<PAGE> 1
As filed with the Securities and Exchange Commission on July 29, 1996.
Registration No. 33-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------
YOUTH SERVICES INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
MARYLAND 52-1715690
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
2 Park Center Court, Suite 200
Owings Mills, Maryland 21117
(410) 356-8600
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
WILLIAM P. MOONEY
Chief Financial Officer
Youth Services International, Inc.
2 Park Center Court, Suite 200
Owings Mills, Maryland 21117
(410) 356-8600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
MARK S. DEMILIO, ESQUIRE
Miles & Stockbridge,
a Professional Corporation
10 Light Street
Baltimore, Maryland 21202
(410) 727-6464
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From
time to time after the effective date of this registration statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are being
offered on a delayed or continuous basis, pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. / x /
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If delivery of the Prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
CALCULATION OF REGISTRATION FEE
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<CAPTION>
=============================================================================================================================
Amount Proposed Maximum Proposed Maximum
Title of Each Class of to be Offering Price Aggregate Amount of
Securities to be Registered Registered Per Unit(1) Offering Price Registration Fee
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
7% Convertible Subordinated Debentures Due $32,200,000 100% $32,200,000 11,104
2006
Common Stock, par value $.01 per share(2) 2,582,197 -- -- --
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(1) Estimated solely for the purpose of calculating the registration fee,
pursuant to Rule 457(i) of Regulation C under the Securities Act of
1933.
(2) Such number represents the number of shares of Common Stock as are
initially issuable upon conversion of the Exchange Offer Debentures
(as defined) and the Restricted Debentures (as defined) offered as
part of the 7% Convertible Subordinated Debentures Due 2006 registered
hereby and, pursuant to Rule 416 under the Securities Act of 1933,
such indeterminate number of shares of Common Stock as may be issued
from time to time upon the conversion of the Exchange Offer Debentures
or the Restricted Debentures by reason of adjustment of the conversion
price upon the occurrence of certain contingencies as outlined in the
Prospectus.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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YOUTH SERVICES INTERNATIONAL, INC.
FORM S-3
CROSS-REFERENCE SHEET
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<CAPTION>
ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
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1. Forepart of the Registration Statement and Registration Statement Cover; Outside Front Cover
Outside Front Cover Page of Prospectus Page of Prospectus
2. Inside Front and Outside Back Cover Pages Inside Front and Outside Back Cover Pages of
of Prospectus Prospectus; Available Information
3. Summary Information, Risk Factors and Prospectus Summary; Risk Factors;
Ratio of Earnings to Fixed Charges Selected Consolidated Financial Data
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price *
6. Dilution *
7. Selling Security Holders Selling Security Holders
8. Plan of Distribution Registration Statement Cover Page; Selling
Holders; Plan of Distribution
9. Description of Securities to be Registered Outside Front Cover Page of Prospectus;
Description of Exchange Offer Debentures;
Description of Capital Stock
10. Interests of Named Experts and Legal Matters; Experts
Counsel
11. Material Changes *
12. Incorporation of Certain Information Available Information; Incorporation of Certain
by Reference Documents by Reference
13. Disclosure of Commission Position on
Indemnification for Securities Act *
Liabilities
</TABLE>
* Omitted from Prospectus because item is inapplicable or answer is in the
negative.
<PAGE> 3
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission but has not yet become effective. These
securities may not be sold nor may offers to buy be accepted prior to the time
the registration statement becomes effective. This prospectus shall not
constitute an offer to sell or the solicitation of an offer to buy nor shall
there be any sale of these securities in any jurisdiction in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of any such jurisdiction.
PROSPECTUS
SUBJECT TO COMPLETION, DATED JULY 29, 1996
$32,200,000
7% Convertible Subordinated
Debentures Due 2006
2,582,197 Shares of Common Stock
YOUTH SERVICES INTERNATIONAL, INC.
