<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission File Number
September 30, 1996 0-23284
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YOUTH SERVICES INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
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<S> <C>
Maryland 52-1715690
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(State of Incorporation) (I.R.S. Employer Identification Number)
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2 Park Center Court, Suite 200, Owings Mills, Maryland, 21117
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(Address of principal executive offices)
Registrant's telephone number, including area code: 410-356-8600
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Not Applicable
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(Former name, former address and former fiscal year if changed since last
report)
Number of shares of common stock outstanding on September 30, 1996: 9,165,281
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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YOUTH SERVICES INTERNATIONAL, INC.
INDEX - FORM 10-Q
SEPTEMBER 30, 1996
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<CAPTION>
PAGE
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PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Statements of Income -
For the Three Months Ended September 30,
1996 and 1995 ........................................................ 1
Consolidated Balance Sheets -
As of September 30, 1996 and June 30, 1996 ........................... 2
Consolidated Statements of Cash Flows-
For the Three Months Ended September 30,
1996 and 1995 ........................................................ 4
Notes to Consolidated Financial Statements ........................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................. 8
PART II - OTHER INFORMATION
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Item 1. Legal Proceedings .................................................... 12
Item 2. Changes in Securities ................................................. 12
Items 3 through 5 have been omitted since the items are either inapplicable or
the answer is negative.
Item 6. Exhibits and Reports on Form 8-K ..................................... 12
Signatures .................................................................................... 13
</TABLE>
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YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in 000's except per share data)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------
1996 1995
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<S> <C> <C>
REVENUES $27,696 $22,758
PROGRAM EXPENSES
Direct operating 23,932 19,405
Amortization of goodwill 384 265
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CONTRIBUTION FROM OPERATIONS 3,380 3,088
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 1,849 1,349
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INCOME FROM OPERATIONS 1,531 1,739
OTHER INCOME (EXPENSE)
Interest expense (974) (564)
Other, net 210 (27)
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(764) (591)
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INCOME BEFORE INCOME TAX EXPENSE 767 1,148
INCOME TAX EXPENSE 197 406
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NET INCOME $570 $742
========= =========
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE $0.06 $0.08
========= =========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 10,147 8,880
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
1
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YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in 000's)
<TABLE>
<CAPTION>
September 30, June 30,
1996 1996
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(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $1,235 $7,046
Restricted cash 507 500
Investments available-for-sale 10,017 9,798
Accounts receivable, net 20,827 17,467
Refundable income taxes 1,046 1,046
Current portion of notes receivable 64 113
Prepaid expenses and supplies 2,575 1,918
Deferred tax asset 66 78
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Total current assets 36,337 37,966
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PROPERTY, EQUIPMENT AND IMPROVEMENTS:
Land 1,086 621
Leasehold improvements 8,886 7,134
Program equipment 3,789 2,289
Buildings 10,570 5,162
Office furniture and equipment 4,049 3,874
Vehicles 1,442 1,320
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29,822 20,400
Accumulated depreciation (4,009) (3,265)
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25,813 17,135
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OTHER ASSETS:
Deposits 368 160
Deferred debt issue costs, net 2,536 2,613
Goodwill, net 18,624 9,613
Non-compete agreements, net 251 277
Notes receivable, net of current portion 3,133 4,133
Deferred tax asset 750 750
Other assets, net 2,404 1,992
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28,066 19,538
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Total assets $90,216 $74,639
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</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
2
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YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in 000's except share data)
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<CAPTION>
September 30, June 30,
1996 1996
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(Unaudited)
LIABILITIES
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $3,705 $1,465
Accrued payroll 2,997 1,641
Accrued interest payable 551 1,093
Other accrued expenses 3,036 3,018
Short-term borrowings 5,000 -
Current portion of long-term debt and capital
lease obligations 996 788
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Total current liabilities 16,285 8,005
DEFERRED REVENUE 405 38
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, net of curent portion 10,277 4,212
7% CONVERTIBLE SUBORDINATED DEBENTURES 32,200 37,950
12% SUBORDINATED DEBENTURES, net of
unamortized discount 985 983
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Total liabilities 60,152 51,188
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SHAREHOLDERS' EQUITY:
Common stock, $.01 par value: authorized
shares 20,000,000, issued and outstanding
9,165,281 at September 30, 1996 and
8,597,712 at June 30, 1996 92 86
Additional paid-in-capital 26,101 20,099
Unrealized loss on investments available-for-sale (220) (255)
Retained earnings 4,091 3,521
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Total shareholders' equity 30,064 23,451
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Total liabilities and shareholders' equity $90,216 $74,639
============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
3
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Page 1 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in 000's)
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<CAPTION>
Three Months Ended
