executive Officers of the Company............................. 20
ITEM 11. Executive Compensation...................................................... 20
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.............. 20
ITEM 13. Certain Relationships and Related Transactions.............................. 20
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............. 20
SIGNATURES.............................................................................. 24
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PART I
ITEM 1. BUSINESS
Youth Services International, Inc. (the "Company" or "YSI") is a leading
national provider of private educational, developmental and rehabilitative
programs which are designed to impact dramatically the thinking and behavior of
troubled youth. The Company's programs focus on troubled youth who either have
been adjudicated as delinquents or suffer from behavioral problems with the
objective of effectively preparing them to become responsible self-sufficient
taxpayers. The Company develops and operates a wide range of programs designed
to promote accountability, respect and discipline through highly structured,
physically demanding, intensely scheduled and intellectually challenging
activities. In conjunction with these programs, the Company offers troubled
youth a broad range of residential programs including juvenile justice
academies, residential treatment centers, boot camps, group homes and foster
homes, as well as non-residential programs including aftercare, tracking,
counseling, partial care and day treatment services. As of June 30, 1996, the
Company operated 18 residential programs in 11 states serving approximately
2,100 enrolled students and conducted non-residential programs serving
approximately 1,700 additional youth. To date, the youth served by the Company
have been drawn from more than 35 states, with each of which the Company
maintains relationships.
Since its formation in 1991, the Company has expanded its base of
operations through a combination of external and internal growth by acquiring
complementary programs and businesses, by developing new programs in response to
privatization opportunities, by increasing student capacity at existing
facilities and by expanding program offerings. The Company has experienced
significant revenue and earnings growth since fiscal year 1993, its first full
year of program operations, with revenues increasing from $8.9 million to $100.4
million and improvement from a loss from operations of $1.5 million to income
from operations of $7.1 million for the fiscal years 1993 and 1996,
respectively.
Initially, the Company was established to capitalize on emerging
opportunities in the privatization of juvenile justice programs by state and
local governments. Management believes that increasing cost containment
pressures at all levels of government coupled with the inability of many
government agencies to deliver economic and effective programs to a rapidly
increasing number of juvenile offenders will continue to accelerate the
privatization of juvenile justice services within the youth care industry. Based
on its experience to date, the Company believes that it can operate its programs
at a lower cost while offering a higher quality of services as compared to
similar programs operated directly by government agencies.
In response to increasing demand for additional youth care services from
both state and local governments as well as managed care and insurance
companies, the Company recently began to expand and diversify its range of
service offerings to include expanded educational, vocational and behavioral
health services thereby further broadening its continuum of care. These entities
recognize that the underlying issues plaguing troubled youth are the same
regardless of whether they have been adjudicated or identified as troubled youth
based upon non-criminal behavior. Consequently, public and private payors are
increasingly seeking providers that can treat a variety of troubled youth
through single source contracts on a nationwide basis. The Company believes it
is well positioned to service the needs of both public and private payors given
the quality and range of its youth care programs as well as its expanding
national presence.
MARKET
The Company believes that the juvenile justice market for publicly and
privately provided residential programs is approximately $3.8 billion annually
and that the total troubled youth care market (juvenile justice, behavioral
health, special education and child welfare) for residential and community-based
services is significantly larger. Trends reflecting increases in both the number
of juvenile offenders and in the severity of the crimes committed suggest that
there is a shortage of residential capacity and a lack of comprehensive programs
to treat juvenile offenders. The Company expects that as juvenile crime
continues to receive increasing levels of visibility, the need for youth care
services will continue to increase. The Company also believes that certain
demographic trends such as annual increases in both the number of teenagers and
youth
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from single parent families will further contribute to the overall growth in the
population of troubled youth in the United States.
Programs for troubled youth generally are created in response to a Request
for Proposals ("RFP") from a state or state agency or created "de novo" by a
provider to accommodate the demand for a facility by placement authorities due
primarily to the lack of available effective programs operated by state agencies
or contracted by state agencies through an RFP. Historically, in the early
stages of privatization of the troubled youth care industry, "de novo" programs
were in demand because of the lack of effective programs and capacity. As
privatization gains more acceptance with states, the Company anticipates that
states will create more facilities and programs through RFPs and over the long
term the need for "de novo" programs may decrease.
In an RFP, the government agency determines the type of program and the
number of youth to be served and specifies factors such as operating and
licensing requirements in the RFP, which it publishes for competitive bidding. A
successful proposal by the Company under an RFP typically has resulted in a five
year contract between the Company and the government agency under which students
are placed in the Company's program by the government agency up to the licensed
capacity. Generally, the Company has little flexibility in admitting students to
facilities resulting from an RFP other than those placed by the contracting
agency or agencies. Historically under the RFP process, the government agency
also provided the facility for the program. These facilities typically were
vacant or under-utilized government-owned facilities that required minimal
renovation for conversion into a program facility. Very recently, the trend has
been developing whereby the RFP involves the design, construction and financing
of a new facility as well as the operation of the program (typically for periods
of five years or longer) upon its completion.
"De novo" programs are initiated by the Company to respond to the demand
for beds by placement authorities seeking to place youth in a youth care
facility. Placement authorities for adjudicated youth include state juvenile
services agencies, judges of juvenile and other courts and parole officers.
Placement authorities for behavioral health services include many of the same
services that place adjudicated youth as well as state welfare and child
protective agencies, doctors, psychiatrists, psychologists and hospitals.
Although the placement authorities generally prefer to place youth in a facility
in geographic proximity to the placement authority's jurisdiction, students are
often placed in facilities in other states due to the lack of facilities or
programs in the home state. The Company enters into purchase of service ("POS")
contracts with the agencies that control placement or placement authorities
which permit students to be placed with YSI, delineate the services to be
provided and describe the method of reimbursement. A POS contract generally has
an initial term of one year and is renewable on an annual basis by the
government agency. Student referrals normally are derived from many different
states, each of which has a separate POS contract.
BUSINESS STRATEGY
The Company's objective is to continue to expand the provision of its
high-quality, innovative and effective programs and services on a national basis
to a broad variety of troubled youth. The Company plans to achieve this
objective through the implementation of its growth and operating strategies. The
key elements of the Company's growth strategy are to: (i) pursue mergers and
acquisitions; (ii) develop new programs through privatization; (iii) increase
the licensed capacity of its programs; (iv) expand its range of services; and
(v) respond to consulting opportunities. The key elements of the Company's
operating strategy are to: (i) implement comprehensive information systems; (ii)
improve operating efficiencies; and (iii) limit capital deployment.
GROWTH STRATEGY
Pursue Mergers and Acquisitions. The Company will continue to evaluate and
selectively pursue merger and acquisition opportunities. Since its inception,
the Company has consummated ten acquisitions of programs that contained an
aggregate of 751 licensed beds at the time of acquisition. The Company's
objective is to acquire businesses that can be integrated into the Company's
high quality, cost-effective approach to servicing troubled youth in areas that
complement existing programs as well as in new markets.
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Develop New Programs Through Privatization. The Company will continue to
pursue the development of new programs in response to privatization
opportunities. In addition, the Company will continue to work with government
agencies to help develop privatization opportunities. The Company has, and
believes it can continue to, facilitate and assist states and state agencies in
the process of determining to shift certain of its youth care services to
private industry. In some instances the development of privatization
opportunities may result in the opening or expansion of a "de novo" program by
the Company to service youth referred by placement authorities. Although the
Company believes that the growing trend is for most privatization opportunities
to be presented in a competitive bidding process in response to RFPs issued by
government agencies, the Company believes that factors such as experience and
the ability to provide effectively the desired services will continue to be
important determinants in RFP awards, and that involvement in the privatization
process can position the Company as the provider of choice and enhance its
ability to be the successful bidder. In addition, the Company believes that new
opportunities are arising to provide governmental agencies with services
relating to the design, construction and financing of new facilities for
troubled youth in connection with the award of an RFP to operate a program. The
Company is positioning itself to provide these development activities in order
to enhance its ability to win RFP awards to operate new programs.
Increase Licensed Capacity. The Company believes that its privatization
programs have been more successful than programs operated by governmental
agencies both in terms of better preparing youth to become productive members of
society and generating cost efficiencies. This success has enabled the Company
to increase the licensed capacity of many of its programs and should assist the
Company in obtaining governmental approval for further increases in licensed
capacity. The Company believes it has the physical facilities and campuses that
are capable of significant expansion of its current programs without significant
additional capital outlays. The Company generally has been able to add beds to
existing facilities at a cost that is substantially lower than the cost of new
construction, which results in lower costs per student.
Expand Range of Programs. The Company will continue to expand the types of
programs and the range of program components it offers in response to the demand
for more programs from its customers. The Company strives to be the full service
provider of programs within the continuum of care of programs necessary or
desirable to serve troubled youth. The Company will continuously evaluate the
effectiveness of its programs in preparing troubled youth to become responsible,
self-sufficient taxpayers. As the Company, or customers, identify new or more
effective programs or program components, the Company will strive to develop and
provide such programs and program components.
Respond to Consulting Opportunities. The Company will continue to respond
to opportunities from customers and others in the youth care industry to provide
consulting services based on the Company's experience and expertise. These
opportunities have been presented in consulting projects to assist in the
evaluation of problems of youth, the improvement of youth care services, the
implementation of programs into a community, privatization and similar projects.
The Company does not actively pursue the provision of these services but is
willing to respond to opportunities if, after evaluating the project, the
Company determines it presents a profitable use of resources, permits the
Company to participate in a privatization process with potential to position the
Company as the provider of choice, assists in community acceptance of potential
youth care programs or is beneficial to the Company based on other similar
factors.
OPERATING STRATEGY
Implement Comprehensive Information Systems. In order to continue to
improve its business, YSI is developing and integrating an information
management system that will produce better and more timely information and
create cost efficiencies by enhancing the operation and control of the Company's
student data management, financial management, human relations and executive
management functions. The student data management function consists of
maintaining a student data base, gathering information regarding the students
upon arrival, monitoring and supplementing such information throughout their
stay and developing meaningful reports of such data that will assist the Company
in measuring the effectiveness of various programs and education and training
techniques. The financial management system is designed to integrate the various
financial systems from the Company's acquisitions and to develop consistent
accounting
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procedures and controls and financial reporting. Similarly, the human resource
system is designed to integrate the human resource functions for its
approximately 2,900 full-time equivalent employees. The Company is in the early
development stage of an executive management system that will produce and
summarize pertinent data regarding the operations of the programs which will
permit more timely oversight and control by executive management.
Improve Operating Efficiencies. The Company believes that it has not yet
fully integrated its acquired programs to create more cost and operating
efficiencies or to capitalize on efficiencies resulting from its increased size
and scope of business. The Company recently has begun the process of
consolidating and rationalizing its organizational structure. As part of this
process, the Company continues to implement a centralized purchasing system
pursuant to which YSI seeks national contracts and takes advantage of volume
purchasing opportunities. It is management's objective to structure its overhead
costs and services so that the Company can leverage incremental growth in a more
efficient and accretive manner.
Limit Capital Deployment. The Company has sought and will continue to seek
to minimize the amount of capital required to develop and operate programs,
particularly investment in real estate and facility costs. The Company seeks,
and consequently many of its existing facilities are comprised of, buildings
that were previously used for purposes that lend themselves to efficient
conversion to YSI programs, such as schools, hospitals and military bases.
Utilization of these facilities allows the Company to focus on the operation of
programs rather than the development and financing of real estate. However, the
Company, after careful review, will make such investments when it is
advantageous to do so in order to respond to an RFP that requires such
investment as a component of the bid or otherwise enhances the Company's chances
to be awarded a desired RFP, or in connection with an acquisition.
YSI PROGRAMS
PROGRAM COMPONENTS
YSI has developed programs which constitute a comprehensive approach
designed to address the multiple needs of troubled youth. YSI provides these
services by using its "Formula for Success" which teaches accountability,
respect and discipline through highly structured, physically demanding,
intensely scheduled and intellectually challenging activities. Educators, YSI
staff, parents, caseworkers and the students themselves participate in a
pre-entry evaluation of each student. Based upon this evaluation, a development
plan is designed for each student. The primary elements of YSI programs include:
- Positive Peer Culture. A positive peer culture is established by
well-trained, experienced staff who model desired behavior, immediately confront
negative behavior and encourage student development through daily group
counseling sessions. In a matured program, the peer culture is self-sustained
and regenerated by student leaders who model for all students the desired
behaviors and attitudes while they mentor and tutor the newer members of the
group. This culture reinforces the values and thinking patterns being taught to
the youth by immersing them in an environment in which such values and thinking
patterns are demonstrated by their peers and the benefits of such behavior and
the ramifications from unacceptable behavior are experienced. Further, the group
will be held accountable for the behavior of the individuals in the group. If a
group is held accountable for the behavior of an individual, the group will
pressure the individual to conform to acceptable behavior. YSI believes that
such behavior modification techniques will prepare the youth for integration
into the community.
- Thinking and Behavior Change. YSI emphasizes accountability in its
programs which the Company believes differentiates its programs from traditional
troubled youth programming. Students are held accountable for their past actions
as well as for their actions while enrolled in the program in order to teach
them to become responsible for their behavior in the future. Accordingly, these
programs include specific components intended to identify thinking errors, teach
emotion management and conflict resolution techniques, and make students aware
of the impact that their actions have on victims.
- Education Programs. Youth attend education programs either at Company
operated fully accredited schools or through attendance at public schools. YSI
teachers conduct a full day of intense school activities.
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All programs at non-foster care residential facilities are accredited by a local
or state education agency; therefore, academic credits earned at a YSI academy
count towards credits required for high school graduation. As an alternative,
many students prepare for a General Equivalency Diploma (a "GED"). The intensity
of this educational experience can produce significant results. The Company has
experienced increases in the number of its students that are achieving high
school diplomas, whether during their residency or afterwards.
- World of Work. YSI students are trained in the skills they will need to
apply for, secure and keep a job. The Company attempts to educate its youth in
the fundamental skills required in the workplace such as punctuality and
satisfaction of employer expectations. As part of the vocational training
provided by the Company, most of the programs teach computer literacy and
include a "World of Work" curriculum which can incorporate courses and hands-on
training in vocations such as carpentry, building maintenance, mechanical
drafting, automotive maintenance, auto body repair, small engine repair, and
certified nursing assistant. The "World of Work" curriculum can also encompass
the operation of a business that provides services or products to the public.
Some of these "World of Work" businesses include restaurants, furniture making,
greeting card business, telemarketing, auto repair and detailing, TV and
electronic appliance repair, remodeling and house painting and printing. This
curriculum provides real work training and experience that can be translated to
employment after graduation and in addition provides an opportunity to exhibit
and understand the work habit skills being taught in YSI programs.
- Life Skills. YSI educates its students in all phases of life so they can
succeed on their own in society. The students are trained in certain basic life
skills such as hygiene, time and money management, parenting and sexual
responsibility. Training in practical daily living and social skills is also
provided. The Company believes that achievement of these life skills is a
critical factor in reducing future recidivism. As part of the money management
training, most YSI students are made responsible for restitution, child care and
other obligations.
- Athletics. In addition to required physical education courses,
participation in team-oriented athletic activities is strongly encouraged in
most of the Company's programs. Athletics provides opportunities for youth to
heighten self-esteem, experience the values of sportsmanship, learn the virtues
of teamwork and leadership and to enhance other values that are important to
being a responsible citizen as well as provide helpful physical exercise.
Several of YSI's programs have become members of the regional high school
athletic associations and field teams that compete with other high schools in a
variety of interscholastic sports including football, baseball, basketball,
wrestling, cross-country and track and field.
- Public Safety. YSI programs are offered in both secure and open
settings. The Company's secure programs utilize security fences and locked doors
and windows to aid the staff in controlling the student population, and in the
open programs, security is maintained solely by staff. Each student's
whereabouts is constantly monitored by staff and the frequency of monitoring
depends upon the student's level of behavior. In both secure and open
facilities, students earn the trust of staff and receive greater freedom to move
about the campus as they successfully progress through the program. All programs
have comprehensive procedures in place to deal with unauthorized departures from
campus.
PROGRAM FACILITIES AND SETTINGS
Residential Juvenile Justice Academies. The Company's residential juvenile
justice academies ("Academy") typically house troubled youth who are 14 to 18
years old and who have been adjudicated delinquent or are considered at risk of
being adjudicated delinquent. These facilities range from medium security
residential academies to high security facilities for serious offenders. The
average length of stay in an Academy typically ranges from 6 to 24 months. The
goal of the programs offered in the Academy environment is to change
dramatically the thinking and behavior of the students and to provide them with
the skills required to continue their education or training successfully, obtain
employment and eventually become self-sufficient taxpayers. In addition, the
Company offers several specialized programs at selected academies, including
High Impact, Boot Camp, Sex Offender and Detention programs. See "-- Specialized
Programs."
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Residential Treatment Centers. The Company's residential treatment centers
("RTCs") typically house youths aged 11 through 18 with a variety of behavioral
and/or mental problems including chemical dependency, mental handicaps and
emotional disturbance. While certain of the Company's RTC facilities offer acute
inpatient care, most of its RTC facilities generally offer a range of less
costly and lower acuity care services as compared to more traditional forms of
behavioral health services. Students at RTC's can receive a wide range of
services, ranging from preventative care and outpatient counseling to intensive
psychiatric treatment. In addition, the Company offers several specialized
programs at selected RTC facilities, including Emergency Shelter, Sex Offender,
Substance Abuse and Long-Term Shelter. See "-- Specialized Programs."
Residential Community-Based Facilities. The Company's residential
community-based facilities offer services to troubled youth in group homes,
foster homes and independent living facilities. Community-based group homes are
staffed 24 hours a day with youth care professionals and usually house between 5
and 10 children.
SPECIALIZED PROGRAMS
The Company also offers various specialized programs at select residential
facilities. These programs are generally shorter term in nature and are designed
to motivate a dramatic change in behavior and attitude on the part of its
students. These programs range among the following:
Sex Offender Programs. The Company's sex offender programs serve the
special needs of youth involved in sexual offenses. The programs are generally
locked-secure and involve lengths of stay from 12 to 24 months.
High Impact Programs. The Company's high impact programs immerse youth who
have failed or performed below expectations in non-residential settings in a 30
to 90 day intense regimen of academic classes, physically demanding activities
and group therapy.
Boot Camp Programs. The Company's boot camp programs are intense,
physically demanding programs that are conducted in a military format including
uniforms and drills and involve lengths of stay from 30 to 150 days.
Detention Programs. The Company's detention programs are designed to house
youth for periods of 1 to 90 days as they await disposition of court cases or
determinations of placement. The Company's assessments of students in detention
programs are often used by courts and other placement authorities in making
placement decisions.
Emergency Shelter Programs. The Company's emergency shelter programs serve
troubled youth who are not adjudicated or accused of a crime but who are in need
of temporary residential facilities due to the lack of a home or other family
circumstances. The lengths of stay are generally short term, from 1 to 3 months.
Substance Abuse Programs. The Company's substance abuse programs serve the
special needs of youth that are suffering, or in danger of suffering, from drug
or alcohol addiction and involve lengths of stay from 3 to 45 days.
Long-Term Shelter Programs. The Company's long-term shelter programs offer
housing services to those youth who are wards of the State or who have been
removed from their own home by child protective services. This program is an
alternative to the traditional orphanage or large welfare institution. Youth
range in age from nine to eighteen years of age and lengths of stay range from 3
months to several years.
Non-Residential Community-Based Programs. The Company's non-residential
community-based programs are designed to assist those students who have
committed a minor offense and are capable of being treated in his/her own
community and those who have graduated from Company facilities seeking to
transition back into their communities. These non-residential programs include
tracking and counseling services, partial care and day treatment programs,
prevention classes and aftercare.
Foster Care Programs. The Company's foster care programs train potential
foster care families, place youth with families, counsel foster children and
their families during the foster care stay and provide other
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services in connection with the placement of youth in foster care environments.
Generally, lengths of stay in these programs vary from six months to one year.