This Prospectus relates to up to $32,200,000 aggregate principal
amount of 7% Convertible Subordinated Debentures due 2006 (the "Debentures") of
Youth Services International, Inc., a Maryland corporation ("YSI" or the
"Company"), issued under the Indenture (the "Indenture"), dated as of
July __,1996, by and between the Company and The Chase Manhattan Bank, N.A., as
trustee (the "Trustee"), and the 2,582,197 shares of the Company's common
stock, par value $.01 per share (the "Common Stock"), issuable upon conversion
of the Exchange Offer Debentures (as defined below) and the Restricted
Debentures (as defined below). The Company originally issued and sold
$37,950,000 aggregate principal amount of 7% Convertible Subordinated
Debentures due 2006 (the "Original Debentures") on January 29, 1996 in
transactions exempt from the registration requirements of the Securities Act of
1933, as amended (the "Securities Act"). A portion of the Original Debentures
(the "Rule 144A Debentures") were offered and sold to persons reasonably
believed to be "qualified institutional buyers," as such term is defined under
Rule 144A under the Securities Act, a portion of the Original Debentures (the
"Accredited Investor Debentures") were offered and sold to persons reasonably
believed to be "accredited investors," as such term is defined by Rule 501(a)
under the Securities Act and a portion of the Original Debentures (the
"Regulation S Debentures") were offered and sold in transactions complying with
the provisions of Regulation S under the Securities Act.
On July 29, 1996, the Company commenced an exchange offer pursuant to
which the Company has offered holders of the Rule 144A Debentures and the
Accredited Investor Debentures (collectively, the "Restricted Debentures") the
opportunity to exchange such Restricted Debentures for an equal principal
amount of Debentures issued under the Indenture (the "Exchange Offer
Debentures"). The exchange offer will expire on September 3, 1996. As of July
26, 1996, there were outstanding an aggregate principal amount of $32,200,000 of
Restricted Debentures and 2,582,197 shares of Common Stock issuable upon
conversion of the Restricted Debentures. Accordingly, an aggregate principal
amount of up to $32,200,000 of the Exchange Offer Debentures and up to
2,582,197 shares of Common Stock issuable upon conversion of the Exchange Offer
Debentures and upon conversion of the Restricted Debentures (the "Conversion
Shares") may be offered and sold from time to time by the holders named herein
or by their transferees, pledgees, donees or their successors (the "Selling
Holders") pursuant to this Prospectus.
The Exchange Offer Debentures have substantially the same terms as the
Restricted Debentures. The Exchange Offer Debentures will mature on February
1, 2006, pay interest semi-annually in arrears on February 1 and August 1 of
each year and are convertible at the option of the holder thereof at any time
after the date of this Prospectus and prior to redemption and maturity, into
shares of Common Stock at a conversion price of $12.47 per share, subject to
adjustment under certain conditions. On July 26, 1996, the reported closing
bid price of the Common Stock on the Nasdaq National Market was $17 3/4 per
share.
<PAGE> 4
The Exchange Offer Debentures are redeemable at the option of the
Company, in whole or in part, at any time on or after February 1, 1999, at the
redemption prices set forth therein. See "Description of Exchange Offer
Debentures." The Company is not required to make any mandatory redemptions or
annual sinking fund payments with regard to the Exchange Offer Debentures.
The Exchange Offer Debentures are unsecured obligations of the Company
and are subordinate in right of payment to the prior payment in full of all
Senior Indebtedness (as defined) of the Company and its subsidiaries, including
all existing and future liabilities of the Company and its subsidiaries. As of
March 31, 1996, the Senior Indebtedness was approximately $12.1 million. The
ability of the Company and its subsidiaries to incur additional indebtedness
and liabilities is not limited by the terms of the Exchange Offer Debentures.
The Exchange Offer Debentures and the Conversion Shares may be sold by
the Selling Holders from time to time directly to purchasers. The Selling
Holders will receive all of the net proceeds from the sale of the Exchange
Offer Debentures and the Conversion Shares and will pay all underwriting
discounts and selling commissions, if any, applicable to the sale of the
Exchange Offer Debentures and the Conversion Shares. The Company is
responsible for payment of all other expenses in connection with the
performance by the Company of its obligations under the terms and provisions of
the Exchange Offer Debentures and the Restricted Debentures.
The Selling Holders and any broker-dealers, agents or underwriters
that participate in the distribution of the Exchange Offer Debentures or the
Conversion Shares may be deemed to be "underwriters," as such term is defined
under Section 2(11) of the Securities Act, and any commission or profit
received by them in connection with the resale of the Exchange Offer Debentures
or the Conversion Shares may be deemed to be underwriting commissions or
discounts under the Securities Act.
SEE "RISK FACTORS" COMMENCING ON PAGE 7 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE EXCHANGE OFFER DEBENTURES
OR THE CONVERSION SHARES.