September 30,
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1996 1995
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OPERATING ACTIVITIES
Net income $570 $742
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 1,292 903
Decrease in deferred taxes - 3
Income from Introspect Operations (371) (107)
Gain on disposal of vehicle - (3)
Net change in operating assets and liabilities (1,502) 4,095
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Net cash (used in) provided by operating activities (11) 5,633
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INVESTING ACTIVITIES
Purchases of property, equipment and improvements (5,161) (3,871)
Purchases of investments available-for-sale (171) -
Goodwill (805) (66)
Collection of notes receivable 49 -
Other long-term assets (828) (431)
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Net cash used in investing activities (6,916) (4,368)
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FINANCING ACTIVITIES
Proceeds from short-term borrowings 11,213 14
Repayments of short-term borrowings, long-term debt and
capital lease obligations (10,355) (1,190)
Proceeds from issuance of common stock under the
Employee Stock Option and Employee Stock
Purchase Plans, net 258 154
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Net cash provided by (used in) financing activities 1,116 (1,022)
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NET (DECREASE) INCREASE IN CASH (5,811) 243
CASH, beginning of period 7,046 784
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CASH, end of period $1,235 $1,027
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</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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Page 2 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in 000's)
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<CAPTION>
Three Months Ended
September 30,
--------------------------
1996 1995
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<S> <C> <C>
CHANGE IN OPERATING ASSETS AND LIABILITIES:
Cash held in escrow $ - $2,543
Restricted cash (7) (9)
Accounts receivable (1,573) (2,747)
Prepaid expenses, supplies and other (582) (134)
Deposits (98) (87)
Accounts payable 1,720 2,737
Accrued payroll 1,078 803
Other accrued expenses (2,040) 989
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Net change in operating assets and liabilities ($1,502) $4,095
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SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 1,529 $253
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Cash paid for taxes $ 99 $120
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Noncash reduction of accounts receivable through
application of advance payments for services $ 9 $36
============ ==========
Noncash asset acquisition through notes payable,
assumption of liabilities and issuance of long-term
debt $ 13,104 $9,288
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Noncash conversion of 7% Convertible Subordinated
Debentures $ 5,750 $ -
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Change in market value of investments available-for-sale $ 48 $ -
============ ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
5
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YOUTH SERVICES INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL INFORMATION
In management's opinion, the accompanying interim unaudited
consolidated financial statements include all adjustments, consisting only of
normal, recurring adjustments, necessary for a fair presentation of Youth
Services International, Inc.'s ("YSI's" or the "Company's") financial position
at September 30, 1996 and the results of its operations and its cash flows for
the three months ended September 30, 1996 and 1995. The accompanying
consolidated balance sheet as of June 30, 1996 is presented herein as set forth
in YSI's Annual Report on Form 10-K for the year ended June 30, 1996. These
statements are presented in accordance with the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in YSI's annual consolidated financial statements
have been omitted from these statements, as permitted under the applicable
rules and regulations. Readers of these statements should refer to the
consolidated financial statements and notes thereto as of June 30, 1996 and
1995 and for the years then ended filed with the Securities and Exchange
Commission on Form 10-K.
The consolidated financial statements as of and for the three months
ended September 30, 1995 have been adjusted to reflect the consolidation of the
results of operations of Introspect Healthcare, Corporation. See NOTE 2.
ACQUISITION for further discussion.
The weighted average common and common equivalent shares and the per
share amounts as of and for the three months ended September 30, 1995 have been
restated to reflect a three-for-two stock split which was effective May 24,
1996.
Operating results for the three months ended September 30, 1996 and
1995 are not necessarily indicative of the results that may be expected for a
full fiscal year.
2. ACQUISITION
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, were included as part of the purchase price.
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 facility.
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. 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 required that the pre-acquisition operating results of
Introspect during the management period be consolidated with those of the
Company. As a result, the first quarter of fiscal 1996 has been adjusted to
reflect revenues of $3,410,000, expenses of $3,303,000, and net income of
$107,000 related to the pre-acquisition consolidation of Introspect.
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3. SIGNIFICANT TRANSACTION
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 interest and 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.
4. PRO FORMA INFORMATION
Assuming the acquisitions of Tampa Bay Academy (which was effective March
1, 1996) and Introspect had been consummated at the beginning of fiscal year
1996, the unaudited pro forma consolidated results of operations for the three
months ended September 30, 1996 and 1995 would have been as follows:
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<CAPTION>
For the three months ended
September 30,
(000's omitted)
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1996 1995
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<S> <C> <C>
Revenues $27,696 $24,740
Net income $ 329 $ 697
Earnings per share $ .03 $ .08
Weighted average common and common
equivalent shares outstanding 10,147 8,880
</TABLE>
The above information reflects adjustments, net of tax effects, to
recognize additional amortization expense related to goodwill and non-compete
agreements, rent expense, and depreciation expense on the fair market value
write-up of fixed assets, as well as reduced interest and amortization expense
on debt not assumed and deferred assets not acquired.