PROGRAM OFFERINGS
The residential programs operated by the Company are as follows:
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AT JUNE 30, 1996
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INITIAL % INCREASE NUMBER
TYPE OF START LICENSED LICENSED IN OF
PROGRAMS FACILITY DATE SOURCE CAPACITY CAPACITY CAPACITY STUDENTS
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Clarinda Academy, IA.............. Academy 2/92 de novo 60 239 298% 208
Victor Cullen Academy, MD......... Academy 9/92 RFP 60 184 207 184
Reflections Treatment, TN......... Academy 9/92 RFP 26 42 62 42
Forest Ridge, IA.................. Academy 2/93 Acq. 105 161 53 140
Hickey School, MD................. Academy 7/93 RFP 312 323 4 321
YSI-Utah, UT...................... Community-Based 7/93 Acq. 60 151 152 127
Chamberlain Academy, SD........... Academy 11/93 Acq. 60 78 30 78
Springfield Academy, SD........... Academy 11/93 Acq. 70 84 20 84
Parc Place, AZ.................... RTC 8/94 Acq. 40 38 -- 36
Tarkio Academy, MO................ Academy 9/94 de novo 103 308 199 308
Promise House, AZ................. Community-Based 10/94 Acq. 28 55 96 54
Developmental Behavioral
Consultants, AZ................. Community-Based 6/95 Acq. 80 80 -- 80
Woodward Academy, IA.............. Academy 7/95 RFP 25 74 196 51
Desert Hills New Mexico, NM....... RTC 7/95 Acq. 74 74 -- 71
Desert Hills Arizona, AZ.......... RTC 7/95 Acq.(1) 120 146 22 140
College Station, TX............... (2) 7/95 (2) 54 102 89 97
Camp Washington, VA............... Academy 1/96 RFP 45 45 -- 34
Tampa Bay Academy, FL............. RTC 3/96 Acq. 104 104 -- 78
----- ----- --- -----
Total/Percentage.................. 1,426 2,288 60% 2,133
===== ===== === =====
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(1) The Desert Hills Arizona program was operated by the Company pursuant to a
management agreement during the period of July 1, 1995 through September 1,
1996. As of September 1, 1996, the Company acquired this program. See
"-- Recent Developments."
(2) The College Station program is an Academy and an RTC. The Company assumed
the operation of this program from the prior operator in July 1995 based on
relationships the Company developed with the mortgagee of the real estate on
which the program operates. Therefore, this program was not acquired, was
not a true "de novo" program and was not obtained through an RFP.
In addition, the Company provides non-residential community-based programs
at some of the Company's residential facilities including aftercare, tracking,
consulting, partial care and day treatment services. The Company's Desert Hills
Arizona program also includes the case management of approximately 1,600 youths
pursuant to a managed care contract.
CONSULTING AND DEVELOPMENT SERVICES
CONSULTING SERVICES
Opportunities to provide consulting services have been presented to the
Company from time to time in projects to assist in the evaluation of problems of
youth, the improvement of youth care services, the implementation of programs
into a community, privatization and similar projects. The Company does not
actively pursue the provision of these services but is willing to respond to
opportunities if, after evaluating the project, the Company determines it
presents a profitable use of resources, permits the Company to participate in a
privatization process with potential to position the Company as the provider of
choice, assists in community acceptance of potential youth care programs or is
beneficial to the Company based on other similar factors.
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DEVELOPMENT SERVICES
The Company believes that new opportunities are arising to provide
governmental agencies with services relating to the design, construction and
financing of new troubled youth care facilities. The Company expects that
governmental agencies will continue to favor companies that can provide turnkey
services from designing and building a facility to creating and operating a
program. Specifically, such agencies are seeking companies that can provide the
design, construction and financing of a facility and can ultimately operate the
program upon completion of construction of the facility. The Company is
positioning itself to provide these development activities in order to be
awarded the contract to operate these new programs. However, even on projects
that do not afford a private operation opportunity, the Company may provide the
design, construction and financing of a facility for the state agency if the
Company believes it can benefit financially from these activities.
Development contracts generally require companies to assume responsibility
for overall project development and completion. These services require the
assembling of a team consisting of architects, operational experts from various
disciplines, and financial and legal advisors that participates in and
coordinates all aspects of the development from conceptual design through final
construction of the project.
The Company expects to act as the primary contractor and project manager on
construction contracts for facilities and to subcontract with local or other
known developers who act as the general contractor. The Company will develop a
decision team of management personnel and subcontractors to respond to these
opportunities and perform these functions. Eventually, the Company may employ
architects established in the design of youth care or correctional facilities to
assist and augment these efforts. The Company believes that it typically will
take 12 to 24 months to construct a facility after the contract is executed and
financing is approved.
As part of the development activities, the Company will facilitate the
arrangement of construction financing to contracting governmental agencies. The
governmental agency may finance the construction of such facilities through
various methods including, but not limited to, the following: (i) a one time
general revenue appropriation by the governmental agency for the cost of the new
facility, (ii) general obligation bonds that are secured by either a limited or
unlimited tax levy by the issuing governmental entity, or (iii) lease revenue
bonds or certificates of participation secured by an annual lease payment that
is subject to annual or bi-annual legislative appropriations. The Company will
not act as a source of financing nor as a broker in any regard with respect to
any of such methods of financing nor will it assume any risk associated with the
financing.
CUSTOMERS AND MARKETING
The Company's sales and marketing efforts are directed toward developing
new programs focused on payors and placement authorities. Placement authorities
consist of state juvenile services agencies, judges of juvenile and other
courts, parole officers, state welfare and child protective agencies, doctors,
psychiatrists, psychologists and hospitals. The Company's senior management and
its senior marketing personnel coordinate with personnel at the Company's
programs to pursue RFP and POS contracts with governments and government
agencies and contracts with private third party payors. The Company believes
that this combined sales and marketing effort ensures that its regional efforts
are consistent with the Company's overall business strategy and that sales
efforts conform to the condition of the market in each region. Further, the
Company believes that its local and regional executive directors and personnel
provide the Company with a competitive advantage through their local contacts
and understanding of local and regional business conditions.
The Company must market its services to governments and government agency
payors in order to capitalize on privatization opportunities. These agencies
contract with the Company to be an "authorized" or licensed provider of services
to troubled youth within their states. In the case of contracts resulting from
RFPs, the agency payor will also be the party responsible for placing the youth.
In the case of POS contracts, the placements need to be more actively sought by
the Company from various sources. In either event, the residential programs
require a concerted effort by the student admissions personnel to manage the
admissions and graduation of students in order to maintain high occupancy. The
student admissions personnel of each program must continually market to
placement authorities in order to obtain a steady flow of referrals.
8
<PAGE> 11
The Public Relations Department at YSI assists the individual programs in
developing local community involvement and relations activities, including
instituting Community Advisory Boards, Community Relations Groups, Foster
Grandparents Programs and Volunteer Programs. In addition, most of the YSI
programs include student involvement in local community service projects such as
park and highway clean-up, snow removal, holiday and festival set-up, feeding
the homeless, and charity races and marathons. The Public Relations Department
also directs a proactive marketing and communications program that includes
public relations, investor relations and media relations for the Company.
PERSONNEL AND TRAINING
GENERAL
The Company has assembled an experienced team of managers and staff that
blends program expertise with business and financial experience in each area of
its operations. This team includes juvenile justice administrators, educators,
mental health professionals, retired military officers and collegiate coaches
and athletes, combined with human resource, financial, facilities and marketing
professionals. YSI prefers to recruit direct care staff who have obtained
undergraduate or graduate degrees in education and in behavioral or social
sciences. YSI believes that its team is fully qualified to carry out the
Company's mission.
YSI employed approximately 2,900 full-time equivalent personnel as of June
30, 1996: 51% in direct care workers; 40% in professional, teacher and manager
positions; and 9% in support functions. In addition, the Company routinely
utilizes independent contractors as needed for medical, educational, facility
expansion, and support services.
Newly hired direct care staff receive pre-service and continuing training.
Core training includes courses in the major YSI program components such as
behavior change education, positive peer culture, discipline and limit setting,
emotion management and the teaching of pro-social skills. Annual continuing
education also is required of all professional staff. In addition, YSI
demonstrates its commitment to its employees' professional development by
offering lectures, classes and training programs as well as tuition
reimbursement benefits.
YSI believes that its recruitment, selection and training programs provide
the Company with quality personnel experienced in YSI's approach to providing
behavior change and education programs. YSI also believes that these programs,
which are conducted throughout the YSI system, provide the Company with
management depth and consistency. These programs promote the cross training of
staff resources which, in turn, creates flexibility in managing the Company's
personnel resources as the number and location of programs expand. Management is
committed to programs that foster career planning and development and that
include elements such as succession planning, regularly scheduled and timely
performance reviews and promoting talented people as they move through the
organization.
QUALITY ASSURANCE
The Company utilizes Quality Improvement Committees at its various programs
in order to monitor and make recommendations and, if appropriate, take
corrective actions. The committees are comprised of employees at various levels
of authority and from various operating departments within each program. In
addition, from time to time, employees of one facility visit other facilities
and perform inspections and critique programs.
The Company's senior management includes a contract compliance officer who
ensures that the various programs are in compliance with their respective
contractual requirements. The contract compliance officer coordinates his
efforts with the Quality Improvement Committees at the Company's various
programs and provides senior management with periodic reports regarding the
overall status of the Company's programs. The Company believes that the contract
compliance officer provides senior management with a vital link to the programs
operations and helps ensure that the Company provides consistent, quality
service.
Governmental agencies perform audits of each operating program, its record
keeping, and the condition of the physical plant pursuant to the Company's
contract or as part of the licensing or license renewal process. In addition,
several programs operate with industry accreditations, such as the Joint
Commission on Accreditation of Healthcare Organizations (JCAHO). Periodic
inspections are undertaken by the accreditation organization in order for the
Company to maintain its accreditation.
9
<PAGE> 12
COMPETITION
YSI competes with a wide variety of organizations, including other
for-profit companies, not-for-profit companies and governmental agencies that
provide youth care services. The Company distinguishes itself from its
competitors by emphasizing growth and development through behavior change and
education programs as opposed to strictly punitive incarceration and
institutionalization. The Company competes primarily on the basis of the quality
and range of its programs, on price and on the professional reputation of its
programs and personnel. The industry is highly fragmented and the Company
believes that most providers of youth care services are very small and operate
on a local or regional basis. YSI believes that there are very few competitors
that can offer as broad an array of services on a national basis. Some of the
Company's competitors have financial resources greater than the Company and
could expand their operations and scope.
REGULATION
The industry in which the Company operates is subject to extensive federal,
state and local regulations that are administered by a variety of regulatory
authorities. Providers of youth services must comply with a variety of
applicable state and local regulations, including education, health care and
safety regulations. The Company must maintain appropriate licenses,
certifications and accreditation for its programs in order to conduct its
operations. In addition, many state and local governments are required to
conduct a competitive bidding procedure before awarding contracts for products
or services. The failure to comply with any applicable laws, rules or
regulations or the suspension, placement of provisions on or loss of a license
may have a material adverse effect on the Company's business, financial
condition and results of operations. Further, the current and future operations
of the Company may be subject to additional regulations as a result of, among
other factors, new statutes and regulations and changes in the manner in which
existing statutes and regulations are or may be interpreted or applied. Any such
additional regulations may have a material adverse effect on the Company's
business, financial condition and results of operations.
The health care industry is subject to extensive regulation by federal,
state and local governments, including regulations under Medicare and Medicaid
programs. Certain of the Company's behavioral health programs, are subject to
such regulation. Failure to comply with such laws and regulations can cause
fines and other penalties to the Company and can cause expulsion from Medicare,
Medicaid or other program involvement which sanctions could have a material
adverse affect on the Company. Government-imposed limitations on Medicare and
Medicaid reimbursement have placed downward pressures on rates charged under
these programs and have caused the private sector to bear a greater share of
increasing health care costs. As a result of the continued escalation of health
care costs and the inability of many individuals to obtain health insurance,
numerous proposals have been or may be considered in the United States Congress
and various state legislatures relating to health care reform. Certain measures,
if adopted, could affect the rates charged by the Company for certain of its
services, could affect the manner in which care must be provided or could
otherwise have a material adverse affect on the Company's business.
ITEM 2. PROPERTIES
Consistent with the Company's policy of limited capital deployment, most of
the Company's facilities are leased and the total cost to the Company for the
land and facilities that it owns was approximately $5.5 million as of June 30,
1996. Many of the lease arrangements are on terms the Company considers to be
favorable. Several leases provide for multiple renewal periods at the option of
the Company providing long-term availability for the Company without the
long-term commitment of resources.
In many cases, the Company leases the facilities it uses in connection with
its program from the customer with which it contracts for the services. In these
cases the lease terms are concurrent with the terms of the service contracts.
The rent varies based upon the terms of the service contract. For example,
facilities used by the Company in connection with the Hickey School and Victor
Cullen Academy programs are provided by the State of Maryland at a cost to the
Company of $1.00 per year each. The Company is responsible for the utilities,
maintenance and repair of the facilities.
10
<PAGE> 13
The Company's executive offices and headquarters are located in a 10,845
square foot leased facility located at 2 Park Center Court, Suite 200, Owings
Mills, Maryland. The lease for this facility expires in May 2002.
ITEM 3. 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 operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information required by this Item 4 is not applicable.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed and traded on the Nasdaq National
Market under the symbol "YSII." On May 24, 1996, the Company affected a
three-for-two stock split through the declaration and payment of a stock
dividend of one share of Common Stock for every two shares of Common Stock
outstanding or reserved for issuance. The following table sets forth the high
and low sales prices of the Common Stock as reported on the Nasdaq National
Market after giving effect to the stock split.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1995:
1st Quarter......................................................... 61/2 4 2/3
2nd Quarter......................................................... 51/3 3 2/3
3rd Quarter......................................................... 67/12 3 /12
4th Quarter......................................................... 81/12 6 1/4
FISCAL YEAR ENDED JUNE 30, 1996:
1st Quarter......................................................... 71/12 5 1/2
2nd Quarter......................................................... 111/3 6 3/4
3rd Quarter......................................................... 17 10 1/6
4th Quarter......................................................... 275/6 11 5/6
</TABLE>
As of September 12, 1996, the approximate number of holders of record of
common stock of the Company was 462.
The Company has never paid dividends on its Common Stock (other than the
stock dividend on May 24, 1996 to effect the stock split) and does not
anticipate paying any dividends in the foreseeable future as the Company intends
to retain all earnings, if any, for use in the expansion of its business. The
declaration and payment of dividends by the Company are subject to the
discretion of the Company's Board of Directors. Any declaration of dividends in
the future will depend upon the results of operations, capital requirements and
financial condition of the Company, contractual restrictions in loan and other
agreements and such other factors as the Company's Board of Directors may deem
relevant.
11
<PAGE> 14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company as of and
for each of the years in the five year period ended June 30, 1996 are derived
from the audited consolidated financial statements of the Company. All of the
financial data presented in the following table should be read in conjunction
with the Company's Consolidated Financial Statements, including the notes
thereto, included herein and Management's Discussion and Analysis of Financial
Condition and Results of Operations. See "Consolidated Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------------------------------
1992 1993 1994 1995 1996
----- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................ $ 436 $ 8,895 $34,892 $53,087 $100,353
Program expenses
Direct operating........................... 499 8,390 29,533 44,374 85,822
Amortization of goodwill................... -- 7 286 583 1,039
Start-up costs............................. 122 392 40 280 58
----- ------- ------- ------- --------
Contribution from operations.................... (185) 106 5,033 7,850 13,434
Other operating expenses
Selling, general and administrative........ 620 1,595 2,731 4,097 5,760
Costs of attempted acquisitions............ -- -- -- -- 569
----- ------- ------- ------- --------
Income (loss) from operations................... (805) (1,489) 2,302 3,753 7,105
----- ------- ------- ------- --------
Other income (expense)
Interest expense........................... (1) (173) (403) (268) (3,160)
Interest income............................ 14 8 51 50 645
Other income (expense), net................ -- (17) 2 (24) (463)
----- ------- ------- ------- --------
13 (182) (350) (242) (2,978)
----- ------- ------- ------- --------
Income (loss) before income tax (expense)
benefit....................................... (792) (1,671) 1,952 3,511 4,127
Income tax (expense) benefit.................... -- -- 140 (1,332) (1,856)
----- ------- ------- ------- --------
Net income (loss)............................... $(792) $(1,671) $ 2,092 $ 2,179 $ 2,271
===== ======= ======= ======= ========
Earnings (loss) per common and common equivalent
share......................................... $(.17) $ (.27) $ .29 $ .26 $ .25
===== ======= ======= ======= ========
Weighted average common and common equivalent
shares outstanding............................ 4,722 6,271 7,094 8,264 9,267
===== ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
--------------------------------------------------
1992 1993 1994 1995 1996
----- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash............................................ $ 369 $ 663 $ 3,816 $ 784 $ 7,046
Working capital................................. 444 178 6,078 9,726 29,961
Total assets.................................... 742 4,704 18,130 29,050 74,639
Long-term obligations, net of current portion... 70 3,141 1,291 6,955 43,145
Total liabilities............................... 258 5,452 4,315 11,382 51,188
Shareholders' equity (deficit).................. 484 (748) 13,815 17,668 23,451
</TABLE>
12
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
As of June 30, 1996, YSI operated 18 residential programs in 11 states. The
Company operates its programs through wholly-owned subsidiaries pursuant to
contracts directly with government agencies and third party payors or, in
certain instances, with unaffiliated not-for-profit entities that have contracts
with government agencies. See the Notes to the Company's Consolidated Financial
Statements.
The Company's programs are operated pursuant to fixed per diem contracts
based upon program occupancy and management contracts, including management
contracts with not-for-profit entities, as well as various third party payor
reimbursement contracts. The Company recognizes revenues under all contracts as
the services are performed. Under certain cost-based reimbursement contracts,
certain costs may be subject to audit and adjustment as determined through
negotiations with government or third party payor representatives. Under these
contracts, contract revenues are recorded at amounts that are expected to be
realized. In addition, the Company recognizes revenue from its consulting and
development services as they are performed.
The contribution from operations, in general, is lower in the initial
stages of a program's development primarily due to costs associated with
staffing requirements needed to obtain licensing prior to admitting students
into a program as well as costs incurred during the period prior to the
achievement of stable program occupancy. The Company's contribution from
operations as a percentage of revenue is greater under some of its contractual
arrangements with unaffiliated not-for-profit entities because the
not-for-profit entity is responsible for certain elements of operating the
program and incurs some of the costs. Therefore, in these instances, the Company
earns its margin on a lower base of costs and revenues.
On May 24, 1996, the Company effected a three-for-two stock split through
the payment of a stock dividend of one share of common stock for every two
shares of common stock held by each record holder thereof.
RECENT DEVELOPMENTS
In September 1996, the Company exercised its option (the "Option") to
acquire all of the stock of Introspect Healthcare Corporation ("Introspect") for
$4,000,000 in cash. 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. As of June 30, 1996, Introspect had assets of approximately $9,293,000
and liabilities of approximately $13,867,000, after intercompany eliminations.
Upon exercise of the Option, the Company retired $9,693,000 of Introspect's
indebtedness with an average interest rate of approximately 11.7% utilizing
funds drawn against YSI's existing credit facilities.
The Company acquired the Option on July 1, 1995, in conjunction with
acquiring the Desert Hills New Mexico program from Introspect and entering into
a management agreement to manage Introspect for a period of five years.
Introspect is a provider of residential and non-residential behavioral health
services to troubled youth through the 120-bed Desert Hills Arizona program. In
addition, under the Company's management during fiscal year 1996, the Desert
Hills Arizona program added juvenile justice programs with a current capacity of
26 beds.
As a result of the "early" exercise of the Option effective as of September
1, 1996 (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 fiscal year 1996 and the
first two months of the first quarter of fiscal year 1997. 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 fiscal year 1996. The acquisition
pursuant to the exercise of the Option will be recorded using the purchase
method of accounting with effect as of September 1, 1996. As a result, the
Company's balance sheet for fiscal year 1996 does not reflect the acquisition of
Introspect pursuant to the exercise of the Option. In addition, the effect of
consolidating Introspect's operations for the first two months
13
<PAGE> 16
of the first quarter of fiscal year 1997, as well as the results of operations
from Introspect during a transition period subsequent to the acquisition during
which the Company intends to improve the operating results of this program, are
expected to continue to adversely affect the Company's consolidated results of
operations.
In July 1996, the Company completed a transaction whereby foreign holders
of an aggregate principal amount of $5,750,000 of the Company's 7% Convertible
Subordinated Debentures Due 2006 (the "Debentures") surrendered such Debentures
for conversion and received in the aggregate 461,106 shares of Common Stock,
accrued interest of $105,500 and a conversion premium of $297,000 (reflecting
the excess of the market value of the Debentures over the face amount at that
time). The Company elected to pay the accrued interest and the premium to induce
the early conversion of these Debentures because the Company believes the
transaction to be accretive to future earnings. Because the Company decided to
pursue this transaction during fiscal year 1996, the Company recorded the
conversion premium in the fourth quarter of fiscal year 1996; however, for
balance sheet purposes, because the transaction occurred in July 1996, the
conversion of the Debentures are not reflected in the Company's consolidated
balance sheet as of June 30, 1996.
In July 1996, the Company purchased the assets and assumed certain
liabilities of Youth Quest, Inc., a Utah corporation that provides residential
group care, therapeutic foster care, and counseling services to approximately
100 youth.