__________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is August ___, 1996.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
regional offices of the Commission: Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center,
13th Floor, New York, New York 10048, and copies of such material can be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The Commission also
maintains a site on the World Wide Web, the address of which is
http:/www.sec.gov., that contains reports, proxy and information statements and
other information regarding issuers, such as the Company, that file
electronically with the Commission. Such reports, proxy statements and other
information concerning the Company also may be inspected at the offices of the
Nasdaq Stock Market, Reports Section, at 1735 K Street, Washington, D.C.
20006.
The Company has filed with the Commission a Registration Statement on
Form S-3 (hereinafter, together with all amendments and exhibits thereto, the
"Registration Statement") under the Securities Act with respect to the
securities covered by this Prospectus. This Prospectus does not contain all of
the information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission.
For further information pertaining to the Company and the securities covered by
this Prospectus, reference is made to the Registration Statement that is on
file at the offices of the Commission and may be obtained upon payment of the
fee prescribed by the Commission, may be examined without charge at the offices
of the Commission or may be obtained from the Commission's site on the World
Wide Web. Statements contained in this Prospectus as to the contents of any
documents referred to are not necessarily complete, and in each such incidence,
are qualified in all respects by reference to the applicable documents filed
with the Commission.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Company hereby incorporates by reference in this Prospectus the
following documents filed with the Commission:
(a) the Company's Annual Report on Form 10-KSB/A for the
fiscal year ended June 30, 1995 (as filed on January 10, 1996);
(b) the Company's Quarterly Report on Form 10-Q/A for the
quarter ended September 30, 1995 (as filed on January 10, 1996);
(c) the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1995;
(d) the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996;
(e) the Company's Current Reports on Forms 8-K dated July 19,
1995 (as amended by Forms 8-K/A dated September 25, 1995 and October 2, 1995),
January 10, 1996, January 24, 1996, and April 10, 1996;
(f) the description of the Company's Common Stock contained in
the section titled "Description of Capital Stock" in the Preliminary Prospectus
included as part of the Company's Registration Statement on Form SB-2 (Reg. No.
33-71958) as filed with the Commission on November 19, 1993 and thereafter
amended and incorporated by reference in the Company's Registration Statement
on Form 8-A filed with the
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Commission pursuant to Section 12 of the Exchange Act, and any amendment or
report filed for the purpose of updating such description; and
(g) the audited financial statements of Prestige Developments,
Inc. and the report of Endorf, Lurken, Olson & Co. thereon contained in the
Company's Registration Statement on Form SB-2 (Reg. No. 33-71958).
All documents filed by the Company with the Commission pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date hereof
and prior to the termination of the offering of securities hereunder shall be
deemed to be incorporated herein by reference and to be a part hereof from the
respective dates of the filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any subsequently filed document
that also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not
be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company hereby undertakes to provide, without charge, to each person
to whom a copy of this Prospectus is delivered, upon written or oral request of
such person, a copy of any or all of the documents incorporated by reference
herein, other than exhibits to such documents (unless such exhibits are
specifically incorporated by reference in such documents). Requests for such
copies should be directed to Youth Services International, Inc., 2 Park Center
Court, Suite 200, Owings Mills, Maryland 21117, Attention: Janice E. Oman,
telephone: (410) 356-8600.
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PROSPECTUS SUMMARY
YSI is a leading national provider of private educational, developmental
and rehabilitative programs focusing on troubled youths who either have been
adjudicated as delinquents or suffer from behavioral problems. 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 also offers troubled youth a broad
range of behavioral health and rehabilitative services. The Company operates
these programs in a variety of settings including residential juvenile justice
academies, residential treatment centers ("RTCs"), boot camps and group homes
and, in addition, offers non-residential services including aftercare services,
tracking, counseling services, and partial care and day services. As of March
31, 1996, the Company operated 18 residential programs serving approximately
2,100 enrolled students and conducted non-residential programs serving
approximately 1,800 youth. The youth served by the Company are drawn from 36
states.
Initially, the Company was established to capitalize on emerging
opportunities in the privatization of juvenile programs by state and local
governments. The Company believes that it can deliver its programs at a lower
cost compared to similar programs operated directly by government agencies. In
response to increased demand from public and private payors for additional
youth care services and changes occurring in reimbursement methods, the Company
evolved and diversified its service offerings to include expanded educational,
vocational and behavioral health services broadening its continuum of care.