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 year 1996.
5. AUTHORIZED CAPITAL
Effective November 8, 1996, the Board of Directors approved an
increase in the Company's authorized common stock from 20,000,000 shares
to 70,000,000 shares.
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YOUTH SERVICES INTERNATIONAL, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As of September 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.
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.
RECENT DEVELOPMENTS
In October 1996, the Company was awarded a contract by the State of
Florida, Department of Juvenile Justice, to operate a 102 bed juvenile
corrections facility for adjudicated youth in Dade County, Florida. The
Company expects to commence operations in early December 1996.
SIGNIFICANT EVENTS
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 were included as part of the purchase price.
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 facility. See NOTES TO UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS - NOTE 2. ACQUISITION for further discussion
of the accounting treatment for this transaction.
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 interest and 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
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during fiscal year 1996, the Company recorded the conversion premium in the
fourth quarter of fiscal year 1996.
RESULTS OF OPERATIONS
The following table sets forth selected items from the Company's
unaudited consolidated financial statements expressed as a percentage of total
revenues:
<TABLE>
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As of September 30,
- -------------------------------------------------------------------------------------------------------
1996 1995
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<S> <C> <C>
Revenues 100.0% 100.0%
Program expense:
Direct operating 86.4 85.3
Amortization of goodwill 1.4 1.2
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Contribution from operations 12.2 13.5
Selling, general and administrative 6.7 5.9
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Income from operations 5.5 7.6
Other income (expense):
Interest expense (3.5) (2.5)
Other, net 0.8 (0.1)
----- -----
Income before income tax expense 2.8 5.0
Income tax expense (0.7) (1.8)
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Net income 2.1 3.2
=== ===
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</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995
Revenues. Revenues increased $4,938,000, or 21.7%, to $27,696,000 for
the three months ended September 30, 1996 from $22,758,000 for the three months
ended September 30, 1995 primarily as a result of the increase in the number of
youth at the Company's programs. Of the total increase in revenues,
$2,219,000 was attributable to the operations of two programs that were acquired
or opened after the first quarter of fiscal 1996; $3,350,000 was attributable to
the increase in census of sixteen programs that were operated by the Company in
both the three months ended September 30, 1996 and 1995; and $150,000 was
attributable to an increase in consulting services revenue. The increase in
revenues was partially offset by a decrease in revenues of $781,000 resulting
from the company's decision to terminate a management contract for one
program in fiscal 1996. The average daily enrollment for all of the Company's
programs increased 22.3% to 2,146 youth for the three months ended September 30,
1996 from 1,755 youth for the three months ended September 30, 1995, including a
16.2% increase in average daily enrollment in the sixteen programs that the
Company operated for both the three months ended September 30, 1996 and 1995 to
2,040 youth from 1,755 youth. The Company reported an occupancy rate of 91.3%
for the first quarter of fiscal 1997 compared to 92.5% for the first quarter of
fiscal 1996 based on an average daily licensed capacity of 2,351 beds for the
three months ended September 30, 1996 and 1,896 beds for the three months ended
September 30, 1995.
Program Direct Operating Expenses. Program direct operating expenses
increased $4,527,000, or 23.3%, to $23,932,000 for the three months ended
September 30, 1996 from $19,405,000 for the three months ended September 30,
1995 primarily as a result of the increase in the number of youth at the
Company's programs. Of the total increase in expenses, $2,175,000 is
attributable to the operations of two programs that were acquired or opened
after the first quarter of fiscal 1996. The increase in expenses was partially
offset by a decrease in expenses of $682,000 resulting from the Company's
decision to terminate a management contract for one program in fiscal 1996.
Salaries and related employee benefits constituted approximately 67.1% of
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program direct operating expenses for the three months ended September 30, 1996
compared to 66.2% of program direct operating expenses for the three months
ended September 30, 1995.
Contribution from Operations. Contribution from operations for the
three months ended September 30, 1996 increased $292,000, or 9.5%, to
$3,380,000 from $3,088,000 for the three months ended September 30, 1995.
Contribution from operations decreased as a percentage of revenues to 12.2% for
the three months ended September 30, 1996 compared to 13.5% for the three
months ended September 30, 1995. This decrease is primarily attributable to
operating losses generated at the Woodward Academy resulting from a decrease in
census during the period while staff received additional training, lower margins
at Clarinda due to additional direct care staff hired during the period in
anticipation of an influx of youth which did not occur as quickly as expected,
Camp Washington's start-up phase of the additional 20 bed program for girls,
and one month of goodwill amortization expense related to the Introspect
acquisition.