RESULTS OF OPERATIONS
The following table sets forth selected items from the Company's
consolidated financial statements expressed as a percentage of total revenues:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE
30,
-------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Revenues............................................................. 100.0% 100.0% 100.0%
Program expenses:
Direct operating................................................ 84.6 83.6 85.5
Amortization of goodwill........................................ 0.9 1.1 1.0
Start-up costs.................................................. 0.1 0.5 0.1
----- ----- -----
Contribution from operations......................................... 14.4 14.8 13.4
Other operating expenses:
Selling, general and administrative............................. 7.8 7.7 5.7
Costs of attempted acquisitions................................. -- -- 0.6
----- ----- -----
Income from operations............................................... 6.6 7.1 7.1
Other income (expense):
Interest expense................................................ (1.2) (0.5) (3.1)
Interest income................................................. 0.2 0.1 0.6
Other income (expense), net..................................... -- (0.1) (0.5)
----- ----- -----
Income before income tax benefit (expense)........................... 5.6 6.6 4.1
Income tax benefit (expense)......................................... 0.4 (2.5) (1.8)
----- ----- -----
Net income........................................................... 6.0% 4.1% 2.3%
===== ===== =====
</TABLE>
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1995
Revenues. Revenues increased $47,266,000, or 89.0%, to $100,353,000 for
fiscal year 1996 from $53,087,000 for fiscal year 1995 primarily as a result of
the addition of new programs operated by the Company during each period. Of the
total increase in revenues, $12,931,000 is attributable to the full year of
operations of four programs that were acquired or opened during fiscal year
1995; $12,713,000 relates to the operations of two programs that were acquired
during fiscal year 1996; and $4,214,000 is attributable to the operations of
three programs that the Company opened or began operating during fiscal year
1996. In addition, $16,131,000 of the increase resulted from the consolidation
of the operations of Introspect for the full fiscal year 1996. An increase in
revenues of $2,497,000 was attributable to programs that were operated by the
14
<PAGE> 17
Company for both the full fiscal years 1995 and 1996. The increase in revenues
was partially offset by a decrease in revenues of $885,000 resulting from the
closing of one program in 1996 and a decrease in consulting services and other
revenues of $335,000 as compared to the previous period. The average daily
enrollment for all of the Company's programs increased 51.2% to 1,901 youth in
fiscal year 1996 from 1,257 youth in fiscal year 1995, including a 5.2% increase
in average daily enrollment in programs that the Company operated for both the
full fiscal years 1996 and 1995 to 1,180 youth from 1,122 youth. The Company
reported an occupancy rate of 92.1% in fiscal year 1996 compared to 92.2% in
fiscal year 1995 based on an average daily licensed capacity of 2,065 beds for
fiscal year 1996 and 1,364 beds for fiscal year 1995.
Program Direct Operating Expenses. Program direct operating expenses
increased $41,448,000, or 93.4%, to $85,822,000 for fiscal year 1996 from
$44,374,000 for fiscal year 1995 primarily as a result of the addition of new
programs operated by the Company during each period. Of the total increase in
expenses, $9,868,000 is attributable to the full year of operations of four
programs that were acquired or opened during fiscal year 1995; $8,681,000
relates to the operations of two programs that were acquired during fiscal year
1996, and $5,236,000 is attributable to the operations of three programs that
the Company opened or began operating during fiscal year 1996. In addition,
$15,235,000 of the increase resulted from the consolidation of the operations of
Introspect for the full fiscal year 1996. Salaries and related employee benefits
decreased to approximately 64.5% of program direct operating expenses for fiscal
year 1996 compared to 70.6% of program direct operating expenses for fiscal year
1995. This decrease primarily is due to an increase in the number of behavioral
health programs operated by the Company which require a greater proportion of
higher skilled contracted professionals.
Contribution from Operations. Contribution from operations for fiscal year
1996 increased $5,584,000, or 71.1%, to $13,434,000 from $7,850,000 for fiscal
year 1995. Contribution from operations decreased as a percentage of revenues to
13.4% of revenues in fiscal year 1996 compared to 14.8% of revenues in fiscal
year 1995. This decrease is primarily attributable to the consolidation of the
operations of Introspect in fiscal year 1996. In fiscal year 1996, the
contribution from operations with respect to Introspect operations was $896,000
representing 5.6% of revenues from Introspect operations and in fiscal year
1995, the Company recognized $600,000 in contribution from operations which
represented 100% of the consulting revenue from the management of Introspect.
The change from recognizing management fees to consolidating the operations of
Introspect, which reported a significantly lower operating margin as compared to
the other programs operated by the Company, had the affect of reducing
contribution from operations as a percentage of revenues for fiscal year 1996.
In addition, amortization of goodwill increased $456,000 from $583,000 to
$1,039,000 as a result of the full year of amortization of goodwill recorded in
connection with three acquisitions completed during fiscal year 1995 and
additional goodwill recorded in connection with two acquisitions completed
during fiscal year 1996. Because the purchase accounting with respect to the
Introspect acquisition will not be recorded until the first quarter of fiscal
year 1997, no amortization of goodwill was recorded in fiscal year 1996 for such
transaction. See "-- Recent Developments."
Selling, General and Administrative Expenses. For fiscal year 1996,
selling, general and administrative expenses increased $1,663,000, or 40.6%, to
$5,760,000 from $4,097,000 for fiscal year 1995. As a percentage of revenues,
selling, general and administrative expenses decreased to 5.7% of revenues from
7.7% of revenues for fiscal year 1995. The most significant components of these
costs relate to the compensation expense and consulting fees associated with
business professionals necessary for the development and oversight of the
Company's operations. The decrease as a percentage of revenues from fiscal year
1995 is primarily attributable to revenues recorded as a result of the
consolidation of Introspect's operations of $16,131,000 with a minimal
corresponding increase in selling, general and administrative expenses in fiscal
year 1996.
Costs of Attempted Acquisitions. For fiscal year 1996, $569,000 of costs
were incurred in the pursuit of acquisitions that the Company elected not to
consummate, of which the most significant component was the costs associated
with the Three Springs, Inc. transaction.
Interest Expense. Interest expense increased $2,892,000 to $3,160,000 in
fiscal year 1996 from $268,000 in fiscal year 1995. Of the increase in interest
expense, $1,055,000 was attributable to the 7% Convertible Subordinated
Debentures Due 2006 that were issued on January 29, 1996, $1,146,000 was
recorded in connection with the consolidation of Introspect, and the remaining
increase of $691,000 resulted from
15
<PAGE> 18
increases in borrowings on the Company's revolving line of credit and other
miscellaneous debt assumed in connection with acquisitions made by the Company.
The Company retired substantially all of Introspect's debt upon the Company's
acquisition of Introspect in September 1996 utilizing funds drawn against YSI's
existing credit facilities.
Interest Income. For fiscal year 1996, interest income increased $595,000
to $645,000 from $50,000 in fiscal year 1995. The increase is primarily
attributable to $288,000 of dividend income earned on temporary investments and
$248,000 of interest income earned on the Company's excess cash balance.
Income Taxes. The provision for income taxes was $1,856,000, representing
an effective tax rate of 45.0% for fiscal year 1996 as compared to $1,332,000,
representing an effective tax rate of 37.9% for fiscal year 1995. The increase
in the effective tax rate was the result of the loss on Introspect operations
which was not consolidated for tax purposes, the increase in non-deductible
goodwill and other non-deductible expenses.
Net Income. Net income was $2,271,000, or $.25 per share for fiscal year
1996 compared to $2,179,000, or $.26 per share for fiscal year 1995.
FISCAL YEAR ENDED JUNE 30, 1995 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1994
Revenues. Revenues increased $18,195,000, or 52.2%, to $53,087,000 for
fiscal year 1995 from $34,892,000 for fiscal year 1994 primarily as a result of
the addition of new programs operated by the Company during each period. Of the
total increase in revenues, $3,171,000 is attributable to the full year of
operations of two programs that were acquired during fiscal year 1994;
$3,092,000 relates to the operations of three programs that were acquired during
fiscal year 1995; and $4,463,000 relates to the operations of two programs which
the Company opened or began managing during fiscal year 1995. Consulting and
other revenue increased $759,000 to $925,000 in fiscal year 1995 from $166,000
in fiscal year 1994. An increase in revenues of $6,710,000 was attributable to
programs that the Company operated for both the full fiscal years 1994 and 1995.
The average daily enrollment for all of the Company's programs increased 48.1%
to 1,257 youth in fiscal year 1995 from 849 youth in fiscal year 1994, including
a 26.7% increase in average daily enrollment in programs that the Company
operated for both the full fiscal years 1995 and 1994 to 991 youth from 782
youth. The Company reported an occupancy rate of 92.2% in fiscal year 1995
compared to 89.3% in fiscal year 1994 based on an average daily licensed
capacity of 1,364 beds for fiscal year 1995 and 951 beds in fiscal year 1994.
Program Direct Operating Expenses. Program direct operating expenses
increased $14,841,000, or 50.3%, to $44,374,000 for fiscal year 1995 from
$29,533,000 for fiscal year 1994 primarily as a result of the addition of new
programs operated by the Company during each period. Of the total increase in
expenses, $2,613,000 is attributable to the full year of operations of two
programs that were acquired during fiscal year 1994; $2,555,000 relates to the
operations of three programs that were acquired during fiscal year 1995; and
$5,085,000 relates to the operations of two programs which the Company opened or
began managing during fiscal year 1995. Salaries and related employee benefits
increased to approximately 70.6% of program direct operating expenses for fiscal
year 1995 compared to 67.1% of program direct operating expenses for fiscal year
1994.
Program Start-up Costs. Program start-up costs in fiscal year 1995 of
$280,000 consisted of costs related to the opening of two programs. Program
start-up costs in fiscal year 1994 of $40,000 consisted of costs incurred in
connection with the opening of one program.
Contribution from Operations. Contribution from operations for fiscal year
1995 increased $2,817,000, or 56.0%, to $7,850,000 from $5,033,000 for fiscal
year 1994. Contribution from operations increased as a percentage of revenues to
14.8% in fiscal year 1995 from 14.4% in fiscal year 1994 primarily as a result
of fewer programs under development in fiscal year 1995 compared to fiscal year
1994, which initially earn lower contribution margins than mature programs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1,366,000, or 50.0%, to $4,097,000 for fiscal
year 1995 from $2,731,000 for fiscal year 1994. The increase in selling, general
and administrative expenses is primarily attributable to the addition of
management personnel needed to oversee an increased number of programs. As a
percentage of revenues, selling, general and
16
<PAGE> 19
administrative expenses decreased slightly to 7.7% of revenues for fiscal year
1995 from 7.8% of revenues for fiscal year 1994.
Income Taxes. The provision for income taxes was $1,332,000, representing
an effective tax rate of 37.9%, for fiscal year 1995 as compared to an income
tax benefit of $140,000 for fiscal year 1994. The income tax benefit in fiscal
year 1994 resulted from the realization of net operating loss carryforwards and
other tax benefits.
Net Income. Net income was $2,179,000, or $.26 per share for fiscal year
1995 as compared to $2,092,000, or $.29 per share for fiscal year 1994. On a
fully-taxed basis, net income for fiscal year 1994 would have been approximately
$1,230,000, or $.17 per share.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had $7,046,000 in cash and $29,961,000 of
working capital, which included $9,798,000 in investments available-for-sale.
Net cash provided by operating activities was $1,956,000 for fiscal year 1996
compared to net cash used in operating activities of $3,476,000 for fiscal year
1995. Net accounts receivable increased by $8,663,000 to $17,467,000 primarily
as a result of the increase in revenues during the year and the increase in the
number of behavioral health programs, for which collection periods typically are
longer than those of juvenile justice programs. The Company believes that its
collection experience for its behavioral health programs is consistent with
collection periods experienced for similar programs in the health care industry.
Net cash used in investing activities was $27,810,000 in fiscal year 1996,
of which approximately $10,223,000 was invested in investments
available-for-sale (a U.S. Government Bond fund and a Corporate Bond fund);
$6,726,000 was used to fund the Tampa Bay Academy acquisition of which
$3,271,000 was related to the purchase of a mortgage note receivable; $2,618,000
was used to fund the acquisition of Desert Hills New Mexico; and $1,000,000 was
advanced pursuant to a line of credit facility provided to Introspect during
fiscal year 1996. The remaining approximately $7,243,000 of investments made
during the year included leasehold improvements, vehicles, computer equipment
and other capital expenditures in support of existing programs.
Net cash provided by financing activities was $32,116,000 for fiscal year
1996 comprised primarily of the net proceeds from the 7% Convertible
Subordinated Debentures Due 2006 of $35,480,000, offset in part by the repayment
of outstanding balances on the Company's bank revolving line of credit and
certain other long-term borrowings. As of June 30, 1996, the Company had
approximately $10,000,000 of credit available on its existing bank revolving
line of credit.
Total debt of $43,933,000 on June 30, 1996 consisted primarily of
$37,950,000 of 7% Convertible Subordinated Debentures Due 2006, approximately
$2,201,000 for a capital lease assumed in the acquisition of Desert Hills New
Mexico, $2,799,000 in other debt and capital leases, and $983,000 of 12%
Subordinated Debentures. Interest on the 7% Convertible Subordinated Debentures
Due 2006 is payable semi-annually in arrears and the first interest payment date
was August 1, 1996. The Debentures, not redeemable by the Company for three
years, are convertible into shares of the Company's Common Stock at a conversion
price of $12.47 per share.
The Company believes that its current funds 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. However, if the Company should
identify one or more acquisition targets or begins substantial "de novo"
programs, it may need to access additional capital resources.
NEW ACCOUNTING STANDARDS NOT YET IMPLEMENTED
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
Disposed of." This statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be
17
<PAGE> 20
recoverable. This statement is effective for fiscal years beginning after
December 15, 1995. The Company has not yet determined the impact of this
statement on its consolidated financial position or results of operations.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123 "Accounting for Stock Based Compensation." This statement defines a fair
value based method of accounting for an employee stock option or similar equity
instrument and encourages, but does not require, all entities to adopt that
method of accounting for all of their employee stock compensation plans.
Entities electing not to make the change in accounting method must make pro
forma disclosures of net income and earnings per share as if the fair value
based method of accounting had been applied. The accounting and disclosure
requirements of this statement are effective for transactions entered into in
fiscal years that begin after December 15, 1995. The Company has not yet
determined whether or not it will adopt the fair value based method of
accounting defined in this statement.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
The consolidated financial statements of the Company are included on pages
F-1 through F-26 of this Form 10-K.
18
<PAGE> 21
SUPPLEMENTARY DATA
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
QUARTERLY RESULTS (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS
REPORTED ADJUSTED AS
FIRST ADJUST- FIRST REPORTED ADJUST- ADJUSTED
FISCAL YEAR ENDED JUNE 30, 1996 QTR MENTS QTR SECOND QTR MENTS SECOND QTR
-------- ------- -------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues.......................................... $19,348 $3,410 (1) $22,758 $20,376 $3,858 (1) $24,234
Program expense................................... 16,413 2,992 (1) 19,405 16,787 3,820 (1) 20,607
Amortization of goodwill.......................... 265 0 265 213 0 213
Start-up costs.................................... 0 0 0 30 0 30
Selling, general and administrative............... 1,349 0 1,349 1,452 0 1,452
Costs of attempted acquisitions................... 0 0 0 0 0 0
------- ------ ------- ------- ------ -------
Income from operations........................ 1,321 418 1,739 1,894 38 1,932
Other income (expense), net....................... (280) (311)(1) (591) (552) (280)(1) (832)
------- ------ ------- ------- ------ -------
Income before income taxes.................... 1,041 107 1,148 1,342 (242) 1,100
Income tax expense................................ 406 0 406 572 0 572
------- ------ ------- ------- ------ -------
Net income.................................... $ 635 $ 107 $ 742 $ 770 $ (242) $ 528
======= ====== ======= ======= ====== =======
Earnings per common and common equivalent
share(4)........................................ $ 0.07 $ 0.01 $ 0.08 $ 0.08 $(0.02) $ 0.06
======= ====== ======= ======= ====== =======
<CAPTION>
AS
REPORTED ADJUST- ADJUSTED
FISCAL YEAR ENDED JUNE 30, 1996 THIRD QTR MENTS THIRD QTR FOURTH QTR TOTAL
--------- ------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Revenues.......................................... $21,552 $3,757 (1,2) $25,309 $28,052 $100,353
Program expense................................... 17,809 4,029 (1) 21,838 23,972 85,822
Amortization of goodwill.......................... 271 0 271 290 1,039
Start-up costs.................................... 28 0 28 0 58
Selling, general and administrative............... 1,246 0 1,246 1,713 5,760
Costs of attempted acquisitions................... 0 0 0 569 569
------- ------ ------- ------- --------
Income from operations........................ 2,198 (272) 1,926 1,508 7,105
Other income (expense), net....................... (437) (309)(1) (746) (809) (2,978)
------- ------ ------- ------- --------
Income before income taxes.................... 1,761 (581) 1,180 699 4,127
Income tax expense................................ 657 (112)(3) 545 333 1,856
------- ------ ------- ------- --------
Net income.................................... $ 1,104 $ (469) $ 635 $ 366 $ 2,271
======= ====== ======= ======= ========
Earnings per common and common equivalent
share(4)........................................ $ 0.12 $(0.05) $ 0.07 $ 0.04 $ 0.25
======= ====== ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
AS
REPORTED ADJUSTED AS
FIRST ADJUST- FIRST REPORTED ADJUST- ADJUSTED
FISCAL YEAR ENDED JUNE 30, 1995 QTR MENTS QTR SECOND QTR MENTS SECOND QTR
-------- ------- -------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues.......................................... $11,065 $ 0 $11,065 $12,533 $ 0 $12,533
Program expense................................... 9,370 0 9,370 10,300 0 10,300
Amortization of goodwill.......................... 112 0 112 160 0 160
Start-up costs.................................... 281 0 281 435 0 435
Selling, general and administrative............... 848 0 848 969 0 969
------- ------ ------- ------- ------- --------
Income from operations........................ 454 0 454 669 0 669
Other income (expense), net....................... (16) 0 (16) (110) 0 (110)
------- ------ ------- ------- ------- --------
Income before income taxes.................... 438 0 438 559 0 559
Income tax expense................................ 124 0 124 230 0 230
------- ------ ------- ------- ------ --------
Net income.................................... $ 314 $ 0 $ 314 $ 329 $ 0 $ 329
======= ====== ======= ======= ====== ========
Earnings per common and common equivalent
share(4)........................................ $ 0.04 $ 0.00 $ 0.04 $ 0.04 $ 0.00 $ 0.04
======= ====== ======= ======= ====== ========
<CAPTION>
AS
REPORTED ADJUST- ADJUSTED
FISCAL YEAR ENDED JUNE 30, 1995 THIRD QTR MENTS THIRD QTR FOURTH QTR TOTAL
--------- ------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Revenues.......................................... $13,818 $ 0 $13,818 $ 15,409 $ 52,825
Program expense................................... 11,449 0 11,449 12,600 43,719
Amortization of goodwill.......................... 159 0 159 152 583
Start-up costs.................................... 0 0 0 20 736
Selling, general and administrative............... 1,036 0 1,036 1,181 4,034
-------- ------ --------- --------- --------
Income from operations........................ 1,174 0 1,174 1,456 3,753
Other income (expense), net....................... (54) 0 (54) (62) (242)
-------- ------- --------- ---------- --------
Income before income taxes.................... 1,120 0 1,120 1,394 3,511
Income tax expense................................ 444 0 444 534 1,332
-------- ------ -------- -------- --------
Net income.................................... $ 676 $ 0 $ 676 $ 860 $ 2,179
======== ====== ======== ======== ========
Earnings per common and common equivalent
share(4)........................................ $ 0.08 $ 0.00 $ 0.08 $ 0.10 $ 0.26
======== ====== ======== ======== ========
</TABLE>
- ---------------
(1) Consolidation of Introspect's results of operations for the fiscal year
ended June 30, 1996 after the reversal of revenue discussed in (2) below.
See Management's Discussion and Analysis of Financial Condition and Results
of Operations for further discussion.
(2) Reversal of revenue recognized in connection with the Company's management
agreement with Introspect in the amount of $303. This management fee
revenue was reversed in connection with the Company's consolidation of
Introspect's results of operations discussed in (1) above.
(3) Amount represents the tax effect related to the reversal of revenue
discussed in (2) above.
(4) Amounts have been restated, where applicable, to reflect the three-for-two
stock split that was effected May 24, 1996. Fully diluted earnings per
common and common equivalent share has not been presented as the impact is
anti-dilutive.