Since its formation in 1991, YSI has successfully expanded its base of
operations through a combination of internal and external growth by expanding
program offerings, increasing student capacity at existing facilities,
developing new programs in response to privatization opportunities, and by
acquiring complimentary programs and businesses. The Company recently
experienced significant revenue and earnings growth with revenues increasing
from $8.9 million to $53.1 million and net income increasing from a loss of
$1.7 million to net income of $2.2 million for the fiscal years ended June 30,
1993 through June 30, 1995, respectively. For the nine months ended March 31,
1996, YSI reported revenues of $61.3 million and net income of $2.5 million,
increases of approximately 64% and 90%, respectively over performance in the
same period in fiscal year 1995.
The Company believes that it is well positioned to respond to
anticipated increased demand for its services. YSI has estimated 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 a significantly
larger market. 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. Management believes that rising costs and cost containment
pressures at all levels of government coupled with the inability of many
government agencies to deliver economic and effective programs to an increasing
number of juvenile offenders will continue to accelerate the trend toward more
privatization of juvenile services. State and local governments, as well as
other private payors such as managed care entities and insurance companies,
recognize that the underlying issues plaguing troubled youth are the same
regardless of whether they have been adjudicated or identified as troubled
youth based on non-criminal behavior. Consequently, payors are increasingly
seeking providers that can treat a variety of troubled youth through single
source contracts on a nationwide basis. YSI believes that it has been adept at
modifying its offerings to respond to industry changes and remains committed to
being at the forefront of the industry. The Company believes that all of these
factors will lead to further consolidation in the sector and fuel the Company's
future growth. The Company further believes that these changes will ultimately
result in improved care for troubled youth in a more cost effective manner.
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ALL SHARE AND PER SHARE AMOUNTS IN THIS PROSPECTUS HAVE BEEN ADJUSTED TO
REFLECT A 3-FOR-2 STOCK SPLIT (EFFECTED THROUGH A STOCK DIVIDEND OF ONE SHARE
FOR EVERY TWO SHARES OUTSTANDING OR RESERVED FOR ISSUANCE) EFFECTED MAY 24,
1996.
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Nine Months Ended
March 31,
-----------------
Fiscal Year Ended June 30,
-------------------------------
1993 1994 1995 1995 1996
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STATEMENT OF OPERATIONS DATA:
Revenues . . . . . . . . . . . . . $ 8,895 $34,892 $53,087 $37,416 $61,276
Total program expenses . . . . . . 8,782 29,573 44,654 31,703 51,067
Income (loss) from operations . . . (1,489) 2,302 3,753 2,297 5,414
Net income (loss) . . . . . . . . (1,671) 2,092 2,179 1,319 2,509
Earnings (loss) per common and
common equivalent share . . . . . $(.27) $ .29 $ .26 $ .16 $ .28
Weighted average common and common
equivalent shares outstanding . . 6,271,203 7,093,510 8,264,320 8,373,529 8,951,031
</TABLE>
<TABLE>
<CAPTION>
June 30, 1995 March 31, 1996
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<S> <C> <C>
BALANCE SHEET DATA:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . $ 784 $14,970
Working capital . . . . . . . . . . . . . . . . . . . . . 9,726 35,522
Total assets . . . . . . . . . . . . . . . . . . . . . . 29,050 79,792
Total long-term debt and capital lease obligations, net
of current portion . . . . . . . . . . . . . . . . . . 6,995 46,950
Total liabilities . . . . . . . . . . . . . . . . . . . . 11,382 58,494
Total stockholders' equity . . . . . . . . . . . . . . . 17,668 21,298
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RISK FACTORS
In addition to the other information in this Prospectus, the following
information should be considered carefully by potential purchasers in
evaluating the Company and its business before making an investment in the
securities offered hereunder:
DEPENDENCE UPON SIGNIFICANT CONTRACTS
The Company's operations currently consist of programs that are based on
various contractual relationships. Three of the Company's long-term contracts
constituted, in the aggregate, approximately 34% of the Company's revenues for
the nine months ended March 31, 1996: (i) the contract to operate The Charles
H. Hickey, Jr. School (20%) which expires on June 30, 1998; (ii) the contract
to operate the Victor Cullen Academy (11%) which expires on August 31, 1997;
and (iii) the contract to operate the Reflections Treatment Agency (3%) which
expires on August 31, 1997. Each of these programs (and several of the
Company's other contracts with governmental agencies) is material to the
Company, and the loss of any such program could have a material adverse effect
on the Company's results of operations and financial condition. These
contracts, which have terms ranging from one to five years, will be subject to
competitive bidding when they expire. The Company's ability to maintain
profitable operations will be dependent upon, among other factors, the
successful continuance of its existing contracts and programs. There can be no
assurance that such contracts will be renewed or extended or that they will be
renewed or extended on terms favorable to the Company, that such programs will
be continued or that the Company will be able to maintain profitable
operations.