Selling, General and Administrative Expenses. For the three months
ended September 30, 1996, selling, general and administrative expenses
increased $500,000, or 37.1%, to $1,849,000 from $1,349,000 for the three
months ended September 30, 1995. As a percentage of revenues, selling,
general, and administrative expenses increased to 6.7% for the three months
ended September 30, 1996 from 5.9% for the three months ended September 30,
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
increase as a percentage of revenues for the three months ended September 30,
1996 as compared to the three months ended September 30, 1995 is primarily
attributable to the Company's efforts to develop the infrastructure necessary
to enhance its current operations and continue its growth.
Interest Expense. Interest expense increased $410,000 to $974,000 for
the three months ended September 30, 1996 from $564,000 for the three months
ended September 30, 1995. Of the increase in interest expense, $566,000 was
attributable to the 7% Convertible Subordinated Debentures Due 2006 that were
issued on January 29, 1996, offset by a decrease in interest expense of
$156,000 related to a reduction in principal of all other indebtedness.
Interest Income. Interest income increased $278,000 to $288,000 for
the three months ended September 30, 1996 from $10,000 for the three months
ended September 30, 1995. The increase is primarily attributable to $177,000
of dividend income earned on temporary investments, and $66,000 of interest
income earned on the mortgage note receivable related to the Tampa Bay Academy
acquisition.
Income Taxes. The provision for income taxes was $197,000,
representing an effective tax rate of 25.7% for the three months ended
September 30, 1996 as compared to $406,000, representing an effective tax rate
of 35.4% for the three months ended September 30, 1995. The decrease in the
effective tax rate was attributable to a $264,000 increase in the
pre-acquisition operating results of Introspect. These operating results were
not taxable to the Company, and therefore, had a favorable impact on the
Company's effective tax rate.
Net Income. Net income was $570,000, or $.06 per share for the three
months ended September 30, 1996 compared to $742,000, or $.08 per share for
the three months ended September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had $1,235,000 in cash and
$20,052,000 of working capital, which included $10,017,000 of investments
available-for-sale. Net cash used in operating activities was $11,000 for the
three months ended September 30, 1996. Net accounts receivable increased
$3,360,000 to $20,827,000, at September 30, 1996 from $17,467,000 at June 30,
1996 primarily as a result of the acquisition of Introspect effective September
1, 1996.
Net cash used in investing activities was $6,916,000 for the three
months ended September 30, 1996, of which $3,445,000 was used to fund the
acquisition of Introspect; $1,716,000 was invested in leasehold improvements,
vehicles, computer equipment and other capital expenditures in support of
10
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existing programs; $805,000 represents goodwill resulting from the acquisition
of a group home and foster care business in Utah; $779,000 represents
investments in deferred software costs, a prepaid consulting agreement
and other long-term asset investments; and $171,000 represents the reinvestment
of dividends earned on the investments available-for-sale.
Net cash provided by financing activities was $1,116,000 for the three
months ended September 30, 1996 and was comprised of $11,213,000 of borrowings
under the Company's lines of credit and $258,000 of proceeds from the issuance
of stock under the Employee Stock Option and Employee Stock Purchase Plans,
offset by the repayment of $9,960,000 of debt assumed as part of the
acquisition of Introspect and the repayment of $395,000 of other long-term
borrowings. As of September 30, 1996, the Company had approximately $3,800,000
available on its existing bank revolving line of credit.
Total debt of $44,458,000 on September 30, 1996 consisted primarily of
$32,200,000 of 7% Convertible Subordinated Debentures Due 2006, $8,143,000 of
borrowings under the Company's lines of credit, $2,178,000 for a capital lease
assumed in the acquisition of Desert Hills New Mexico, $985,000 of 12%
Subordinated Debentures, and $952,000 in other debt and capital leases.
The Company believes that its current funds and funds available under
it lines 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.
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YOUTH SERVICES INTERNATIONAL, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings other than routine
litigation which the Company does not believe is significant to its future
financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES
On September 30, 1996, the Company commenced an exchange offer pursuant
to which the Company offered to issue an aggregate principal amount of
$31,600,000 of 7% Convertible Subordinated Debentures due 2006 under an
Indenture dated as of October 15, 1996 with The Chase Manhattan Bank (the
"Exchange Debentures") in exchange for an equal principal amount of 7%
Convertible Subordinated Debentures due 2006 originally issued by the Company
(the "Original Debentures") under a Fiscal and Paying Agency Agreement dated as
of January 29, 1996 with The Chase Manhattan Bank, N.A., New York, The Chase
Manhattan Bank, N.A. London and Chase Manhattan Bank Luxembourg, S.A. (the
"Fiscal Agency Agreement"). The exchange offer, which was required by the
Fiscal Agency Agreement, was for all of the Original Debentures that were
originally issued pursuant to Rule 144A or Regulation D under the Securities
Act of 1933 (the "Act"). The exchange offer terminated on October 31, 1996 and
all $31,600,000 of Original Debentures for which exchange was offered were
exchanged for an aggregate principal amount of $31,600,000 of Exchange
Debentures. The terms of the Exchange Debentures are substantially the same as
the terms of the Original Debentures. As a result of the exchange, as of
October 31, 1996, there were outstanding an aggregate principal amount of
$31,600,000 of Exchange Debentures and an aggregate principal amount of $600,000
of Original Debentures that were originally issued pursuant to Regulation S
under the Act.