19
<PAGE> 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required by this Item 9 is not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this Item 10 is included under the captions
"Election of Directors", "Board of Directors" and "Executive Officers" in the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A no
later than October 28, 1996 (the "1996 Proxy Statement") and that information is
incorporated by reference in this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is included under the caption
"Executive Compensation" in the 1996 Proxy Statement and that information is
incorporated by reference in this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is included under the caption
"Security Ownership of Management and Certain Beneficial Owners" in the 1996
Proxy Statement and that information is incorporated by reference in this Form
10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is included under the caption
"Certain Related Party Transactions" in the 1996 Proxy Statement and that
information is incorporated by reference in this Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements:
The consolidated financial statements of the Company are included on pages
F-1 through F-26 of this Form 10-K.
(2) Financial Statement Schedules
The financial statement schedules prescribed by this Item 14 are not
required.
(3) Exhibits (All references herein to "SEC" shall mean the U.S.
Securities and Exchange Commission)
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------------------------------------------------------
<C> <S>
3.1 Articles of Incorporation of the Company, as amended.(1)
3.2 Bylaws of the Company, as amended and restated.
4.1 The rights of security holders are defined in the Articles of Incorporation, as
amended, and the Bylaws, as amended and restated, of the Company filed as Exhibits
3.1 and 3.2 hereto, respectively.
4.2 The Company's 12% Subordinated Debenture Due December 31, 2002.(1)
4.3 Specimen of Common Stock Certificate.(1)
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------------------------------------------------------
<C> <S>
4.4 Form of Company's 7% Convertible Subordinated Debentures Due February 1, 2006.
(Included as exhibit to Exhibit 4.5 of this Form 10-K.)
4.5 Fiscal and Paying Agency Agreement dated January 29, 1996 by and among the Company,
The Chase Manhattan Bank, N.A., New York, The Chase Manhattan Bank, N.A., London and
Chase Manhattan Bank Luxembourg S.A. (Incorporated by reference to Exhibit 10.4 to
the Company's Quarterly Report on Form 10-Q for the quarter ended December 31,
1995.)
10.1 Contract among Youth Services International of Baltimore, Inc., the Company and the
Maryland Department of Juvenile Services for the operation and management of the
Charles H. Hickey, Jr. School.(1)
10.2 Contract between Youth Services International of Maryland, Inc. and the Maryland
Department of Juvenile Services for the operation of the Victor Cullen Center.(1)
10.13 Contract between the State of Tennessee and Youth Services International of
Tennessee, Inc., d/b/a Reflections Treatment Agency.(1)
10.31 The Company's Stock Option Plan.(1)
10.33 The Company's Board of Directors Compensation Plan. (Incorporated by reference to
Exhibit 4 to the Company's Registration Statement on Form S-8 (registration number
33-99500) filed with the SEC on November 16, 1995.)
10.34 Warrant to Purchase Common Stock of The Company.(1)
10.35 The Company's 1995 Employee Stock Option Plan. (Incorporated by reference to Exhibit
4 to the Company's Registration Statement on Form S-8 (registration number 33-84934)
filed with the SEC on October 11, 1994.)
10.36 The Company's 1996 Employee Stock Option Plan. (Incorporated by reference to Exhibit
4 to the Company's Registration Statement on Form S-8 (registration number 33-99498)
filed with the SEC on November 16, 1995.)
10.37 The Company's Fiscal Year 1997 Employee Stock Purchase Plan. (Incorporated by
reference to Exhibit 4 to the Company's Registration Statement on Form S-8
(registration number 333-07157) filed with the SEC on June 28, 1996.)
10.38 The Company's 1995 Director Stock Option Plan. (Incorporated by reference to Exhibit
4 to the Company's Registration Statement on Form S-8 (registration number 33-84938)
filed with the SEC on October 11, 1994.)
10.39 Asset Purchase Agreement between Parc Place Limited Partnership and Southwestern
Children's Health Services, Inc., a wholly-owned subsidiary of the Company
(Incorporated by reference to Exhibit to the Company's Current Report on Form 8-K
filed with the SEC on August 26, 1994.)
10.40 Asset Purchase Agreement, dated as of August 11, 1994, by and among Parc Place
Limited Partnership, Business Financial Services Corporation, Parc Place, Inc., PLC
Management, Inc., Patricia L. Carey, Bertram J. Trobman and Southwestern Children's
Health Services, Inc. (Incorporated by reference to Exhibit 1 to the Company's
Current Report on Form 8-K, filed with the SEC on August 24, 1994.)
10.41 Stock Purchase Agreement, dated as of September 1, 1994, by and among Nicholas J.
Mavrolas and Suzan N. Mavrolas and Southwestern Children's Health Services,
Inc.(Incorporated by reference to Exhibit 10.2 to the Company's Form 10-QSB, filed
with the SEC on November 14, 1994.)
10.42 Stock Purchase Agreement, dated as of June 1, 1995, by and among Kurt Mahoney, Ph.D.
and Southwestern Children's Health Services, Inc.(2)
10.43 Loan and Security Agreement, dated as of June 20, 1995, by and among the Company,
each of its subsidiaries and Signet Bank/Maryland.(2)
10.44 Master Revolving Promissory Note, dated as of June 20, 1995, by and among the
Company, each of its subsidiaries and Signet Bank/Maryland.(2)
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------------------------------------------------------
<C> <S>
10.45 Asset Purchase Agreement, dated as of June 30, 1995, by and among the Company, Youth
Services International of New Mexico, Inc., Desert Hills Center for Youth and
Families of New Mexico, Inc., Diversification Association, Inc., Introspect
HealthCare Corporation, Anna Ash, William Ash, Manuel G. Bracomonte, 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. (Incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K, filed with the SEC on August 3, 1995.)
10.46 Option Agreement, dated as of June 30, 1995, by and among the Company,
Diversification Association, Inc., Introspect HealthCare Corporation, Desert Hills
Center for Youth and Families, Inc., Desert Hills Center for Youth and Families of
Hawaii, Inc., Anna Ash, William Ash, Manuel G. Bracomonte, 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. (Incorporated by reference to Exhibit 2.2 to the Company's Current
Report on Form 8-K, filed with the SEC on August 3, 1995.)
10.47 Management Agreement, dated as of June 30, 1995, by and among the Company,
Southwestern Children's Health Services, 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.
Bracomonte, 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. (Incorporated by reference to
Exhibit 2.3 to the Company's Current Report on Form 8-K, filed with the SEC on
August 3, 1995.)
10.48 Loan Agreement, dated as of June 30, 1995, by and between Introspect HealthCare
Corporation and the Company. (Incorporated by reference to Exhibit 2.4 to the
Company's Current Report on Form 8-K, filed with the SEC on August 3, 1995.)
10.49 Asset Purchase Agreement dated March 27, 1996 by and among the Company, Youth
Services International of Florida, Inc., a Florida corporation and a wholly-owned
subsidiary of YSI, the Tampa Bay Academy, Ltd., a Florida limited partnership,
American Residential Centers, Inc., a Florida corporation and the general partner of
Tampa Bay and Malcolm B. Harriman, Edward C. Hoefle, Ronald L. Knaus and Wayne
Shive, being all of the stockholders of American Residential Centers, Inc.
(Incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form
8-K, filed with the SEC on April 11, 1996.)
10.50 Agreement dated March 27, 1996 by and among the Company, American Residential
Centers, Inc., a Florida corporation and Malcolm B. Harriman, Edward C. Hoefle,
Ronald L. Knaus and Wayne Shive, being all of the stockholders of American
Residential Centers, Inc. (Incorporated by reference to Exhibit 2.2 to the Company's
Current Report on Form 8-K, filed with the SEC on April 11, 1996.)
10.51 Lease dated March 27, 1996 but effective as of March 1, 1996 by and between The
Tampa Bay Academy, Ltd., a Florida limited partnership and Youth Services
International of Florida, Inc., a Florida corporation. (Incorporated by reference to
Exhibit 2.3 to the Company's Current Report on Form 8-K, filed with the SEC on April
11, 1996.)
10.52 Promissory Note dated April 13, 1989 made by The Tampa Bay Academy, Ltd., a Florida
limited partnership, in favor of National Home Life Assurance Company, a Missouri
corporation, in the original principal amount of $3,800,000. (Incorporated by
reference to Exhibit 2.4 to the Company's Current Report on Form 8-K, filed with the
SEC on April 11, 1996.)
10.53 Guaranty dated April 13, 1989 executed by Wayne M. Shive, Ann W. Shive, Malcolm B.
Harriman, Alysa G. Harriman, Edward C. Hoefle, Ronald L. Knaus and Yvonne Knaus.
(Incorporated by reference to Exhibit 2.5 to the Company's Current Report on Form
8-K, filed with the SEC on April 11, 1996.)
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------------------------------------------------------
<C> <S>
10.54 Mortgage, Assignment of Rents and Security Agreement dated April 13, 1989 by and
between The Tampa Bay Academy, Ltd., a Florida limited partnership, and National
Home Life Assurance Company, a Missouri corporation. (Incorporated by reference to
Exhibit 2.6 to the Company's Current Report on Form 8-K, filed with the SEC on April
11, 1996.)
10.55 Assignment dated March 27, 1996 by National Home Life Assurance Company, n/k/a
Providian Life and Health Insurance Company, a Missouri corporation in favor of the
Company. (Incorporated by reference to Exhibit 2.7 to the Company's Current Report
on Form 8-K, filed with the SEC on April 11, 1996.)
10.56 Promissory Note Modification Agreement dated March 27, 1996 by and among the
Company, a Maryland corporation, The Tampa Bay Academy, Ltd., a Florida limited
partnership, Wayne M. Shive, Ann W. Shive, Malcolm B. Harriman, Alysa G. Harriman,
Edward C. Hoefle, Ronald L. Knaus and Yvonne Knaus. (Incorporated by reference to
Exhibit 2.8 to the Company's Current Report on Form 8-K, filed with the SEC on April
11, 1996.)
10.57 Option Exercise Agreement, dated as of September 11, 1996, by and among the Company,
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. (Incorporated by reference to the Company's Current Report on
Form 8-K filed with the SEC on September 25, 1996. The Exhibits to the Option
Exercise Agreement have been omitted from such Form 8-K and this filing. The Company
hereby undertakes to furnish these materials to the SEC upon request.)
11 Computation of Per Share Earnings.
21 Subsidiaries of the Company
23 Consent of Arthur Andersen LLP, independent public accountants.
</TABLE>
- ---------------
(1) Incorporated by reference from the identically numbered exhibit to the
Company's Registration Statement (registration number 33-71958) filed with
the SEC on November 19, 1993, as amended.
(2) Incorporated by reference from the identically numbered exhibit to the
Company's Annual Report on Form 10-KSB for the year ended June 30, 1995.
(b) The Company filed a Current Report on Form 8-K on April 10, 1996 in
connection with its acquisition of the Tampa Bay Academy. The Form 8-K included
audited financial statements of The Tampa Bay Academy, Ltd. and of American
Residential Centers, Inc. for the years ended December 31, 1994 and 1995, and
pro forma financial statements of the Company for the fiscal year ended June 30,
1995 and the nine months ended March 31, 1996.
(c) Exhibits:
Exhibits required to be filed in response to this paragraph (c) are
listed above in subparagraph (a)(3.)
(d) Financial Statement Schedules:
Financial Statement Schedules prescribed to be filed in response to
this paragraph (d) of Item 14 are not required.
23
<PAGE> 26
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE 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/ TIMOTHY P. COLE
-------------------------------------
TIMOTHY P. COLE
VICE CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE EXCHANGE ACT OF
1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------- -------------------
<S> <C> <C>
/s/ W. JAMES HINDMAN Chairman of the Board September 26, 1996
- ---------------------------------------------
W. JAMES HINDMAN
/s/ TIMOTHY P. COLE Vice Chairman and September 26, 1996
- --------------------------------------------- Chief Executive Officer
TIMOTHY P. COLE (Principal Executive
Officer)
/s/ WILLIAM P. MOONEY Chief Financial Officer September 26, 1996
- --------------------------------------------- and Treasurer
WILLIAM P. MOONEY (Principal Financial
Officer and Principal
Accounting Officer)
/s/ HENRY D. FELTON President and September 26, 1996
- --------------------------------------------- Chief Operating Officer and
HENRY D. FELTON Director
Director September 26, 1996
- ---------------------------------------------
J. DONALD BLACK
/s/ MAYER KANTER Director September 26, 1996
- ---------------------------------------------
MAYER KANTER
Director September 26, 1996
- ---------------------------------------------
CYNTHIA K. HINDMAN, M.D.
Director September 26, 1996
- ---------------------------------------------
MARTIN V. MARSHALL
/s/ JACQUES T. SCHLENGER Director September 26, 1996
- ---------------------------------------------
JACQUES T. SCHLENGER
</TABLE>
24
<PAGE> 27
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF YOUTH SERVICES INTERNATIONAL, INC. AND
SUBSIDIARIES
Report of Independent Public Accountants.............................................. F-1
Consolidated Financial Statements:
Balance Sheets................................................................... F-2
Statements of Income............................................................. F-4
Statements of Shareholders' Equity............................................... F-5
Statements of Cash Flows......................................................... F-6
Notes to Consolidated Financial Statements....................................... F-7
</TABLE>
<PAGE> 28
YOUTH SERVICES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1995 AND 1996 AND
FOR THE YEARS ENDED JUNE 30, 1994, 1995 AND 1996
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
<PAGE> 29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Youth Services International, Inc.:
We have audited the accompanying consolidated balance sheets of Youth
Services International, Inc. (a Maryland corporation) and subsidiaries as of
June 30, 1995 and 1996, and the related consolidated statements of income,
shareholders' equity and cash flows for the years ended June 30, 1994, 1995 and
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits 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 audits provide 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 Youth
Services International, Inc. and subsidiaries as of June 30, 1995 and 1996, and
the results of their operations and their cash flows for the years ended June
30, 1994, 1995 and 1996, in conformity with generally accepted accounting
principles.
Baltimore, Maryland,
September 12, 1996
F-1
<PAGE> 30
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1995 AND 1996
ASSETS
<TABLE>
<CAPTION>
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash (Note 6)........................................................ $ 784 $ 7,046
Cash held in escrow (Note 16)........................................ 2,543 --
Restricted cash (Notes 1 and 12)..................................... 656 500
Investments available-for-sale (Notes 1 and 2)....................... -- 9,798
Accounts receivable, net of allowance for doubtful accounts of $175
and $748, respectively (Notes 1, 4, 6, 15, 20 and 23)............... 8,804 17,467
Refundable income taxes.............................................. 40 1,046
Current portion of notes receivable (Note 3)......................... -- 113
Prepaid expenses and supplies........................................ 1,224 1,918
Deferred tax asset (Notes 1 and 14).................................. -- 78
------- -------
Total current assets............................................ 14,051 37,966
------- -------
PROPERTY, EQUIPMENT AND IMPROVEMENTS
(Notes 1, 4 and 6):
Land................................................................. 307 621
Leasehold improvements............................................... 2,280 7,134
Program equipment.................................................... 1,135 2,289
Buildings............................................................ 2,164 5,162
Office furniture and equipment....................................... 1,738 3,874
Vehicles............................................................. 1,354 1,320
------- -------
8,978 20,400
Less -- Accumulated depreciation..................................... (1,726) (3,265)
------- -------
7,252 17,135
------- -------
OTHER ASSETS
(Notes 1, 3, 5, 14, 16, 20 and 23):
Deposits............................................................. 204 160
Organization costs, net.............................................. 29 38
Deferred debt issue costs, net....................................... 121 2,613
Goodwill, net........................................................ 5,874 9,613
Notes receivable, net of current portion............................. -- 4,133
Non-compete agreements, net.......................................... 116 277
Deferred tax asset................................................... 392 750
Management fee receivable............................................ 510 154
Other assets, net.................................................... 501 1,800
------- -------
7,747 19,538
------- -------
Total assets.................................................... $29,050 $74,639
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-2
<PAGE> 31
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1995 AND 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1995 1996
------- -------
(IN THOUSANDS
EXCEPT SHARE DATA)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable..................................................... $ 1,927 $ 1,465
Accrued payroll...................................................... 538 1,641
Accrued interest payable............................................. -- 1,093
Other accrued expenses (Notes 1, 11 and 12).......................... 1,121 3,018
Short-term borrowings (Note 4)....................................... 568 --
Current portion of long-term debt and capital lease obligations
(Notes 6 and 7).................................................... 133 788
Deferred tax liability (Notes 1 and 14).............................. 38 --
------- -------
Total current liabilities....................................... 4,325 8,005
DEFERRED REVENUE (Note 1)................................................. 102 38
CAPITAL LEASE OBLIGATIONS, less current portion (Note 7).................. 3 2,266
7% CONVERTIBLE SUBORDINATED DEBENTURES (Note 5)........................... -- 37,950
12% SUBORDINATED DEBENTURES, net of unamortized original issue discount of
$26 and $17, respectively, including debentures in the principal amount
of $580, held by shareholders or their close relatives (Note 5)......... 974 983
OTHER LONG-TERM DEBT, less current portion (Note 6)....................... 5,978 1,946
------- -------
Total liabilities............................................... 11,382 51,188
------- -------
COMMITMENTS AND CONTINGENCIES (Notes 1, 9 and 10).........................
SHAREHOLDERS' EQUITY (Notes 1, 5 and 13):
Common stock, $.01 par value:
authorized shares 20,000,000, issued and outstanding 8,056,141 at
June 30, 1995 and 8,597,712 at June 30, 1996, respectively.......... 81 86
Additional paid-in capital........................................... 16,337 20,099
Unrealized loss on investments available-for-sale.................... -- (255)
Accumulated earnings................................................. 1,250 3,521
------- -------
Total shareholders' equity...................................... 17,668 23,451
------- -------
Total liabilities and shareholders' equity...................... $29,050 $74,639
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 32
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- --------
(IN THOUSANDS EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
REVENUES (Notes 1, 15, 18 and 20)............................. $34,892 $53,087 $100,353
PROGRAM EXPENSES (Notes 1, 11, 15, and 18):
Direct operating......................................... 29,533 44,374 85,822
Amortization of goodwill................................. 286 583 1,039
Start-up costs........................................... 40 280 58
------- ------- --------
Contribution from operations........................ 5,033 7,850 13,434
OTHER OPERATING EXPENSES (Notes 1, 11, 15, and 18):
Selling, general and administrative...................... 2,731 4,097 5,760
Costs of attempted acquisitions.......................... -- -- 569
------- ------- --------
Income from operations.............................. 2,302 3,753 7,105
------- ------- --------
OTHER INCOME (EXPENSE) (Notes 3, 4, 5, 6, 7, and 23):
Interest expense......................................... (403) (268) (3,160)
Interest income.......................................... 51 50 645
Other income (expense), net.............................. 2 (24) (463)
------- ------- --------
(350) (242) (2,978)
------- ------- --------
Income before income tax (expense) benefit.................... 1,952 3,511 4,127
Income tax (expense) benefit (Note 14)........................ 140 (1,332) (1,856)
------- ------- --------
Net income.......................................... $ 2,092 $ 2,179 $ 2,271
======= ======= ========
Earnings per common and common equivalent share (Note 1)...... $ 0.29 $ 0.26 $ 0.25
======= ======= ========
Weighted average common and common equivalent shares
outstanding (Note 1)........................................ 7,094 8,264 9,267
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 33
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(NOTES 1, 2, 5, 13 AND 14)
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL ACCUMULATED UNREALIZED LOSS SHAREHOLDERS'
COMMON PAID-IN (DEFICIT) ON INVESTMENTS (DEFICIT)
STOCK CAPITAL EARNINGS AVAILABLE-FOR-SALE EQUITY
------ ---------- ----------- ------------------ -------------
(IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1993...................... $ 50 $ 2,223 $(3,021) $ -- $ (748)
Repurchase of 5,294 shares of common
stock, at $2.00....................... -- (11) -- -- (11)
Tax benefit realized due to exercise of
employee stock options................ -- 108 -- -- 108
Issuance of 1,950,000 shares of common
stock at $6.67 per share, net of
issuance costs of $1,696,000, in
connection with initial public
offering.............................. 20 11,284 -- -- 11,304
Issuance of common stock as follows:
91,500 shares at $0.67, 7,500 shares
at $1.33 and 307,536 shares at $2.00
under the Stock Option Plan; and
170,200 shares at $1.70, 29,074 shares
at $2.83 and 6,885 shares at $4.53
under the Employee Stock Purchase
Plan, net of issuance costs of
$19,000............................... 6 1,064 -- -- 1,070
Net income.............................. -- -- 2,092 -- 2,092
---- ------- ------- ------ -------
BALANCE, June 30, 1994...................... 76 14,668 (929) -- 13,815
Tax benefit realized due to exercise of
employee stock options................ -- 554 -- -- 554
Issuance of common stock as follows:
182,499 shares at $0.67, 7,999 shares
at $1.67, 38,499 shares at $2.00 and
148,476 shares at $3.75 under the
Stock Option Plans; and 2,798 shares
at $3.40, 95,196 shares at $4.18 and
3,600 shares at $5.31 under the
Employee Stock Purchase Plan, net of
issuance costs of $76,000............. 5 1,115 -- -- 1,120
Net income.............................. -- -- 2,179 -- 2,179
---- ------- ------- ------ -------
BALANCE, June 30, 1995...................... 81 16,337 1,250 -- 17,668
Tax benefit realized due to exercise of
employee stock options................ -- 1,029 -- -- 1,029
Issuance of common stock as follows:
88,500 shares at $0.67, 11,250 shares
at $1.67, 58,776 shares at $2.00,
58,552 shares at $3.75, 50,625 shares
at $5.00, 5,663 shares at $5.33, 2,999
shares at $5.25 and 15,000 shares at
$8.83 under the Stock Option Plans;
and 44,900 shares at $5.67, 137,704
shares at $6.02, 25,353 shares at
$8.79 and 42,249 shares at $14.46
under the Employee Stock Purchase
Plan, net of issuance costs of
$26,000............................... 5 2,733 -- -- 2,738
Unrealized loss on investments
available-for-sale, net of tax
effect................................ -- -- -- (255) (255)
Net income.............................. -- -- 2,271 -- 2,271
---- -------- ------- ------ -------
BALANCE, June 30, 1996...................... $ 86 $ 20,099 $ 3,521 $ (255) $23,451
==== ======== ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 34
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income........................................................................... $ 2,092 $ 2,179 $ 2,271
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Loss on Introspect operations.................................................... -- -- 296
Depreciation and amortization.................................................... 799 1,841 3,428
(Gain) loss on disposal of property, equipment and improvements.................. (13) -- 105
(Increase) decrease in deferred taxes, net....................................... (381) 27 (304)
Tax benefit realized due to exercise of employee stock options................... 108 554 1,029
Net change in operating assets and liabilities................................... (2,214) (8,077) (4,869)
------- ------- --------
Net cash provided by (used in) operating activities...................................... 391 (3,476) 1,956
------- ------- --------
INVESTING ACTIVITIES:
Purchases of property, equipment and improvements.................................... (2,522) (3,521) (9,675)
Proceeds from sale of property, equipment and improvements........................... 25 -- 674
Organization costs................................................................... (4) (10) (19)
Goodwill............................................................................. (245) (1,827) (2,203)
Disbursements for notes receivable................................................... -- -- (4,271)
Collection of notes receivable....................................................... -- -- 25
Purchases of investments available-for-sale.......................................... -- -- (10,223)
Other long-term assets............................................................... -- (501) (1,868)
Non-compete agreements............................................................... -- (40) (250)
------- ------- --------
Net cash used in investing activities.................................................... (2,746) (5,899) (27,810)
------- ------- --------
FINANCING ACTIVITIES:
Proceeds from short-term borrowings.................................................. 710 202 440
Proceeds from borrowings on other long-term debt..................................... -- 5,350 7,566
Issuance of 7% convertible subordinated debentures................................... -- -- 37,950
Repayments of short-term borrowings, other long-term debt and capital lease
obligations......................................................................... (7,565) (238) (13,914)
Proceeds from Initial Public Offering, net........................................... 11,304 -- --
Proceeds from issuance of common stock under the Employee Stock Option
and Purchase Plans, net............................................................ 1,070 1,120 2,738
Repurchase of common stock........................................................... (11) -- --
Deferred debt issue costs............................................................ -- (91) (2,664)
------- ------- --------
Net cash provided by financing activities................................................ 5,508 6,343 32,116
------- ------- --------
NET INCREASE (DECREASE) IN CASH.......................................................... 3,153 (3,032) 6,262
CASH, beginning of year.................................................................. 663 3,816 784
------- ------- --------
CASH, end of year........................................................................ $ 3,816 $ 784 $ 7,046
======= ======= ========
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Cash held in escrow.................................................................. $ -- $(2,543) $ 2,543
Restricted cash...................................................................... (170) (435) 156
Accounts receivable.................................................................. (2,730) (4,187) (8,700)
Refundable income taxes.............................................................. (177) 137 (1,006)
Prepaid expenses and supplies........................................................ (70) (948) (684)
Deposits............................................................................. (76) (65) 44
Deferred debt issue costs and other.................................................. (25) -- --
Management fee receivable............................................................ -- (510) 60
Accounts payable..................................................................... 6 1,122 (1,173)
Accrued payroll...................................................................... 636 (790) 928
Accrued interest payable............................................................. -- -- 1,093
Accrued transition costs............................................................. (213) -- --
Other accrued expenses............................................................... 605 142 1,897
Deferred revenue..................................................................... -- -- (27)
------- ------- --------
Net change in operating assets and liabilities........................................... $(2,214) $(8,077) $ (4,869)
======= ======= ========
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest............................................................... $ 403 $ 268 $ 921
======= ======= ========
Cash paid for taxes.................................................................. $ 310 $ 655 $ 2,292
======= ======= ========
Noncash net asset acquisition through assumption of liabilities, notes payable,
bank loan and mortgage assumption.................................................. $ 4,260 $ 1,440 $ 4,880
======= ======= ========
Noncash reduction of accounts receivable through application of advance payments for
services............................................................................ $ 37 $ 38 $ 37
======= ======= ========
Noncash acquisition of leasehold improvements through a note payable................. $ -- $ 79 $ --
======= ======= ========
Capital lease obligation............................................................. $ -- $ -- $ 230
======= ======= ========
Unrealized loss on investments available-for-sale.................................... $ -- $ -- $ 425
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 35
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1994, 1995 AND 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Youth Services International, Inc. (YSI, Inc.) and its subsidiaries
(collectively, "the Company") are organized to privately manage and operate a
broad range of educational, developmental and rehabilitative programs for
troubled youth who have either been adjudicated as delinquents or suffer from
behavioral problems. The Company commenced the operation of its first program in
February, 1992. As of June 30, 1996, the Company managed and operated programs
in 11 states. The Company's programs are provided in residential, boot camp and
non-residential settings.
On February 3, 1994, the Company sold 1,950,000 shares of common stock at
$6.67 per share pursuant to its Registration Statement filed on Form SB-2 with
the Securities and Exchange Commission. The net proceeds to the Company from
this offering were used to reduce long-term indebtedness, borrowings under the
lines of credit and other short-term borrowings, to fund the acquisitions of
Prestige and Western Youth, to fund capital expenditures and provide working
capital. The costs associated with the registration and sale of the common stock
were recorded as a reduction of additional paid-in capital.
Principles of Consolidation
The consolidated financial statements include the accounts of Youth
Services International, Inc. and the following wholly-owned subsidiaries:
- Youth Services International of Iowa, Inc. (YSII)
- Youth Services International of Tennessee, Inc. (YSIT)
- YSI of Utah, Inc. (YSIU)
- Youth Services International of Baltimore, Inc. (YSIB)
- Youth Services International of Maryland, Inc. (YSIM)
- Youth Services International of Northern Iowa, Inc. (YSINI)
- Youth Services International of South Dakota, Inc. (YSISD)
- Youth Services International of Missouri, Inc. (YSIMO)
- YSI of Central Iowa, Inc. (YSICI)
- Youth Services International of New Mexico, Inc. (YSINM)
- Youth Services International of Texas, Inc. (YSITX)
- Youth Services International of Florida, Inc. (YSIF)
- Youth Services International of Virginia, Inc. (YSIV)
- Southwestern Children's Health Services, Inc. (SWCHS) and its
wholly-owned subsidiaries --
- Promise House, Inc.
- Developmental Behavioral Consultants, Inc. (DBC)
YSINM, YSITX, YSIF and YSIV began operations during fiscal 1996 and, as
such had no operating activity through June 30, 1995. YSICI and SWCHS began
operations during fiscal 1995 and, as such, had no operating activity through
June 30, 1994.
The consolidated financial statements also include the results of
operations of Introspect Healthcare Corporation (see Note 20).
Significant intercompany accounts and transactions have been eliminated in
consolidation.
The Company manages and operates certain of its programs pursuant to
subcontracts or similar relationships with not-for-profit entities. These
not-for-profit entities hold contracts directly with state and local governments
to provide rehabilitative services to troubled youth and choose to subcontract
this
F-7
<PAGE> 36
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
management responsibility to the Company. These not-for-profit entities are each
controlled by independent Boards of Directors which have the right to terminate
their contract with the Company under certain circumstances. The accompanying
consolidated balance sheets include net accounts receivable pursuant to these
contracts of $3,753,000 and $6,028,000, as of June 30, 1995 and 1996,
respectively.
Revenue Recognition and Contract Provisions
The Company's programs are typically provided pursuant to contracts
directly with governmental entities and third-party payors, or subcontracts with
not-for-profit entities. These contracts generally provide for fixed per diem
payments based upon program occupancy. Revenues on fixed per diem and management
contracts are recognized as the services are performed.
One of the Company's programs operates under a contract with three distinct
revenue components as follows:
- Gross maximum price cost reimbursement under which revenues are
recognized as reimbursable costs are incurred.
- Fixed per diem under which revenues are recognized as the services are
performed.
- Management fee under which revenues are recognized as the services are
performed.
Prior to January 1, 1996, one of the Company's contracts provided for the
payment of $5.00 per student per day to be deposited equally into a facility
renewal and equipment fund and an aftercare fund. Effective January 1, 1996, the
contract was amended to provide for the payment of $1.50 per student per day to
be deposited solely into a facility renewal and equipment fund. Use of these
funds is 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 combined
balance in these funds was approximately $349,000 and $300,000 as of June 30,
1995 and 1996, respectively, and is included in restricted cash and other
accrued expenses in the accompanying consolidated balance sheets.
Contract terms with government and not-for-profit entities generally range
from one to five years in duration and expire at various dates through December
2000. Some of these contracts are subject to termination for the convenience of
a particular governmental entity. Management of the Company is not aware of any
circumstances that would cause any governmental entity to terminate any existing
agreement.
Certain contract costs, including indirect costs, are subject to audit and
adjustment by negotiations with government or third party payor representatives.
Contract revenues have been recorded at amounts which are expected to be
realized.
Revenues
Revenues consist of the following as of June 30 (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Program......................................... $34,726 $52,162 $ 99,561
Consulting services and other................... 166 925 792
------- ------- --------
$34,892 $53,087 $100,353
======= ======= ========
</TABLE>
F-8
<PAGE> 37
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Concentration of Credit Risk
Accounts receivable are uncollateralized and are due primarily from state
and local governments and not-for-profit entities under contracts.
Investments Available-for-Sale
Investments available-for-sale are reported at estimated fair value with
unrealized gains and losses reported as a separate component of shareholders'
equity.
Property, Equipment and Improvements
Property and equipment is recorded at cost and is depreciated using the
straight-line method over estimated useful lives ranging from 3 to 39 years.
Leasehold improvements are amortized over the term of the related lease or the
useful life, if shorter.
Intangible Assets
Intangible assets are amortized using the straight-line method and consist
of the following:
<TABLE>
<CAPTION>
INTANGIBLE ASSET USEFUL LIFE
---------------------------------------------------------------- -----------
<S> <C>
Organization costs.............................................. 5 years
Deferred debt issue costs....................................... 2-10 years
Goodwill........................................................ 10 years
Non-compete agreements.......................................... 3-5 years
Other........................................................... 5-10 years
</TABLE>
Amortization expense for the years ended June 30, 1994, 1995 and 1996 was
$341,000, $676,000 and $1,452,000, respectively. Accumulated amortization at
June 30, 1995 and 1996 was $1,042,000 and $2,494,000, respectively.
Goodwill
Subsequent to making an acquisition, the Company continually evaluates
whether later events and circumstances have occurred that indicate the remaining
estimated useful life of goodwill may warrant revision or that the remaining
balance of goodwill may not be recoverable. When factors indicate that goodwill
should be evaluated for possible impairment, the Company uses an estimate of the
related acquisition's net earnings and cash flows over the remaining life of the
goodwill in measuring whether the goodwill is recoverable.
Deferred Revenue
Deferred revenue consists of advance payments for services which will be
recognized as revenue as the related services are performed.
Income Taxes
The Company accounts for income taxes utilizing the liability method in
accordance with the provisions of Financial Accounting Standards Board Statement
No. 109 (SFAS 109), "Accounting for Income Taxes". Under this method, deferred
tax assets and liabilities are determined based on the differences between
financial reporting and tax bases of assets and liabilities and are measured
using the rates and laws that are
F-9
<PAGE> 38
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
projected to be in effect when the differences are expected to reverse. Any
resulting deferred tax asset along with the tax benefits related to operating
loss and tax credit carryforwards are recognized if management believes, based
on available evidence, that it is more likely than not they will be realized
(see Note 14).
Stock Split
A three-for-two stock split in the form of a stock dividend was effected
May 24, 1996, with the issuance of 2,823,544 shares of common stock and the
transfer of $27,000 from additional paid-in capital to the common stock account.
All share and per share amounts in the accompanying consolidated financial
statements and notes thereto have been retroactively restated to reflect this
split.
Earnings Per Share
Earnings per share have been computed by dividing net income by the
weighted average number of shares of common stock and common stock equivalents
outstanding after giving retroactive effect to the fiscal 1996 three-for-two
stock split. Common stock equivalents include all stock options after applying
the treasury stock method.
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 the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to amounts reported in the prior
year to conform to the current year presentation.
2. INVESTMENTS
Under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", securities are required to be reported as held-to-maturity, trading
or available-for-sale securities. Securities classified as available-for-sale
are reported at fair value with unrealized gains and losses reported as a
separate component of stockholders' equity.
Amortized cost and approximate fair value of investment securities
available-for-sale as of June 30, 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
AMORTIZED GROSS APPROXIMATE
COST UNREALIZED LOSS FAIR VALUE
--------- --------------- -----------
<S> <C> <C> <C>
U.S. Government Bond Fund, Class A................ $ 5,103 $ 182 $ 4,921
Corporate Bond Fund, Class A...................... 5,120 243 4,877
------- ----- -------
$10,223 $ 425 $ 9,798
======= ===== =======
</TABLE>
3. NOTES RECEIVABLE
During fiscal 1996, the Company entered into a $1,000,000 discretionary
line of credit agreement with Introspect under which the Company, at its sole
discretion, may extend credit to Introspect for a term that
F-10
<PAGE> 39
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. NOTES RECEIVABLE -- (CONTINUED)
corresponds to the Option Agreement (see Note 20). Credit extended under this
line of credit bears interest at prime plus 2% and is payable on demand. The
uncollected principal balance under this line of credit was $1,000,000 as of
June 30, 1996.
In connection with its fiscal 1996 asset purchase of Tampa Bay Academy,
Ltd. (see Note 16), the Company repaid a mortgage obligation of TBA of
approximately $3,271,000 thereby creating a note receivable from the former
owners of TBA. The note receivable bears interest at an annually adjustable rate
equal to the 10 year Treasury Bond rate plus 285 basis points (9.2% at June 30,
1996). Monthly principal and interest payments are due through April 1, 1999,
with a balloon payment of $2,892,000 due on May 1, 1999. The note is secured by
real property and the assignment of rental income. The uncollected principal
balance of this note was $3,246,000 as of June 30, 1996.
4. SHORT-TERM BORROWINGS
Lines of Credit
During fiscal 1992, the Company entered into an operating line of credit
arrangement with a bank, under which it could borrow the lesser of $275,000 or
85% of eligible accounts receivable. Amounts drawn under this line of credit
bore interest at prime plus two percent and were payable on demand. The line was
secured by furniture, inventory, machinery and equipment, and accounts
receivable related to the Company's operations in Clarinda, Iowa. During fiscal
1994, the Company entered into an operating line of credit arrangement with a
bank, under which it could borrow the lesser of $400,000 or 75% of eligible
accounts receivable. Amounts drawn under this line of credit bore interest at
prime plus one and one-half percent and were payable on demand. The line was
secured by accounts receivable of the Company and provided for the right of
set-off. During fiscal 1995, the Company entered into an operating line of
credit arrangement with a bank, under which it could borrow the lesser of
$5,000,000 or 85% of eligible accounts receivable. Amounts drawn under this line
of credit bore interest at prime plus one-half percent and were payable on
demand. The line was secured by accounts receivable of the Company. The
preceding lines of credit were canceled in fiscal 1995 and replaced with the
line of credit facility described in Note 6. During fiscal year 1995, the
Company entered into a line of credit agreement with a bank, under which it
could borrow up to $80,000. Amounts drawn under this line of credit bore
interest at 10% and were payable on demand. The line was guaranteed by the
former owners of DBC (see Note 16). This line of credit was canceled during
fiscal 1996.
Borrowings information for the fiscal years ended June 30, 1995 and 1996,
is as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
------ -----
<S> <C> <C>
Balance as of end of year.................................... $ 70 $ --
Maximum amount outstanding during the year................... 3,070 70
Average outstanding month-end balance during the year........ 820 70
Weighted average interest rate during the year............... 9.4% 10.0%
</TABLE>
Promissory Notes
During fiscal 1995, the Company entered into a promissory note arrangement
with a lessor, under which it financed the cost of $79,000 in leasehold
improvements. The note bore interest at 8.678% and provided for six monthly
payments of principal plus accrued interest. The unpaid principal balance was
$58,000 and $0 as of June 30, 1995 and 1996, respectively.
During fiscal 1995, the Company issued a short-term promissory note in
connection with its purchase of DBC (see Note 16). The note was non-interest
bearing with a face value of $450,000. The note was discounted to $440,000 using
an imputed interest rate of 8%. The note was paid in full during fiscal 1996.
F-11
<PAGE> 40
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. SUBORDINATED DEBENTURES
12% Subordinated Debentures
During fiscal 1993, the Company issued 12% Subordinated Debentures in the
principal amount of $1,000,000 due in 10 equal semi-annual installments
beginning June 30, 1998. Debentures in the principal amount of $580,000 are held
by shareholders or their close relatives.
In connection with the issuance of the debentures, warrants to purchase
231,900 shares of common stock at an exercise price of $3.23 per share were
issued. These warrants were exercisable beginning in April 1993 and expire at
various dates through November 1999. The warrants have been assigned a value of
$50,000.
The debentures were issued with an original issue discount of $50,000. The
discount is being amortized over the life of the debentures using the effective
interest method.
7% Convertible Subordinated Debentures
During fiscal 1996, the Company issued 7% Convertible Subordinated
Debentures due February 1, 2006, in the principal amount of $37,950,000.
Interest is payable semi-annually in arrears. The debentures are convertible
into common stock at the rate of one share for each $12.47 of principal. The 7%
Convertible Subordinated Debentures may be redeemed at the option of the
Company, in whole or in part at any time after February 1, 1999, at a redemption
price equal to that percentage of their principal amount set forth below (see
Note 23):
<TABLE>
<CAPTION>
ON OR AFTER FEBRUARY 1, PREMIUM
------------------------------------------------------------------- -------
<S> <C>
1999.......................................................... 103%
2000.......................................................... 102%
2001.......................................................... 101%
2002 and thereafter........................................... 100%
</TABLE>
The Company incurred approximately $2,500,000 of direct costs in connection
with the issuance of the 7% Convertible Subordinated Debentures. These costs
have been deferred in the accompanying consolidated balance sheets (see Note 1
for amortization policy).
6. OTHER LONG-TERM DEBT
Other long-term debt consists of the following at June 30 (in thousands):
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Bank Loans:
Revolving line of credit payable to bank, permitted borrowings equal to
the lesser of $10,000,000 or 85% of eligible accounts receivable plus
95% of cash balances on deposit, secured by accounts receivable and
cash balances on deposit, bearing interest at the prime rate or LIBOR
plus 2.25%, (8.3%) due September 1997. ................................ $5,300 $ --
Note Payable to bank, secured by vehicle, bearing interest at 11%,
payable in monthly installments through August 1995 with a $6,500
balloon payment due August 1995. ...................................... 7 --
DBC Purchase Note (Note 16):
Note payable to a non-affiliated individual, in the face amount of
$450,000 discounted to $393,000, at an imputed interest rate of 8%,
$225,000 is payable August 1996 and $225,000 is payable August
1997. ................................................................. 393 393
</TABLE>
F-12
<PAGE> 41
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
[CAPTION]
<TABLE>
<CAPTION>
6. OTHER LONG-TERM DEBT -- (CONTINUED)
<S> <C> <C>
1995 1996
------ ------
Mortgage Payable:
Mortgage payable to the City of Springfield, South Dakota secured by
property in the City of Springfield, South Dakota, bearing interest at
3.5%, principal and interest due in annual installments through June
2002. ................................................................. $ 105 $ 90
Economic Development Loans:
Note payable to the City of Clarinda, Iowa secured by a second position
lien on certain accounts receivable and property and equipment, bearing
interest at 4%, paid in full during fiscal 1996. ...................... 148 --
Forest Ridge Purchase Note:
Note payable to a non-affiliated individual, in the face amount of
$150,000 discounted to $117,000, at an imputed interest rate of 10%,
payable in monthly installments beginning March 1993. ................. 70 46
Other:
Note payable to Finova Capital Corporation, secured by certain personal
property, bearing interest at 11%, payable in monthly installments
through January 2001. ................................................. -- 1,669
Note payable to Finova Capital Corporation, secured by certain fixed
assets, bearing interest at 11%, payable in monthly installments
through
November 2000. ........................................................ -- 363
Note payable to Tarkio Development Group, bearing interest at 3% per
annum, principal and interest due August 1997. ........................ 50 50
------ ------
6,073 2,611
Less: Current portion....................................................... 95 665
------ ------
Total............................................................. $5,978 $1,946
====== ======
</TABLE>
Borrowings information with respect to the revolving line of credit for the
fiscal years ended June 30, 1995 and 1996, is as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Balance as of end of year................................... $5,300 $ --
Maximum amount outstanding during the year.................. 5,300 7,295
Average outstanding month-end balance during the year....... 5,300 5,295
Weighted average interest rate during the year.............. 8.3% 8.3%
</TABLE>
Certain of these agreements require that the Company maintain a minimum
current ratio and level of tangible net worth, as well as meet certain other
financial standards. As of June 30, 1996, the Company was in compliance with
these covenants.