The Company filed a registration statement with respect to
resales of the Exchange Debentures and resales of the shares of Common
Stock issuable upon conversion of the Exchange Debentures which registration
statement became effective with the Securities and Exchange Commission on
October 29, 1996. Under the Fiscal Agency Agreement and the Indenture, the
Company is required to keep such registration statement effective until January
29, 1999.
ITEMS 3 THROUGH 5 have been omitted since the items are either inapplicable or
the answer is negative.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
10 Employment Agreement with Timothy P. Cole
11 Computation of Per Share Earnings
27 Financial Data Schedule
</TABLE>
(b) The registrant filed a Current Report on Form 8-K on September
25, 1996 to report its acquisition of all of the outstanding capital stock of
Introspect Healthcare, Corporation from Diversification Association, Inc. , and
filed Amendments to Current Report on Form 8-K/A on October 17, 1996 and
October 23, 1996 to file the required Financial Statements of Businesses
Acquired and Pro Forma Financial Information with respect to that acquisition
that were unavailable for filing at the time of the original filing of the
Current Report on Form 8-K. The financial statements filed included Audited
Financial Statements of Introspect Healthcare, Corporation and Subsidiaries as
of and for the year ended June 30, 1996, a Pro Forma Consolidated Statement
of Income for the year ended June 30, 1996, and a Pro Forma Consolidated
Balance Sheet as of June 30, 1996.
12
<PAGE> 15
YOUTH SERVICES INTERNATIONAL, INC.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
YOUTH SERVICES INTERNATIONAL, INC.
By: /s/ William P. Mooney
----------------------------------------
William P. Mooney
Chief Financial Officer and Treasurer
Date: November 14, 1996
13
<PAGE> 16
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
YOUTH SERVICES INTERNATIONAL, INC.
-----------------------------
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
<PAGE> 17
YOUTH SERVICES INTERNATIONAL, INC.
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
[S] [C]
10 Employment Agreement with Timothy P. Cole
11 Computation of Per Share Earnings
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10
July 16, 1996
Mr. Timothy P. Cole
3274 SE River Vista Drive
Port St. Lucie, Florida 34952-5927
Dear Tim:
The purpose of this letter is to set forth the terms and conditions of
your employment with Youth Services International, Inc. ("YSI"). In this
regard, we have agreed as follows:
1. YSI hereby employs you and you hereby accept employment and
agree to serve as the Chief Executive Officer of YSI. You will perform all
duties and responsibilities and will have, subject to the limitations of
authority set forth on Exhibit A to this letter, all authority inherent in the
position of Chief Executive Officer, subject to the power of the Board of
Directors to modify, expand and limit such duties, responsibilities and
authorities. You will be elected to the Board of Directors of YSI immediately
and will serve as Vice Chairman of the Board of Directors. You understand that
W. James Hindman will simultaneously be elected as Chairman of the Board and
Chairman of the Executive Committee.
2. The period of your employment under this Agreement will be
three (3) years. Following the first anniversary of this Agreement, the period
of employment under this Agreement will be extended by successive additional
one-year terms, unless terminated prior to any anniversary of this Agreement by
written notice by either party to the other no less than sixty (60) days prior
to the end of any anniversary. In that case, the Agreement will terminate two
years from the anniversary of this Agreement immediately prior to which a
notice of termination was given pursuant to this numbered paragraph 2.
<PAGE> 2
Mr. Timothy P. Cole
July 16, 1996
Page 2
3. For all of the services rendered by you during the period of
employment, YSI will pay you a base salary at the rate of not less than
$300,000 per year, subject to such periodic increases, if any, as the
Organization and Compensation Committee of the Board of Directors may approve.
You will be eligible to receive an award under an incentive bonus program
beginning with YSI's fiscal year ending June 30, 1997. This incentive bonus
program, which is outlined on Exhibit B to this letter, will enable you to earn
annual bonuses of up to 60% of your base salary. Notwithstanding the
provisions of the incentive bonus arrangements set forth on Exhibit B to this
letter, your award for the year ended 1997 will not be less than $100,000. You
will not be guaranteed any minimum bonus for subsequent years. All bonuses
payable under the bonus plan will be paid promptly following the time that the
bonus criteria have been measured following the end of each fiscal year.