F-13
<PAGE> 42
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate maturities of other long-term debt at June 30, 1996, are as
follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED JUNE 30,
--------------------------------------------------------------------
<S> <C>
1997........................................................... $ 665
1998........................................................... 634
1999........................................................... 474
2000........................................................... 527
2001........................................................... 296
2002 and thereafter............................................ 15
------
Total..................................................... $2,611
======
</TABLE>
7. CAPITAL LEASE OBLIGATIONS
The Company leases certain operating facilities and computer and office
equipment under capital leases expiring through fiscal 2010. Included in
property, equipment and improvements at June 30, 1996, is $2,292,000 related to
these leases, net of accumulated amortization of $176,000.
Future minimum lease payments, by year and in the aggregate, under capital
lease obligations are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED JUNE 30,
--------------------------------------------------------------------
<S> <C>
1997........................................................... $ 353
1998........................................................... 355
1999........................................................... 302
2000........................................................... 280
2001........................................................... 286
2002 and thereafter............................................ 2,843
------
4,419
Less -- Amounts representing interest.......................... 2,030
------
2,389
Less -- Current portion........................................ 123
------
$2,266
======
</TABLE>
8. EMPLOYEE RETIREMENT PLAN
Effective July 1, 1992, the Company established the YSI 401(k) Retirement
Plan (the Plan) pursuant to Section 401(k) of the Internal Revenue Code. The
Plan covers all full-time employees of the Company who have satisfied
eligibility requirements. Contributions are made by the Company at the rate of
25% of employee contributions up to 8% of an employee's salary. The Company may
also make additional contributions to the Plan at its discretion. During fiscal
years 1994, 1995 and 1996, the Company expensed $72,000, $115,000 and $191,000,
respectively, in matching contributions and administrative fees related to the
Plan.
F-14
<PAGE> 43
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS
The Company has operating leases for equipment and office space. Future
minimum annual rents under noncancelable operating leases are as follows (in
thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED JUNE 30,
-------------------------------------------------------------------
<S> <C>
1997.......................................................... $ 2,847
1998.......................................................... 2,317
1999.......................................................... 2,202
2000.......................................................... 1,706
2001.......................................................... 1,234
2002 and thereafter........................................... 5,604
-------
Total.................................................... $15,910
=======
</TABLE>
Rent expense for the fiscal years ended June 30, 1994, 1995 and 1996, was
$353,000, $940,000 and $2,482,000, respectively.
10. CONTINGENCIES
The Company has been named as defendant in various legal proceedings
arising from the performance of its normal activities. It is the opinion of
management, after consultation with legal counsel, that the amount, if any, of
the Company's ultimate liability under all current legal proceedings will not
have a material adverse effect on the financial position of the Company.
11. SELF-INSURANCE
Effective November 1, 1993, the Company implemented a program of providing
group health insurance benefits for employees on a self-insured basis. The plan
covers all full-time employees of the Company who have satisfied eligibility
requirements. Administrative services related to the benefits program are
provided by a third-party contract administrator. The Company also entered into
a re-insurance agreement which provides specific and aggregate stop loss
coverage. Amounts payable for claims incurred on or before June 30, 1995 and
1996, were $275,000 and $436,000, respectively, and are included in other
accrued expenses in the accompanying consolidated balance sheets. Self-insurance
activity for the fiscal years ended June 30, 1994, 1995 and 1996, is summarized
below (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
----- ------- -------
<S> <C> <C> <C>
Balance, beginning of year........................ $ -- $ 209 $ 275
Claims expense.................................... 804 2,368 3,334
Claims payments................................... (595) (2,302) (3,173)
----- ------- -------
Balance, end of year.............................. $ 209 $ 275 $ 436
===== ======= =======
</TABLE>
12. STUDENT FUNDS
The Company holds student funds in bank accounts in the Company's name.
These funds are not commingled with funds of the Company, and are included in
restricted cash and other accrued expenses in the accompanying consolidated
balance sheets.
F-15
<PAGE> 44
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. EQUITY PARTICIPATION PLANS
Stock Option Plans
In fiscal 1992, the Board of Directors approved the establishment of the
Youth Services International, Inc. 1992 Stock Option Plan (the 1992 Stock Option
Plan), under which the Company may grant to eligible employees nonqualified
stock options to purchase up to 1,125,000 shares of common stock. Options
granted under the 1992 Stock Option Plan allow for the purchase of common stock
at prices not less than the fair market value of the common stock at the date of
grant, for a term of no more than ten years. At the discretion of the Board of
Directors, the granted options may also be subject to certain vesting
provisions. The majority of the options granted to date contain a three-year
vesting period.
In fiscal 1994, the Board of Directors approved the establishment of the
Youth Services International, Inc. 1995 Employee Stock Option Plan and the Youth
Services International, Inc. 1995 Director Stock Option Plan (the 1995 Stock
Option Plan and the 1995 Director Stock Option Plan, respectively). Under the
1995 Stock Option Plan, the Company may grant to eligible employees nonqualified
stock options to purchase up to 750,000 shares of common stock beginning July 1,
1994. The 1995 Stock Option Plan provides for the purchase of common stock at
the fair market value of the common stock at the date of grant. Under the 1995
Director Stock Option Plan, the Company may grant options to purchase up to
200,000 shares of common stock to nonemployee members of the Board of Directors.
The 1995 Director Stock Option Plan provides for the granting of 7,500 shares of
the Company's common stock each year coincident with the anniversary date of the
appointment of a nonemployee Board of Directors member through September 27,
2004. The 1995 Director Stock Option Plan provides for the purchase of common
stock at the fair market value of the common stock at the date of grant.
F-16
<PAGE> 45
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. EQUITY PARTICIPATION PLANS -- (CONTINUED)
The following table summarizes the option activity under the 1992 and 1995
Stock Option Plans.
<TABLE>
<CAPTION>
1992 STOCK OPTION 1995 STOCK OPTION 1995 DIRECTOR STOCK
PLAN PLAN OPTION PLAN
--------------------- --------------------- ---------------------
1995 1996 1995 1996 1995 1996
--------- --------- --------- --------- --------- ---------
OPTION PRICE NUMBER NUMBER OPTION PRICE NUMBER NUMBER OPTION PRICE NUMBER NUMBER
PER SHARE OF SHARES OF SHARES PER SHARE OF SHARES OF SHARES PER SHARE OF SHARES OF SHARES
------------ --------- --------- ------------ --------- --------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Granted and
outstanding... $ .67 528,501 440,000 $ 3.75 84,511 18,710 $ 4.17 15,000 15,000
1.67 45,251 34,001 4.92 -- 1,125 4.42 22,500 22,500
2.00 143,001 79,227 5.00 265,425 214,800 6.38 22,500 22,500
5.25 13,500 7,505 6.75 199,500 156,750 9.17 -- 15,000
5.33 26,500 14,834 -- -- -- 10.50 -- 15,000
-- -- -- -- -- -- 11.50 -- 7,500
-- -- -- -- -- -- 28.25 -- 22,500
-------- -------- -------- -------- ------- -------
756,753 575,567 549,436 391,385 60,000 120,000
======== ======== ======== ======== ======= =======
Canceled...... 2.00 (5,001) -- 3.75 -- (7,250) -- -- --
5.25 (3,000) -- 6.75 -- (41,250) -- -- --
5.33 -- (6,000) -- -- -- -- -- --
-------- -------- -------- -------- ------- -------
(8,001) (6,000) -- (48,500) -- --
======== ======== ======== ======== ======= =======
Exercised..... .67 (182,499) (88,500) 3.75 (148,476) (58,552) -- -- --
1.67 (7,999) (11,250) 5.00 -- (50,625) -- -- --
2.00 (38,499) (58,776) -- -- -- -- -- --
5.25 -- (2,999) -- -- -- -- -- --
5.33 -- (5,663) -- -- -- -- -- --
-- -- -- -- -- -- -- -- --
-------- -------- -------- -------- ------- -------
(228,997) (167,188) (148,476) (109,177) -- --
======== ======== ======== ======== ======= =======
Available for
granting.... 28,999 42,998 52,088 100,962 140,000 80,000
======== ======== ======== ======== ======= =======
Exercisable... .67 523,501 440,000 3.75 50,647 10,460 4.17 15,000 15,000
1.67 41,250 34,001 4.92 -- 375 4.42 22,500 22,500
2.00 48,249 54,477 5.00 265,425 214,800 6.83 22,500 22,500
5.25 -- 4,000 6.75 -- 64,755 9.17 -- 15,000
5.33 8,832 8,000 -- -- -- 10.50 -- 15,000
-- -- -- -- -- -- 11.50 -- 7,500
-- -- -- -- -- -- 28.25 -- 22,500
-------- -------- -------- -------- ------- -------
621,832 540,478 316,072 290,390 60,000 120,000
======== ======== ======== ======== ======= =======
</TABLE>
In fiscal 1995, the Board of Directors approved the establishment of the
Youth Services International, Inc. 1996 Employee Stock Option Plan (the 1996
Stock Option Plan). Under the 1996 Stock Option Plan, the Company may grant to
eligible employees nonqualified stock options to purchase up to 450,000 shares
of common stock beginning July 1, 1995. The 1996 Stock Option Plan provides for
the purchase of common stock at the fair market value of the common stock at the
date of grant.
F-17
<PAGE> 46
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. EQUITY PARTICIPATION PLANS -- (CONTINUED)
The following table summarizes the option activity under the 1996 Stock
Option Plan.
<TABLE>
<CAPTION>
OPTION PRICE NUMBER OF
PER SHARE SHARES
------------ ---------
<S> <C> <C>
Granted and Outstanding................................. $ 6.33 47,250
8.42 7,500
8.83 93,750
11.17 75,000
11.67 6,750
12.71 42,000
13.00 25,800
-------
298,050
=======
Canceled................................................ -- --
=======
Exercised............................................... 8.83 15,000
=======
Available for Granting.................................. 136,950
=======
Exercisable............................................. 6.33 47,250
8.83 20,000
11.17 75,000
-------
142,250
=======
</TABLE>
Stock Purchase Plans
In fiscal 1994 and 1995, the Board of Directors approved the establishment
of the Youth Services International, Inc. 1995 Employee Stock Purchase Plan and
the Youth Services International, Inc. 1996 Employee Stock Purchase Plan (the
1995 Stock Purchase Plan and the 1996 Stock Purchase Plan, respectively). Under
the Stock Purchase Plans, the Company was authorized to grant to eligible
employees opportunities to purchase 225,000 and 300,000 shares of common stock
beginning July 1, 1994 and 1995, respectively. The Stock Purchase Plans allowed
for the purchase of common stock at 85% of the fair market value of the common
stock at the date of grant.
F-18
<PAGE> 47
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. EQUITY PARTICIPATION PLANS -- (CONTINUED)
The following table summarizes the activity under the Stock Purchase Plans:
<TABLE>
<CAPTION>
1995 STOCK 1996 STOCK PURCHASE
PURCHASE PLAN PLAN
------------------ -------------------
SHARE NUMBER SHARE NUMBER
PRICE OF SHARES PRICE OF SHARES
----- --------- ------ ---------
<S> <C> <C> <C> <C>
Granted.................................... $3.40 4,601 $ 5.67 45,885
4.18 115,648 6.02 145,497
5.31 5,849 8.79 27,121
-- -- 14.46 43,525
------- -------
126,098 262,028
======= =======
Exercised.................................. 3.40 2,798 5.67 44,900
4.18 95,196 6.02 137,704
5.31 3,600 8.79 25,353
-- -- 14.46 42,249
------- -------
101,594 250,206
======= =======
Forfeited.................................. 98,902 37,972
======= =======
</TABLE>
14. INCOME TAXES
The income tax (expense) benefit for the fiscal years ended June 30, 1994,
1995 and 1996, included the following components (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
----- ------- -------
<S> <C> <C> <C>
Federal income tax benefit (expense).............. $ 125 $(1,110) $(1,616)
State income tax benefit (expense)................ 15 (222) (240)
----- ------- -------
Total................................... $ 140 $(1,332) $(1,856)
===== ======= =======
Current income tax expense........................ $(241) $(1,305) $(2,160)
Deferred income tax benefit (expense)............. 381 (27) 304
----- ------- -------
Total................................... $ 140 $(1,332) $(1,856)
===== ======= =======
</TABLE>
A reconciliation between the actual income tax provision (benefit) and the
amount computed by applying the federal statutory tax rate of 34% to the income
before income tax expense is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
----- ---- ----
<S> <C> <C> <C>
Income tax provision at federal statutory rate........ 34.0% 34.0% 34.0%
State income taxes, net of federal income tax
effect.............................................. 5.0 4.6 5.0
Loss on Introspect operations......................... -- -- 2.4
Non-deductible goodwill............................... -- -- 1.6
Change in valuation allowance......................... (44.8) -- --
Other................................................. (1.4) (.7) 2.0
----- ---- ----
Total....................................... (7.2)% 37.9% 45.0%
===== ==== ====
</TABLE>
F-19
<PAGE> 48
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. INCOME TAXES -- (CONTINUED)
Deferred tax assets (liabilities) are comprised of the following as of June
30 (in thousands):
<TABLE>
<CAPTION>
1995 1996
----- -----
<S> <C> <C>
Net operating loss carryforwards............................. $ 242 $ 203
Depreciation and amortization................................ 147 490
Accounts receivable valuation................................ 53 288
Medical self-insurance accrual............................... 88 150
Start-up losses.............................................. 89 96
Prepaid expenses............................................. (41) (85)
Finders fee.................................................. (2) --
Prepaid supplies............................................. (180) (397)
Program contract reserves.................................... 8 (29)
Unrealized loss on investments available-for-sale............ -- 170
Rent expense................................................. -- 29
Developed software........................................... -- (68)
Accrued expenses............................................. (50) (19)
----- -----
Deferred tax asset........................................... $ 354 $ 828
===== =====
</TABLE>
At June 30, 1996, the Company had net operating loss carryforwards of
approximately $305,000 and $1,983,000 for federal and state income tax purposes,
respectively, that expire through 2011.
15. RELATED PARTY TRANSACTIONS
During fiscal 1994, the Company obtained loans from certain shareholders in
the amount of $210,000 to purchase computer and data processing equipment for
several facilities. These loans bore interest at the rate of 10% per annum and
were paid off during fiscal 1994.
During fiscal 1995, the Company provided aftercare services to troubled
youth pursuant to an informal agreement with a not-for-profit entity. An officer
of the Company and majority shareholder is a member of the Board of Trustees of
the not-for-profit entity. In connection with this informal agreement, the
Company made working capital advances and extended a $100,000 operating line of
credit to the not-for-profit entity. The line of credit bears interest at 10%
and requires payment in full of all unpaid principal plus accrued interest
thereon on or before June 30, 1996. The Company is in the process of extending
the maturity date of this line of credit to June 30, 1997. Revenues earned in
connection with this informal agreement totaled $57,000 for fiscal 1995. Unpaid
working capital and line of credit advances totaled $196,000 and $131,000 as of
June 30, 1995 and 1996, respectively, and are included in accounts receivable in
the accompanying consolidated balance sheets.
During fiscal 1996, the Company entered into a lease with an officer of the
Company and majority shareholder pursuant to which the Company leased certain
real property upon which it constructed a conference center and apartment
facility. The improvements on the real property were constructed at the sole
expense of the Company and totaled approximately $200,000. The real property and
improvements thereon are available for use by the Company for an initial period
of five years with an optional five year renewal. During the initial five year
term of the lease, the Company is not required to pay any rent; however, the
Company is responsible for the payment of all utilities used by the Company and
for the maintenance of certain specified liability insurance coverages. The
Company will surrender the leased premises, as improved, upon expiration of the
lease agreement.
F-20
<PAGE> 49
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. ACQUISITIONS
Prestige Developments, Inc.
Effective November 1, 1993, the Company purchased substantially all of the
assets of Prestige Developments Inc., (Prestige), a South Dakota company.
Prestige manages two juvenile rehabilitative residential treatment facilities
pursuant to a management contract with an unaffiliated not-for-profit entity.
The Company purchased the assets for $900,000 in cash, a note payable in the
amount of $3,825,000, payment of a corporate built-in gains tax of $70,000 and a
mortgage assumption in the amount of $135,000. Acquisition costs of
approximately $113,000 were incurred in connection with the purchase. The
purchase method of accounting was used to record the transaction.
The fair market values assigned to the purchased assets are as follows (in
thousands):
<TABLE>
<S> <C>
Land................................................................ $ 189
Building............................................................ 851
Equipment........................................................... 200
Non-compete agreement............................................... 100
Goodwill............................................................ 3,703
------
$5,043
======
</TABLE>
In connection with this purchase, the sellers signed a covenant not to
compete in the state of South Dakota for a period of five years from the closing
date of the transaction (see Note 1 for amortization policy).
Western Youth, Inc.
Effective January 1, 1994, the Company purchased all of the issued and
outstanding stock of Western Youth, Inc. (Western Youth), a Utah company.
Western Youth operates foster care and group home treatment programs in the Utah
cities of Salt Lake City, Clearfield and Orem. The Company purchased the stock
for $50,000 in cash and $300,000 in notes payable to the former stockholders.
Western Youth was merged with YSIU during fiscal 1996.
Goodwill in the amount of $300,000 arose through this purchase transaction
and was based upon the excess of purchase price over the fair market value of
assets acquired (see Note 1 for amortization policy).
Parc Place, Limited Partnership
Effective August 1, 1994, the Company purchased certain assets of Parc
Place, Limited Partnership (Parc Place), an Arizona limited partnership, for
$843,000 in cash and the assumption of liabilities and notes payable in the
amount of $80,000. The Company also incurred acquisition related costs of
approximately $334,000. Parc Place is a provider of residential and day
treatment services for adolescents, with a focus on chemical dependency and dual
diagnosis cases.
The fair market values assigned to the purchased assets are as follows (in
thousands):
<TABLE>
<S> <C>
Leasehold improvements.............................................. $ 3
Office furniture and equipment...................................... 120
Vehicles............................................................ 19
Prepaid expenses and supplies....................................... 30
Goodwill............................................................ 1,085
------
$1,257
======
</TABLE>
F-21
<PAGE> 50
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. ACQUISITIONS -- (CONTINUED)
Promise House, Inc.
Effective October 1, 1994, the Company purchased all of the issued and
outstanding stock of Promise House, Inc. (Promise House), an Arizona company.
Promise House operates group home treatment programs in Arizona. The Company
purchased the stock for $607,000 in cash and the assumption of $79,000 in
liabilities.
Goodwill in the amount of $582,000 arose through this purchase transaction
and was based upon the excess of purchase price over the fair market value of
assets acquired (see Note 1 for amortization policy).
In connection with this purchase, the sellers signed a covenant not to
compete in the defined geographical area for a period of three years from the
closing date of the transaction (see Note 1 for amortization policy).
Developmental Behavioral Consultants, Inc.
Effective June 1, 1995, the Company purchased all of the issued and
outstanding stock of Developmental Behavioral Consultants, Inc. (DBC), an
Arizona company. DBC operates residential group home treatment programs in
Arizona. The Company purchased the stock for $100,000 in cash, notes payable
with a net present value of $833,000 (see Notes 4 and 6) and the assumption of
$464,000 in liabilities. The Company also incurred acquisition related costs of
approximately $47,000.