4. You will be granted an option to purchase 125,000 shares of
YSI common stock at 100% of the fair market value of the shares of YSI common
stock on the date that you execute this Agreement. 50,000 of the options which
are subject to this grant will vest on the date which is six months from the
date that the parties execute this Agreement. An additional 50,000 will vest
on the date that is 18 months from the date of this Agreement, and the
remaining 25,000 will vest on the second anniversary of the date that you
execute this Agreement. The options will have a five-year term and must be
exercised by the close of business on the fifth anniversary of the date of this
Agreement.
5. (a) YSI understands that you are in the process of
completing the construction of a home in Stewart, Florida. YSI has agreed that
it will advance up to $50,000 in construction costs you may incur following the
date of this letter if this amount is required in connection with completing
the construction of the home. In addition, at such time as the construction is
completed, YSI will at your request discharge the construction loan you have
incurred in connection with the construction of the home and advance you the
equity you have in the home, to the extent that the principal and accrued
interest on the construction loan and your equity does not exceed $705,000 in
the aggregate.
<PAGE> 3
Mr. Timothy P. Cole
July 16, 1996
Page 3
(b) Promptly after the home is constructed, you will take
appropriate steps to list the house for sale. YSI will be entitled to receive
the costs it has advanced you for completing the construction of the home and
the amount of the construction loan and equity YSI has discharged or advanced
on your behalf, out of the net proceeds you realize from the sale of the home.
In the event that the net proceeds you realize from the sale of the home are
insufficient to reimburse YSI in full for the costs it advanced you for
completing construction and the amount of the construction loan and equity it
discharged and advanced on your behalf in accordance with paragraph (a) above,
YSI will forgive up to $100,000 in the aggregate of such costs and expenses,
and you will only be required to reimburse YSI the balance of the costs and
expenses YSI has advanced or discharged on your behalf. You will execute a
promissory note, the terms of which shall be consistent with this paragraph,
and you will grant YSI a first priority security interest in the property to
secure YSI's rights with respect to the repayment of amounts it has advanced or
discharged on your behalf pursuant to paragraph (a) above.
6. YSI will provide you with employee relocation benefits which
will include (i) reimbursement of temporary living expenses, (ii) the move of
your office furnishings and equipment to YSI's offices, and (iii) reasonable
out-of-pocket moving expenses you and your family incur in connection with
relocating your principal residence to the State of Maryland.
7. YSI will provide you with a $30,000 car allowance every third
year which you will apply to the purchase of a new automobile. YSI will be
responsible for the repair and maintenance of this automobile during the term
of this Agreement.
8. You will be entitled to four weeks of vacation during YSI's
fiscal year ending June 30, 1997. You will be entitled to five weeks of
vacation during each fiscal year thereafter. Unused vacation may not be
carried over from one fiscal year to the next.
9. You will have any additional benefits for which you, without
action by the Board of Directors of YSI or any committee thereof, may be or
become eligible under any group health, life
<PAGE> 4
Mr. Timothy P. Cole
July 16, 1996
Page 4
insurance, disability, or other form of employee benefit plan or program of YSI
now existing or that may be later adopted by YSI. This includes the health,
dental and life insurance programs YSI provides currently to its executives.
10. YSI will provide you with a family membership, owned by YSI,
at a country club of your choice. YSI shall not be responsible for paying more
than $15,000 in initiation fees with respect to such membership.
11. (a) This Agreement may be terminated by YSI for cause by
written notice to you specifying the event relied upon for such termination
within 30 days of such event. The term "cause" will mean: (i) the failure
(after written notice and a reasonable opportunity to cure) by you to perform
such duties that are reasonably incidental to the position of Chief Executive
Officer and Vice Chairman of the Board of Directors; (ii) the repeated failure
(after written notice and a reasonable opportunity to cure) by you to observe
in all material respects YSI policies; (iii) any instance of gross negligence
or willful misconduct by you in the performance of your duties; (iv) the
commission by you of any act of fraud or financial dishonesty with respect to
YSI or any of its affiliates or the commission of any crime involving financial
dishonesty or moral turpitude; (v) chronic absenteeism (after written notice
and a reasonable opportunity to cure); (vi) substance abuse (after written
notice and a reasonable opportunity to cure); or (vii) your breach of the
representations and warranties contained in numbered paragraph 13 of this
Agreement.
(b) The termination by YSI of your employment for any
reason other than those specified in paragraph (a) above will be deemed to be a
termination of your employment without cause. Following any termination of
your employment without cause, YSI will pay you the base salary that would
otherwise become payable to you through the then remaining term of this
Agreement. Amounts payable to you will be offset by any other income that you
may earn during such period, it being understood that you will use your
reasonable efforts to mitigate amounts YSI will be obligated to pay you
pursuant to this paragraph (b).
<PAGE> 5
Mr. Timothy P. Cole
July 16, 1996
Page 5
(c) In the event that you resign, retire or otherwise
terminate this Agreement, your salary and benefits will be payable through your
date of termination.
(d) Your employment will terminate immediately upon your
death and in that event your base salary will be paid to your estate or legally
appointed representative through the end of the month in which your death
occurs. If you become physically or mentally disabled so as to become unable
for a period of more than four consecutive months or for shorter periods
aggregating at least four months during any twelve-month period to perform your
duties hereunder on a substantially full-time basis, your employment will
terminate with no further payments of base salary or incentive compensation as
of the end of such four-month or twelve-month period. Such termination will
not affect your benefits under YSI' disability insurance program, if any, then
in effect.
(e) YSI will provide you with a Change-In-Control
Agreement providing you with benefits on a change-in-control of YSI
substantially comparable to those provided to other YSI executives.
12. (a) During the period of your employment with YSI, you
will not, directly or indirectly, on your own behalf or as a partner, officer,
director, trustee, employee, agent, consultant or member of any person, firm or
corporation, or otherwise, enter into the employ of, render any service to, or
engage in any business or activity which is the same as or competitive with any
business or activity conducted by YSI or any of its affiliates. During the
two-year period following the termination of your employment, you will not
directly or indirectly, in any such manner, enter into the employ of, render
any service to, or engage in a business or activity which is the same as,
similar to, or competitive with any business or activity of YSI or any of its
affiliates. During the period of your employment and until two years after the
termination of your employment, you will not, directly or indirectly, on your
own behalf or as a partner, shareholder, officer, employee, director, trustee,
agent, consultant or member of any person, firm or corporation or otherwise,
employ, seek to employ or otherwise obtain or seek the services of any employee
of YSI or any of its affiliates.
<PAGE> 6
Mr. Timothy P. Cole
July 16, 1996
Page 6
(b) During and following the period of your employment
with YSI, you will not use for your own benefit or for the benefit of others,
or divulge to others, any information, trade secrets, knowledge or data of
secret or confidential nature and otherwise not available to members of the
general public that concerns the business or affairs of YSI or its affiliates
and which was acquired by you at any time prior to or during the term of your
employment with YSI, except with the specific prior written consent of YSI.
(c) You agree that all programs, inventions, innovations,
improvements, developments, methods, designs, analyses, reports and all similar
or related information which relate to the business of YSI and its affiliates,
actual or anticipated, or to any actual or anticipated research and development
conducted in connection with the business of YSI and its affiliates, and all
existing or future products or services, which are conceived, developed or made
by you (alone or with others) during the term of this Agreement ("Work
Product") belong to YSI. You will cooperate fully in the establishment and
maintenance of all rights of YSI and its affiliates in such Work Product. The
provisions of this Section 12(c) will survive termination of this Agreement
indefinitely to the extent necessary to require actions to be taken by you
after the termination of the Agreement with respect to Work Product created
during the Agreement.
(d) If any covenant or agreement contained in this
paragraph 12 is found by a court having jurisdiction to be unreasonable in
duration, geographical scope or character of restriction, the covenant or
agreement will not be rendered unenforceable thereby but rather the duration,
geographical scope or character of restriction of such covenant or agreement
will be reduced or modified with retroactive effect to make such covenant or
agreement reasonable, and such covenant or agreement will be enforced as so
modified.
13. You hereby represent and warrant to YSI that (i) the
execution, delivery and full performance of this Agreement by you does not and
will not conflict with, breach, violate or cause a default under any agreement,
contract or instrument to which you are a party or any judgment, order or
decree to which you are
<PAGE> 7
Mr. Timothy P. Cole
July 16, 1996
Page 7
subject; (ii) you are not a party or bound by any employment agreement,
consulting agreement, agreement not to compete, confidentiality agreement or
similar agreement with any other person or entity; and (iii) upon the execution
and delivery of this Agreement by YSI, this Agreement will be your valid and
binding obligation, enforceable in accordance with its terms.
14. In the event of any dispute between YSI and you with respect
to this Agreement, either party may, in its sole discretion by notice to the
other, require such dispute to be submitted to arbitration. The arbitrator
will be selected by agreement of the parties or, if they cannot agree on
arbitrator or arbitrators within 30 days after the giving of such notice, the
arbitrator will be selected by the American Arbitration Association. The
determination reached in such arbitration will be final and binding on both
parties without any right of appeal. Execution of the determination by such
arbitrator may be sought in any court having jurisdiction. Unless otherwise
agreed by the parties, any such arbitration will take place in Baltimore
County, Maryland and will be conducted in accordance with the rules of the
American Arbitration Association.