The fair market values assigned to the purchased assets are as follows (in
thousands):
<TABLE>
<S> <C>
Cash................................................................ $ 232
Accounts receivable................................................. 389
Prepaid expenses and supplies....................................... 83
Fixed assets........................................................ 121
Goodwill............................................................ 619
------
$1,444
======
</TABLE>
Desert Hills Center for Youth and Families of New Mexico, Inc.
Effective July 1, 1995, the Company purchased certain of the assets of
Desert Hills Center for Youth and Families of New Mexico, Inc. (Desert Hills), a
New Mexico corporation and a wholly owned subsidiary of Introspect Healthcare
Corporation (Introspect), an Arizona corporation. Desert Hills is a provider of
services to behaviorally disturbed and at-risk adolescents at two adjacent
facilities in Albuquerque, New Mexico. The Company purchased the assets for
$2,618,000 in cash and the assumption of $4,545,000 in liabilities. Acquisition
costs of approximately $658,000 were incurred in connection with the purchase.
In connection with this acquisition and the Option Agreement discussed in Note
20, the Company transferred $2,543,000 into an escrow account as of June 30,
1995. These escrowed funds were utilized upon the transaction's closing in July
1996. The purchase method of accounting was used to record the transaction.
The fair market values assigned to the purchased assets are as follows (in
thousands):
<TABLE>
<S> <C>
Cash................................................................ $ 1
Property, equipment and improvements................................ 5,346
Prepaid expenses and supplies....................................... 10
Goodwill............................................................ 2,464
------
$7,821
======
</TABLE>
F-22
<PAGE> 51
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. ACQUISITIONS -- (CONTINUED)
Tampa Bay Academy, Ltd.
Effective March 1, 1996, the Company purchased the business and certain
assets of Tampa Bay Academy, Ltd. (TBA), a Florida limited partnership, and a
management contract with a related entity. TBA is primarily a residential
treatment center licensed for 104 youth. The Company purchased the assets and
management contract for $4,250,000 in cash and the assumption of $337,000 in
liabilities. Acquisition costs of approximately $342,000 were incurred in
connection with the purchase. Additionally, the sellers signed a covenant not to
compete for a period of three years. The purchase method of accounting was used
to record the transaction.
The fair market values assigned to the purchased assets are as follows (in
thousands):
<TABLE>
<S> <C>
Cash................................................................ $ 250
Accounts receivable, net............................................ 834
Fixed assets........................................................ 1,187
Prepaid expenses and supplies....................................... 17
Deposits............................................................ 36
Non-compete agreement............................................... 150
Goodwill............................................................ 2,455
------
$4,929
======
</TABLE>
In connection with this transaction, the Company entered into a lease of
certain real property owned by TBA.
17. SIGNIFICANT CONTRACT
In May 1993, the Company was awarded a five-year contract with the State of
Maryland to operate the Charles H. Hickey, Jr. School, a 312-bed residential
treatment facility located in Baltimore County, Maryland. The terms of the
contract, as amended, call for payments to the Company of $48,286,000 (excluding
certain potential incentive and penalty fees) during the first three years of
the contract. Payments in the fourth and fifth years will be based upon the
previous year adjusted for inflation. The contract commenced July 1, 1993.
18. REVENUES AND EXPENSES
Approximately 99%, 99% and 80% of the Company's revenues for the years
ended June 30, 1994, 1995 and 1996, respectively, relate to amounts earned from
state and local governmental agency and local not-for-profit entity contracts
the Company has entered into to manage and operate programs that provide
educational, developmental and rehabilitative services to troubled youth.
The Company earned revenues of approximately 72%, 76% and 61% from state
and local governments and approximately 27%, 23% and 19% from local
not-for-profit entities for the years ended June 30, 1994, 1995 and 1996,
respectively.
Salaries and related benefits represented approximately 67%, 64% and 57% of
operating expenses for the years ended June 30, 1994, 1995 and 1996,
respectively.
19. PRO FORMA INFORMATION (UNAUDITED)
Assuming the acquisitions of Prestige, Western Youth, Parc Place and Desert
Hills had been consummated at the beginning of fiscal 1994, and the acquisitions
of TBA and Introspect had been consummated at
F-23
<PAGE> 52
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. PRO FORMA INFORMATION (UNAUDITED) -- (CONTINUED)
the beginning of fiscal 1995, the unaudited pro forma consolidated results of
operations would have been as follows (in thousands except for per share data)
for the years ended June 30, 1994, 1995 and 1996 (see Notes 16 and 23). Such
information reflects adjustments, net of tax effects, to reflect changes in
depreciation, lease and interest expense, goodwill amortization, salaries of
limited partners (as positions were eliminated subsequent to the acquisition)
and the elimination of intercompany fees.
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Revenues........................................ $46,771 $80,926 $106,262
Net income...................................... 2,233 1,766 2,277
Net income per share............................ .31 .21 .25
Weighted average common and common equivalent
shares outstanding............................ 7,094 8,264 9,267
</TABLE>
The pro forma information presented above may not be indicative of the
results of operations which actually would have occurred if the transactions had
taken place as of the beginning of fiscal 1994 and 1995, respectively.
20. INTROSPECT OPTION, MANAGEMENT AND CONSULTING/NON-COMPETE AGREEMENTS
Effective July 1, 1995, the Company entered into an Option Agreement
whereby the Company acquired the option to purchase all of the issued and
outstanding capital stock of Introspect, a wholly-owned subsidiary of
Diversification Association, Inc. (DAI), an Arizona corporation, for a period of
five years. The Option Agreement provides for a purchase price of $4,100,000 in
cash and $3,825,000 in the Company's common stock. The purchase price is subject
to reduction based on a number of factors as defined in the Option Agreement.
Pursuant to the terms of the Option Agreement, prior to the Company's exercise
of the option, DAI will contribute to the capital of Introspect, all of the
outstanding capital stock of Desert Hills Center for Youth and Families of
Hawaii, Inc. (Desert Hills -- HI), a Hawaii corporation and Desert Hills Center
for Youth and Families of Nevada, Inc. (Desert Hills -- NV), a Nevada
corporation. The Company paid $350,000 in cash as consideration for the option.
The Company incurred approximately $32,000 in additional costs related to the
Option Agreement.
Introspect is a provider of services to behaviorally disturbed and at-risk
children and adolescents. Desert Hills -- NV and Desert Hills -- HI currently
are not operational.
Simultaneous with the Option Agreement, the Company entered into a
Management Agreement effective July 1, 1995, pursuant to which the Company would
manage the business of Introspect, Desert Hills -- HI and Desert Hills -- NV for
a period of five years. The Management Agreement provides that the Company
receive a management fee of $600,000 for management services provided during the
period January 1, 1995 through June 30, 1995. This amount is included in
revenues in the accompanying consolidated statements of income in fiscal 1995.
The Company will receive a management fee, as defined in the Management
Agreement, for services provided during the term of the Management Agreement.
The Option Agreement provides that in the event the Management Agreement is
terminated prior to its expiration and the option under the Option Agreement is
not exercised within 120 days of the termination of the Management Agreement,
the Company is required to pay a penalty which decreases as time passes from
$500,000 if the Management Agreement is terminated after June 30, 1995, and
prior to December 31, 1995 to $100,000 at the expiration of the Management
Agreement if the option is not exercised.
Effective July 1, 1995, the Company also entered into a consulting and
non-compete agreement with certain of DAI's shareholders. Under this agreement,
certain of DAI's shareholders agreed to provide consulting services to the
Company, as well as, to not compete with the Company in a defined geographical
F-24
<PAGE> 53
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. INTROSPECT OPTION, MANAGEMENT AND CONSULTING/NON-COMPETE
AGREEMENTS -- (CONTINUED)
area. This agreement extends over a five year period and requires payment of
approximately $500,000 in the aggregate per year.
During fiscal 1996, the Company provided management services to Introspect
in accordance with the terms of the Management Agreement. In addition to
providing such management services, the Company extended various forms of
financial support to Introspect. As of June 30, 1996, the Company had notes and
other receivables due from Introspect in the amount of $1,918,000. Given the
significant degree of Introspect's financial dependence upon the Company, as
well as the Company's exercise of the Option in the fourteenth month of a sixty
month option exercise period (see Note 23), the revenues and expenses of
Introspect have been included in the Company's consolidated statements of income
for fiscal 1996.
21. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash and restricted cash is the carrying amount, which is
a reasonable estimate of fair value. For securities held as investments, fair
value is determined using the quoted market prices.
The fair value of the Company's subordinated debentures and other long-term
debt is estimated based on the quoted market prices for the same or similar
issues or on the current rates offered to the Company for debt of the same
remaining maturity.
The fair value of notes receivable is estimated based on the discounted
value of the future cash flows expected to be received from the notes. The
discount rates used are reflective of the effects of interest rate changes and
the effects of changes in credit risk.
The estimated fair values of the Company's financial instruments at June
30, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
CARRYING APPROXIMATE
AMOUNT FAIR VALUE
-------- -----------
<S> <C> <C>
Financial Assets:
Cash............................................... $ 7,046 $ 7,046
Restricted cash.................................... 500 500
Investments available-for-sale..................... 9,798 9,798
Notes receivable................................... 4,246 4,246
-------- -------
$ 21,590 $21,590
======= =======
Financial Liabilities:
Subordinated debentures............................ $ 38,933 $39,377
Other long-term debt............................... 2,611 2,659
-------- -------
$ 41,544 $42,036
======== =======
</TABLE>
22. NEW AUTHORITATIVE STANDARDS NOT YET IMPLEMENTED
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of ". This statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. This statement is effective
for fiscal years beginning after December 15, 1995. The Company has not yet
determined the impact of this statement on its consolidated financial position
or results of operations.
F-25
<PAGE> 54
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
22. NEW AUTHORITATIVE STANDARDS NOT YET IMPLEMENTED -- (CONTINUED)
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123 "Accounting for Stock Based Compensation". This statement defines a fair
value based method of accounting for an employee stock option or similar equity
instrument and encourages, but does not require, all entities to adopt that
method of accounting for all of their employee stock compensation plans.
Entities electing not to make the change in accounting method must make pro
forma disclosures of net income and earnings per share as if the fair value
based method of accounting had been applied. The accounting and disclosure
requirements of this statement are effective for transactions entered into in
fiscal years that begin after December 15, 1995. The Company has not yet
determined whether or not it will adopt the fair value based method of
accounting defined in this statement.
23. SUBSEQUENT EVENTS
In July 1996, the Company purchased substantially all of the assets of
Youth Quest, Inc. (Youth Quest), a Utah corporation, for $815,000 in cash and
the assumption of $128,000 of liabilities. Youth Quest provides residential
group care, therapeutic foster care and counseling services to youth.
In July 1996, holders of an aggregate principal amount of $5,750,000 of 7%
Convertible Subordinated Debentures surrendered such debentures for conversion
and received 461,106 shares of common stock. A conversion premium of $297,000
was paid by the Company. The conversion premium has been included in other
expense in the accompanying consolidated statement of income for the year ended
June 30, 1996.
In September 1996, the Company exercised its option to acquire all of the
issued and outstanding capital stock of Introspect (see Note 20). The Company
purchased the stock for $4,000,000 in cash. Concurrent with this acquisition the
Company retired $9,693,000 of Introspect's indebtedness. The $1,918,000 of notes
and other receivables and $306,000 of costs related to the option agreement, net
of accumulated amortization, which are described in Note 20, will be
reclassified and assigned to goodwill or other Introspect assets in connection
with the purchase price allocation.
F-26
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
YOUTH SERVICES INTERNATIONAL, INC.
ARTICLE I
STOCKHOLDERS
SECTION 1. Annual Meetings.
The annual meeting of the stockholders of the Corporation shall be held on
such date within the month of November as may be fixed from time to time by the
Board of Directors. Not less than ten nor more than 90 days' written or printed
notice stating the place, day and hour of each annual meeting shall be given in
the manner provided in Section 1 of Article IX hereof. The business to be
transacted at the annual meetings shall include the election of directors,
consideration and action upon the reports of officers and directors, and any
other business within the power of the Corporation. All annual meetings shall be
general meetings.
SECTION 2. Special Meetings Called by Chairman, CEO, or Board of
Directors.
At any time in the interval between annual meetings, special meetings of
stockholders may be called by the Chairman, by the CEO or by a majority of the
Board of Directors. Not less than ten days' nor more than 90 days' written
notice stating the place, day and hour of such meeting and the matters proposed
to be acted on thereat shall be given in the manner provided in Section 1 of
Article IX. No business shall be transacted at any special meeting except that
specified in the notice.
SECTION 3. Special Meeting Called by Stockholders.
Upon the request in writing delivered to the Secretary by the stockholders
entitled to cast at least 25% of all the votes entitled to be cast at the
meeting, it shall be the duty of the Secretary to call forthwith a special
meeting of stockholders. Such request shall state the purpose of such meeting
and the matters proposed to be acted on thereat, and no other business shall be
transacted at any such special meeting.
SECTION 4. Place of Meetings.
All meetings of stockholders shall be held at the principal office of the
Corporation in the State of Maryland or at such other place within the United
States as may be fixed from time to time by the Board of Directors and
designated in the notice.
SECTION 5. Quorum.
At any meeting of stockholders the presence in person or by proxy of
stockholders entitled to cast a majority of the votes thereat shall constitute a
quorum. In the absence of a quorum, the stockholders present in person or by
proxy, by majority vote and without notice other than by announcement, may
adjourn the meeting from time to time, but not for a period exceeding 60 days
until a quorum shall attend.
SECTION 6. Adjourned Meetings.
A meeting of stockholders convened on the date for which it was called (or
one adjourned to achieve a quorum as above provided in Section 5 of this
Article) may be adjourned from time to time without further notice to a date not
more than 120 days after the record date, and any business may be transacted at
any adjourned meeting which could have been transacted at the meeting as
originally called.
SECTION 7. Voting.
At all meetings of stockholders, every stockholder shall be entitled to one
vote for each share of stock of the Corporation registered in his or her name
upon the books of the Corporation on the date the Board of
<PAGE> 2
Directors may fix (as provided in Article VIII, Section 3 of these Bylaws) as
the date of record for the determination of stockholders entitled to vote at
such meeting. All elections and matters submitted to a vote at meetings of
stockholders shall be decided by the vote of the holders of a majority of the
votes cast, in person or by proxy, unless a different vote is required by law or
by charter, or is provided for in these bylaws. If the officer presiding over
the meeting shall so determine, a vote by ballot may be taken upon any matter,
and the vote shall be so taken upon the request of the holders of 10% of the
stock present and entitled to vote on the matter.
SECTION 8. Proxies.
A stockholder may vote the shares owned or record either in person or by
proxy executed in writing and signed by the stockholder or by a duly authorized
attorney-in-fact. Every proxy shall be dated, but need not be sealed, witnessed
or acknowledged. No proxy shall be valid after 11 months from its date, unless
otherwise provided in the proxy. At all meetings of stockholders, the proxies
shall be filed with and verified by the Secretary of the Corporation, or, if the
meeting shall so decide, by the Secretary of the meeting.
SECTION 9. Order of Business.
Meetings of stockholders shall be presided over by the Chairman or, in his
or her absence, by the Vice Chairman of the Board or, if neither of those
officers is present, by a chairman to be elected at the meeting. The Secretary
shall act as secretary of meetings of the stockholders, and in his or her
absence, the record of the proceedings shall be kept and authenticated by any
other person at the meeting appointed for that purpose by the presiding officer.
At all meetings of stockholders, any stockholder, present and entitled to
vote in person or by proxy shall be entitled to require, by written request to
the Chairman of the meeting, that the order of business shall be as follows:
(1) Organization.
(2) Proof of notice of meeting or of waivers thereof. (The certificate
of the Secretary of the Corporation, or the affidavit of any other person
who mailed or published the notice or caused the same to be mailed or
published, shall be proof of service of notice.)
(3) Submission by Secretary of the Corporation of a list of the
stockholders entitled to vote, present in person or by proxy.
(4) A reading of unapproved minutes of preceding meetings and action
thereon.
(5) Reports.
(6) If an annual meeting, or a special meeting called for that
purpose, the election of directors.
(7) Unfinished business.
(8) New business.
(9) Adjournment.
SECTION 10. List of Stockholders.
Prior to each meeting of the stockholders, the Secretary shall prepare, as
of the record date fixed by the Board of Directors with respect to the meeting,
a full and accurate list of all stockholders entitled to vote at the meeting,
indicating the number of shares held by each. The Secretary shall be responsible
for the production of the list at the meeting.
1
<PAGE> 3
ARTICLE II
DIRECTORS
SECTION 1. Powers.
The property, business and affairs of the Corporation shall be managed
under the direction of its Board of Directors. They shall have and exercise in
the name of the Corporation and on its behalf all the rights and privileges
legally exercisable by the Corporation, except as otherwise provided by law, by
the charter or by these Bylaws. A director need not be a stockholder. The Board
of Directors shall keep minutes of its meetings and full and fair accounts of
its transactions.
SECTION 2. Number of Directors.
The number of directors of the Corporation shall be determined by the vote
of two-thirds of the entire Board of Directors provided, however, that the
number of directors shall not be more than eleven (11) nor less than three (3).
The tenure of office of a director may not be affected by any change in the
number of directors.
SECTION 3. Election.
Except as hereinafter provided, the members of the Board of Directors shall
be elected each year at the annual meeting of stockholders by a plurality of all
the votes cast, in person or by proxy, provided a quorum is present. Directors
need not be stockholders. Each director shall hold office until the next annual
meeting of stockholders held after his or her election and until his or her
successor has been duly elected and qualifies, until his or her death, or until
he or she has resigned or has been removed pursuant to the applicable provisions
of these by-laws.
SECTION 4. Removal.
At a duly called meeting of the stockholders at which a quorum is present,
the stockholders, by vote of the holders of a majority of the votes cast, in
person or by proxy, may remove with or without cause any director or directors
from office, and may elect a successor or successors to fill any resulting
vacancy for the remainder of the term of the director so removed.
SECTION 5. Vacancies.
If any director shall die or resign, or if the stockholders shall remove
any director without electing a successor to fill the remaining term, the
vacancy may be filled by the vote of a majority of the remaining members of the
Board of Directors, although the remaining directors may be less than a quorum.
Vacancies in the Board of Directors created by an increase in the number of
directors may be filled by the vote of a majority of the entire Board of
Directors as constituted prior to the increase. A director elected by the Board
of Directors to fill any vacancy, however created, shall hold office until the
next annual meeting of stockholders and until his or her successor has been duly
elected and qualifies.
SECTION 6. Annual Meeting; Regular Meetings; Special Meetings.
As soon as practicable after each annual meeting of stockholders, the Board
of Directors shall meet for the purpose of election of officers of the
Corporation and for the transaction of other business. No notice of the annual
meeting of the Board of Directors need be given if it is held immediately
following the annual meeting of stockholders and at the same place. Other
regular meetings of the Board of Directors may be held at such times as the
Board of Directors may determine by resolution or as may be designated by the
Chairman or Vice Chairman of the Board. Special meetings of the Board of
Directors may be called at any time by the Chairman, the Vice Chairman or by any
three directors. Special meetings of the Board of Directors may be called by the
Chairman, by the Vice Chairman or by any three directors.
2
<PAGE> 4
SECTION 7. Place of Meetings.
Regular or special meetings of the Board may be held within or without the
State of Maryland, as the Board may from time to time determine. Members of the
Board of Directors may participate in meetings by means of a conference call or
similar communication equipment if all persons participating in the meeting can
hear and speak to each other at the same time. Participation in a meeting by
these means constitutes presence in person at such meeting.
SECTION 8. Quorum; Voting.
A majority of the Board of Directors shall constitute a quorum for the
transaction of business at every meeting of the Board of Directors; but, if at
any meeting there be less than a quorum present, a majority of those present may
adjourn the meeting from time to time, but not for a period exceeding ten days
at any one time or 60 days in all, without notice other than by announcement at
the meeting, until a quorum shall attend. At any such adjourned meeting at which
a quorum shall be present, any business may be transacted which might have been
transacted at the meeting as originally called. Except as hereinafter provided
or as otherwise provided by the charter or by law, directors shall act by a vote
of a majority of those members in attendance at a meeting at which a quorum is
present.
SECTION 9. Presumption of Assent.
A director of the Corporation who is present at a meeting of the Board of
Directors at which action on any corporate matter is taken shall be presumed to
have assented to the action taken unless the director announces his or her
dissent at the meeting, and such dissent is entered in the minutes of the
meeting, or the director files his or her written dissent to the action before
the meeting adjourns with the person acting as the secretary of the meeting, or
the director forwards his or her written dissent within 24 hours after the
meeting is adjourned by registered or certified mail to the secretary of the
meeting or the Secretary of the Corporation. The right to dissent does not apply
to a director who voted in favor of the action or who failed to make his or her
dissent known at the meeting. A director may abstain from voting on any matter
coming before the meeting by stating that he or she is so abstaining at the time
the vote is taken and by causing his or her abstention to be recorded or stated
in writing in the same manner as provided above for a dissent.