15. You may not assign, transfer, convey, mortgage, hypothecate,
pledge or in any way encumber the compensation or other benefits payable to you
or any rights which you may have under this Agreement. Neither you nor your
beneficiary or beneficiaries will have any right to receive any compensation or
other benefits under this Agreement, except at the time, in the amounts and in
the manner provided in this Agreement. This Agreement will inure to the
benefit of and will be binding upon any successor to YSI. As used in this
Agreement, the term "successor" means any person, firm, corporation or other
business entity which at any time, whether by merger, purchase or otherwise,
acquires all or substantially all of the capital stock or assets of YSI. This
Agreement may not be otherwise assigned by YSI.
16. This Agreement constitutes the only agreement between YSI and
you regarding your employment by YSI. This Agreement supersedes any and all
other agreements and understandings, written or oral, between YSI and you. A
waiver by either party of any
<PAGE> 8
Mr. Timothy P. Cole
July 16, 1996
Page 8
provision of this Agreement of any breach of such provision in any instance
will not be deemed or construed to be a waiver of such provision for the
future, or of any subsequent breach of such provision. This Agreement may be
amended, modified or changed only by further written agreement between YSI and
you, duly executed by both parties.
17. Any and all notices required or permitted to be given
hereunder will be in writing and will be deemed to have been given when
deposited in United States mail, certified or registered mail, postage prepaid.
Any notice to be given by you hereunder will be addressed to YSI to the
attention of its Chief Financial Officer and General Counsel at its main
offices, 2 Park Center Court, Suite 200, Owings Mills, Maryland 21117. Any
notice to be given to you will be addressed to you at your residence address
last provided by you to YSI. Either party may change the address to which
notices are to be addressed by notice in writing to the other party given in
accordance with the terms of this paragraph.
18. The effectiveness of this Agreement is conditioned upon your
completion of a physical examination, the results of which are reasonably
satisfactory to YSI.
* * * * *
As we have discussed, we are extremely happy that you have agreed to
join YSI as Chief Executive Officer and Vice Chairman and we look forward to a
mutually rewarding relationship. If the foregoing accurately sets forth our
understanding, kindly so indicate by signing one of the enclosed copies and
returning it to me.
Very truly yours,
YOUTH SERVICES INTERNATIONAL, INC.
<PAGE> 9
Mr. Timothy P. Cole
July 16, 1996
Page 9
By: \s\ W. JAMES HINDMAN
--------------------------
W. James Hindman
Chairman
Accepted and agreed this
29th day of June, 1996.
\s\ TIMOTHY P. COLE
- -------------------------------
Timothy P. Cole
<PAGE> 1
STATEMENT REGARDING COMPUTATION OF
PRIMARY EARNINGS PER SHARE
Youth Services International, Inc.
<TABLE>
<CAPTION>
Three Three
Months Months
Ended Ended
9/30/96 9/30/95
----------- -----------
<S> <C> <C>
Weighted average shares
outstanding 8,984,729 8,099,664
Weighted average common stock
equivalents outstanding:
Stock options 1,434,858 1,342,707
Employee stock purchase options 245,241 147,018
Warrants 187,924 231,900
----------- -----------
Total 1,868,023 1,721,625
----------- -----------
Assumed treasury stock repurchases:
Stock options 473,591 675,927
Employee stock purchase options 199,258 147,018
Warrants 32,683 117,956
----------- -----------
Total 705,531 940,901
----------- -----------
Net weighted average common stock
equivalents 1,162,492 780,725
----------- -----------
Total primary weighted average
common stock and common stock
equivalents outstanding 10,147,221 8,880,389
============ ===========
Note: 20% buy back limit 1,796,946 1,619,933
============ ===========
Net income $570,000 $742,000
============ ===========
Primary earnings per share $0.06 $0.08
============ ===========
</TABLE>
Note: The fully-diluted calculation has not been presented as the impact is
anti-dilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,235
<SECURITIES> 10,017
<RECEIVABLES> 21,545
<ALLOWANCES> 718
<INVENTORY> 0
<CURRENT-ASSETS> 36,337
<PP&E> 29,822
<DEPRECIATION> 4,009
<TOTAL-ASSETS> 90,216
<CURRENT-LIABILITIES> 16,285
<BONDS> 0
0
0
<COMMON> 92
<OTHER-SE> 29,972
<TOTAL-LIABILITY-AND-EQUITY> 90,216
<SALES> 0
<TOTAL-REVENUES> 27,696
<CGS> 0
<TOTAL-COSTS> 26,165
<OTHER-EXPENSES> 764
<LOSS-PROVISION> 33
<INTEREST-EXPENSE> 974
<INCOME-PRETAX> 767
<INCOME-TAX> 197
<INCOME-CONTINUING> 767
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 570
<EPS-PRIMARY> .06
<EPS-DILUTED> 0
</TABLE>