SECTION 10. Notice of Meetings.
Except for the meeting immediately following the annual meeting of
stockholders, notice of the place, day and hour of a regular meeting of the
Board of Directors shall be given to each director not less than three days
prior to the meeting, and notice of special meetings of the Board of Directors
shall be given not less than one day prior to the meeting, in the manner
provided in Section 2 of Article IX hereof. Subsequent to each Board meeting,
and as soon as practicable thereafter, each director shall be furnished with a
copy of the minutes of said meeting. At least 24 hours notice shall be given of
all meetings. The purpose of any meeting of the Board of Directors need not be
stated in the notice.
SECTION 11. Rules and Regulations.
The Board of Directors may adopt such rules and regulations for the conduct
of its meetings and the management of the affairs of the Corporation as it may
deem proper and not inconsistent with the laws of the State of Maryland or these
Bylaws or the Charter.
SECTION 12. Compensation.
The directors may receive a stated salary for their services, and/or fixed
sum and expense of attendance may be allowed for attendance at each regular or
special meeting. The stated salary and attendance fee, if any, shall be
determined by resolution of the Board; provided, however, that nothing herein
contained shall be construed as precluding a director from serving the
Corporation in any other capacity and receiving compensation therefor.
3
<PAGE> 5
SECTION 13. Informal Action by the Directors.
Any action required or permitted to be taken at any meeting of the Board
may be taken without a meeting, if a written consent to such action is signed by
all of the directors entitled to vote on the matter and such consent is filed
with the minutes of the Board.
SECTION 14. Committees of Directors.
The Board of Directors may, by resolution passed by a majority of the whole
Board, designate one or more committees, each committee to consist of one or
more of the directors of the corporation, which, to the extent provided in the
resolution, shall have and may exercise the power of the Board of Directors in
the management of the business and affairs of the corporation, and may have
power to authorize the seal of the corporation to be affixed to all papers which
may require it. Such committee or committees shall have such name or names as
may be determined from time to time by resolution adopted by the Board of
Directors. Each committee of the Board of Directors shall fix its own rules of
procedure, and shall meet as provided by those rules, or by resolution of the
Board of Directors, or at the call of the chairman or any two members of the
committee. A majority of each entire committee shall constitute a quorum, and in
every case the affirmative vote of a majority of the entire committee shall be
necessary to take any action. Vacancies in any committee of the Board of
Directors shall be filled by the Board of Directors.
ARTICLE III
OFFICERS
SECTION 1. In General.
The Board of Directors shall elect a Chairman of the Board, a Chief
Executive Officer, a President and Chief Operating Officer, a Chief Financial
Officer and Treasurer and a Secretary. The Board may elect a Vice Chairman of
the Board, one or more Vice Presidents and such Assistant Secretaries and
Assistant Treasurers and other officers as may be chosen by the Board of
Directors. Each officer shall be elected by a majority vote of the entire Board
and shall hold office only during the pleasure of the Board of until his or her
successor is chosen and qualifies. Any two or more of the above officers may be
held by the same person, except that the same person cannot serve as both
President and Vice President. The Board of Directors may from time to time
appoint such other agents and employees with such powers and duties as they may
deem proper. In its discretion, the Board of Directors may leave unfilled any
offices except those of President, Treasurer and Secretary.
SECTION 2. Chairman of the Board.
The Chairman of the Board (the "Chairman") shall preside at all meetings of
the stockholders and of the Board of Directors at which he or she shall be
present. The Chairman also shall have such other powers and perform such other
duties as from time to time may be assigned to him or her by the Board of
Directors. The Chairman must be a member of the Board of Directors.
SECTION 3. Vice Chairman of the Board.
In the absence of the Chairman, the Vice Chairman of the Board (the "Vice
Chairman") shall preside at meetings of stockholders and of the Board of
Directors. The Vice Chairman also shall have such other powers and perform such
other duties as from time to time may be assigned to him or her by the Board of
Directors or by the Chairman. The Vice Chairman must be a number of the Board of
Directors.
SECTION 4. Chief Executive Officer.
The Chief Executive Officer ("CEO") shall have the responsibility for the
general supervision and direction of the affairs of the Corporation and shall
perform such other duties as may be assigned by the Board of Directors. The CEO
shall have authority to sign and execute, in the name of the Corporation, all
authorized
4
<PAGE> 6
deeds, mortgages, bonds, contracts or other instruments and the authority on the
Corporation's behalf to endorse securities owned by the Corporation.
SECTION 5. President and Chief Operating Officer.
The President and Chief Operating Officer ("President") shall have
authority to sign and execute, in the name of the Corporation, all authorized
deeds, mortgages, bonds, contracts or other instruments and shall have the
responsibility for the Corporation's continued growth and development of the
juvenile justice, behavioral health and managed care programs. The President
shall have the authority on the Corporation's behalf to endorse securities owned
by the Corporation and to execute any documents requiring the signature of an
executive officer, and shall perform such other duties as may be prescribed by
the Board of Directors or the CEO.
SECTION 6. Chief Financial Officer and Treasurer.
The Chief Financial Officer and Treasurer ("CFO") shall have authority to
sign and execute, in the name of the Corporation, all authorized deeds,
mortgages, bonds, contracts or other instruments and shall have the
responsibility for the active financial management of the Corporation. The CFO
shall have the authority on the Corporation's behalf to endorse securities owned
by the Corporation and to execute any documents requiring the signature of an
executive officer, and shall perform such other duties as the Board or the CEO
may direct.
SECTION 7. Vice Presidents.
Each Vice President shall have the power to sign and execute, unless
otherwise provided by resolution of the Board of Directors, all contracts or
other obligations in the name of the Corporation in the ordinary course of
business, and with the Secretary, or with the Treasurer, or with an Assistant
Secretary, or with an Assistant Treasurer, may sign certificates of stock of the
Corporation. At the request of the President or in his or her absence or during
his or her inability to act, the Vice President or Vice Presidents shall perform
the duties and exercise the functions of the President, and when so acting shall
have the powers of the President. If there be more than one Vice President, the
Board of Directors may determine which one or more of the Vice Presidents shall
perform any of such duties or exercise any of such functions, or if such
determination is not made by the Board of Directors, the President may make such
determination. The Vice President or Vice Presidents shall have such other
powers and perform such other duties as may be assigned to him or them by the
Board of Directors, by the CEO or by the President.
SECTION 8. Secretary.
The Secretary shall keep the minutes of the meetings of the stockholders
and of the Board of Directors and shall attend to the giving and serving of all
notices of the Corporation required by law or these Bylaws. The Secretary shall
maintain at all times in the principal office of the Corporation at least one
copy of the Bylaws with all the amendments to date, and shall make the same,
together with the minutes of the meeting of the stockholders, the annual
statement of affairs of the Corporation and any stockholders agreement on file
at the office of the Corporation, available for inspection by any officer,
director or stockholder during reasonable business hours. The Secretary shall
perform such other duties as may be assigned by the Board of Directors, the CEO
or the President.
SECTION 9. Compensation; Removal; Vacancies.
The Board of Directors shall have power to fix the compensation of all
officers of the Corporation. It may authorize any committee or officer, upon
whom the power of appointing subordinate officers may have been conferred, to
fix the compensation of such subordinate officers. The Board of Directors, by
vote of a majority of the entire Board, shall have the power at any regular or
special meeting to remove any officer, if in the judgment of the Board the best
interests of the Corporation will be served by such removal. The Board of
Directors may authorize any officer to remove subordinate officers. The Board of
Directors may authorize the
5
<PAGE> 7
Corporation's employment of an officer for a period in excess of the term of the
Board. The Board of Directors at any regular or special meeting shall have the
power to fill a vacancy occurring in any office for the unexpired portion of the
term.
SECTION 10. Substitutes.
The Board of Directors may from time to time in the absence of any one of
the officers or at any other time, designate any other person or persons, on
behalf of the Corporation to sign any contract, deeds, notes or other
instruments in the place or stead of any of such officer, and may designate any
person to fill any one of said offices, temporarily or for any particular
purpose; and any instruments so signed in accordance with a resolution of the
Board shall be valid act of the Corporation as fully as if executed by any
regular officer.
ARTICLE IV
RESIGNATION
Any director or officer may resign the office at any time. Such resignation
shall be made in writing and shall take effect from time to time of its receipt
by the Corporation, unless some time be fixed in the registration, and then from
that date. The acceptance of a resignation shall not be required to make it
effective.
ARTICLE V
COMMERCIAL PAPER, ETC.
All bills, notes, checks, drafts and commercial paper of all kinds to be
executed by the Corporation as maker, acceptor, endorser or otherwise, and all
assignments and transfers of stock, contracts, or written obligations of the
Corporation, and all negotiable instruments, shall be made in the name of the
Corporation and shall be signed by any one or more of the following officers:
the Chairman, the CEO, the President, or the CFO, or by such other person or
persons as the Board of Directors may from time to time designate.
ARTICLE VI
FISCAL YEAR
The fiscal year of the Corporation shall be a 12 month period, ending June
30 of each and every year.
ARTICLE VII
SEAL
The seal of the Corporation shall be in the form of two concentric circles
inscribed with the name of the Corporation and the year and State in which it is
incorporated. The Secretary or Treasurer, or any Assistant Secretary or
Assistant Treasurer, shall have the right and power to attest to the corporate
seal. In lieu of affixing the corporate seal to any document, it shall be
sufficient to meet the requirements of any law, rule or regulation relating to a
corporate seal to affix the word ("SEAL") adjacent to the signature of the
authorized officer of the Corporation.
ARTICLE VIII
STOCK
SECTION 1. Issue.
Each stockholder shall be entitled to a certificate or certificates which
shall represent and certify the number and class of shares of stock owned in the
Corporation. Each certificate shall be signed by the Chairman, the CEO or the
President and countersigned by the Secretary or any Assistant Secretary or the
6
<PAGE> 8
CFO, the Treasurer or any Assistant Treasurer, and sealed with the seal of the
Corporation. Stock certificates shall be in such form not inconsistent with law
or with the Charter, as shall be approved by the Board of Directors. In case any
officer of the Corporation who has signed any certificate ceases to be an
officer of the Corporation, whether by reason of death, resignation or
otherwise, before such certificate is issued, then the certificate may
nevertheless be issued by the Corporation with the same effect as if the officer
had not ceased to be such officer as of the date of such issuance.
SECTION 2. Transfers.
The Board of Directors shall have power and authority to make all such
rules and regulations as it may deem expedient concerning the issue, transfer
and registration of stock certificates. The Board of Directors may appoint one
or more transfer agents and/or registrars for its outstanding stock, and their
duties may be combined. No transfer of stock shall be recognized or binding upon
the Corporation until recorded on the books of the Corporation, or, as the case
may be, of its transfer agent upon surrender and cancellation of a certificate
or certificates for a like number of shares.
SECTION 3. Record Dates for Dividends and Stockholder's Meeting.
The Board of Directors may fix a date not exceeding 90 days preceding the
date of any meeting of stockholders, any dividend payment date or any date for
the allotment of rights, as record date for the determination of the
stockholders entitled to notice of and to vote at such meeting, or entitled to
receive such dividends or rights, as the case may be, and only stockholders of
record on such date shall be entitled to notice of and to vote at such meeting
or to receive such dividends or rights, as the case may be. In the case of a
meeting of stockholders, the record date shall be fixed not less than ten days
prior to the date of the meeting.
SECTION 4. New Certificates.
In case any certificate of stock is lost, stolen, mutilated or destroyed,
the Board of Directors may authorize the issue of a new certificate in place
thereof upon indemnity to the Corporation against loss and upon such other terms
and conditions as it may deem advisable. The Board of Directors may delegate
such power to any officer or officers of the Corporation or to any transfer
agent or registrar of the Corporation; but the Board of Directors, such officer
or officers or such transfer agent or registrar may, in their discretion, refuse
to issue such new certificate save upon the order of some court having
jurisdiction in the premises.
ARTICLE IX
NOTICE
SECTION 1. Notice to Stockholders.
Whenever by law or these Bylaws notice is required to be given to any
stockholder, such notice shall be in writing and may be given to each
stockholder by delivery to the stockholder's residence or usual place of
business, or by mailing it, postage prepaid, and addressed at the address as it
appears on the books of the Corporation or its transfer agent. Such leaving or
mailing of notice shall be deemed the time of giving such notice.
SECTION 2. NOTICE TO DIRECTORS AND OFFICERS.
Whenever by law or these Bylaws notice is required to be given to any
director or officer, such notice may be given in any one of the following ways:
by personal notice to such director or officer, by telephone communication with
such director or officer at the address as it appears on the books of the
Corporation, or by depositing the same in writing in the post office or in a
letter box in a postage paid, sealed wrapper addressed to such director or
officer at the address as it appears on the books of the Corporation. The time
when such notice shall be consigned to a communication company for delivery
shall be deemed to be the time of the giving of such notice, and 48 hours after
the time when such notice shall be mailed shall be deemed to be the time of the
giving of such notice by mail.
7
<PAGE> 9
SECTION 3. Waiver of Notice.
Notice to any stockholder or director of the time, place and/or purpose of
any meeting of stockholders or directors required by these Bylaws may be
dispensed with if such stockholder shall either attend in person or by proxy, or
if such director shall attend in person, or if such absent stockholder or
director shall, in writing filed with the records of the meeting either before
or after the holding thereof, waive such notice.
ARTICLE X
STOCKHOLDER DISTRIBUTIONS AND FINANCE
SECTION 1. Distributions.
Subject to any conditions and limitations of the charter or law, the Board
of Directors may in its discretion determine what, if any, distributions shall
be made to the stockholders of the Corporation, the date when such distributions
shall be made, and the date for the determination of holders of record to whom
such distributions shall be made.
SECTION 2. Depositories.
The Board of Directors from time to time shall designate one or more banks
or trust companies as depositories of the Corporation and shall designate those
officers and agents who shall have authority to deposit corporate funds in such
depositories. It shall also designate those officers and agents who shall have
authority to withdraw from time to time any or all of the funds of the
Corporation so deposited upon checks, drafts, or orders for the payment of
money, notices and other evidences of indebtedness, drawn against the account
and issued in the name of the Corporation. Any such designations by the Board of
Directors may be either general or specific. The signatures of such officers or
agents may be made by manual or facsimile signature. No check or order for the
payment of money shall be invalidated because a person whose signature appears
on such check or order has ceased to be an officer or agent of the Corporation
prior to the time of payment of such check or order by any such depository.
SECTION 3. Corporate Obligations.
No loans shall be contracted on behalf of the Corporation and no evidences
of indebtedness or guaranties of the obligations of others shall be issued in
the name of the Corporation unless authorized by a resolution of the Board of
Directors. Such authority may be either general or specific. Unless the
authorizing resolution shall provide otherwise, all loans, promissory notes,
acceptances, other evidences of indebtedness and guaranties shall be signed by
the Chairman, the CEO President, a Vice President, the Secretary or the
Treasurer.
ARTICLE XI
BOOKS AND RECORDS
SECTION 1. Books and Records.
The Corporation shall maintain a stock ledger that shall contain the name
and address of each stockholder and the number of shares of stock of the
Corporation which the stockholder holds. The ledger shall be kept at the
principal offices of the Corporation. All other books, accounts and records of
the Corporation, including the original or a certified copy of these by-laws,
the minutes of all stockholders meetings, a copy of the annual statement, and
any voting trust agreements on file with the Corporation, shall also be kept and
maintained by the Secretary at the principal offices of the Corporation.
SECTION 2. Inspection Rights.
Except as otherwise provided by law or by charter, the Board of Directors
shall determine whether and to what extent the books, accounts, and records of
the Corporation, or any of them, shall be open to the
8
<PAGE> 10
inspection of stockholders. No stockholder shall have any right to inspect any
book, account, document or record of the Corporation, except as conferred by
law, by charter, or by resolution of the Board of Directors.
ARTICLE XII
INDEMNIFICATION
To the maximum extent permitted by the Maryland General Corporation Law as
from time to time amended, the Corporation shall indemnify its currently acting
and its former directors, officers, agents and employees and those persons who,
at the request of the Corporation serve or have served another corporation,
partnership, joint venture, trust or other enterprise in one or more of such
capacities against any and all liabilities incurred in connection with their
services in such capacities.
ARTICLE XIII
AMENDMENTS
These Bylaws may be added to, altered, amended, repealed or suspended by a
vote of a majority of the Board of Directors at any regular meeting of the Board
or at any special meeting called for that purpose.
9
<PAGE> 1
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF
PRIMARY EARNINGS PER SHARE
YOUTH SERVICES INTERNATIONAL, INC.
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED 6/30/96 ENDED 6/30/95 ENDED 6/30/94
------------- ------------- -------------
<S> <C> <C> <C>
Weighted average shares outstanding.................. 8,271,365 7,639,874 6,156,360
Weighted average common stock equivalents
outstanding:
Common stock....................................
Stock options................................... 1,386,630 1,179,627 1,034,667
Employee stock purchase options................. 134,883 89,775 174,399
Warrants........................................ 230,934 231,900 231,900
----------- ----------- -----------
Total........................................... 1,752,447 1,501,302 1,440,966
----------- ----------- -----------
Assumed treasury stock repurchases:
Common stock....................................
Stock options................................... 578,951 666,916 263,976
Employee stock purchase options................. 85,167 70,188 74,925
Warrants........................................ 92,236 139,752 164,915
----------- ----------- -----------
Total........................................... 756,354 876,856 503,816
----------- ----------- -----------
Net weighted average common stock equivalents........ 996,092 624,446 937,150
----------- ----------- -----------
Total primary weighted average common stock and
common stock equivalents outstanding............... 9,267,458 8,264,320 7,093,510
=========== =========== ===========
Note: 20% buy back limit............................. 1,654,273 1,527,975 1,231,272
=========== =========== ===========
Net Income........................................... $ 2,271,000 $ 2,179,000 $ 2,092,000
=========== =========== ===========
Primary Earnings Per Share........................... $ 0.25 $ 0.26 $ 0.29
=========== =========== ===========
</TABLE>
Note: The fully-diluted calculation has not been presented as the impact is
anti-dilutive.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
STATE OF
NAME INCORPORATION
- ------------------------------------------------------------------------------ -------------
<S> <C>
Youth Services International of Iowa, Inc. ................................... Maryland
Youth Services International of Tennessee, Inc. .............................. Maryland
Youth Services International of Maryland, Inc. ............................... Maryland
Youth Services International of Baltimore, Inc. .............................. Maryland
Youth Services International of Northern Iowa, Inc. .......................... Iowa
YSI of Central Iowa, Inc. .................................................... Iowa
YSI of Utah, Inc. ............................................................ Utah
Youth Services International of South Dakota, Inc. ........................... South Dakota
Youth Services International of Missouri, Inc. ............................... Missouri
Southwestern Children's Health Services, Inc. ................................ Arizona
Youth Services International of Texas, Inc. .................................. Texas
Youth Services International of New Mexico, Inc. ............................. New Mexico
Youth Services International of Delaware, Inc. ............................... Delaware
YSI Professional Services Group, Inc. ........................................ Maryland
Youth Services International of Florida, Inc. ................................ Florida
Youth Services International of Virginia, Inc. ............................... Virginia
Development Behavioral Consultants, Inc.(*)................................... Arizona
Promise House, Inc.(*)........................................................ Arizona
</TABLE>
- ---------------
* Subsidiaries of Southwestern Children's Health Services, Inc.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K, into Youth Services International,
Inc. and subsidiaries' previously filed Registration Statement File Nos.
333-07517, 33-99500, 33-99498, 33-93880, 33-84934, 33-84938, 33-84672, 33-83726
and 33-83724.
ARTHUR ANDERSEN LLP
Baltimore, Maryland,
September 12, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 7,046
<SECURITIES> 9,798
<RECEIVABLES> 18,328
<ALLOWANCES> 748
<INVENTORY> 0
<CURRENT-ASSETS> 37,966
<PP&E> 20,400
<DEPRECIATION> 3,265
<TOTAL-ASSETS> 74,639
<CURRENT-LIABILITIES> 8,005
<BONDS> 0
0
0
<COMMON> 86
<OTHER-SE> 23,365
<TOTAL-LIABILITY-AND-EQUITY> 74,639
<SALES> 0
<TOTAL-REVENUES> 100,353
<CGS> 0
<TOTAL-COSTS> 93,248
<OTHER-EXPENSES> 2,978
<LOSS-PROVISION> 707
<INTEREST-EXPENSE> 3,160
<INCOME-PRETAX> 4,127
<INCOME-TAX> 1,856
<INCOME-CONTINUING> 4,127
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,271
<EPS-PRIMARY> .25
<EPS-DILUTED> 0
</TABLE>