POSSIBLE TERMINATION OF CONTRACTS AT THE DISCRETION OF GOVERNMENT AGENCIES
The terms of a number of the contracts with government agencies pursuant
to which the Company operates its programs provide that such contracts (i) are
subject to the ongoing appropriation by state legislatures and authorities of
sufficient funds, and (ii) may be terminated for any reason by providing the
Company notice of termination immediately or within specified periods of time
(ranging from 10 to 90 days) or otherwise at the "convenience" of the state and
local authorities. These terms give state and local authorities significant
discretion in terminating or modifying their contractual arrangements with the
Company. Recently, a number of state and local governments have experienced
fiscal pressures associated with a reduced tax base and other factors.
Accordingly, the Company's operations could be materially adversely affected by
the termination or modification of an agreement or agreements at any time for
reasons that may be outside of the Company's control.
MANAGEMENT OF GROWTH
The Company has experienced significant growth since its inception and
expects to continue to grow in the foreseeable future. The Company's success
will depend in part on the ability of the Company to obtain and train qualified
personnel to handle the increasing number of youths in its care; to develop and
operate the information technology systems and financial controls to manage the
increased number of personnel, responsibilities and youths; to manage its
resources over a larger base of programs and activities; to integrate
efficiently and effectively the business and financial functions of any newly
acquired programs; and to integrate any new programs into the Company's
programmatic functions and philosophy. Although the Company believes it has
been able to manage these processes during its historical growth, there can be
no assurance that the Company will be able to continue to do so on the larger
scale that may occur as the Company continues to grow.
CONCENTRATION OF SHARE OWNERSHIP AND CONTROL BY MANAGEMENT
The executive officers and directors of the Company and their
affiliates, as a group, owned or controlled approximately 36.1% of the
Company's outstanding Common Stock as of June 30, 1996, including all shares
that can be acquired pursuant to all outstanding options and warrants
exercisable within 60 days of such date held by such individuals. Assuming
full conversion of Debentures, management ownership would have been
approximately 27.4% of the total outstanding Common Stock as of June 30, 1996.
As a result, the executive officers and directors and their affiliates may be
able to control the
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<PAGE> 10
Company, to direct its affairs and business and to control the outcome of
matters requiring stockholder approval, including matters involving a change in
control of the Company.
DEPENDENCE ON KEY PERSONNEL
At the present time, the Company depends to a great extent upon the
efforts of each of its executive officers, program directors and certain other
key personnel to obtain contracts, to operate and develop programs and to
administer the Company's business. In addition, the Company's ability to
perform under new contracts will depend, in part, on its ability to attract or
obtain additional qualified personnel. There is significant competition for
qualified teachers, counselors, health care providers, program managers,
administrators and other key personnel, and there can be no assurance that the
Company will be successful in recruiting or training a sufficient number of
employees of the requisite caliber to enable the Company to operate its
business and implement its strategy as planned.
CONTRACT REVENUES AND PROFIT
The Company's program revenues are generated under the terms of
contracts that generally call for fixed per diem payments that are based upon
program occupancy. Such payments are recognized as revenues for financial
statement purposes as services are performed. One of the Company's contracts
contains a gross maximum price cost reimbursement provision that results in the
recognition of revenues as specific reimbursable costs are incurred. The
Company's ability to estimate and control its costs with respect to all of
these contracts is critical to its profitability.
NOT-FOR-PROFIT ORGANIZATIONS
The Company has conducted and will conduct a portion of its business
pursuant to subcontracts or similar relationships with not-for-profit entities
organized under Section 501(c)(3) of the Internal Revenue Code of 1986, as
amended (the "Code"), that have obtained status as organizations exempt from
federal income taxation under Section 501(a) of the Code. State governments,
agencies or licensing authorities that contract with the not-for-profit
organizations are eligible to receive matching funds from the federal
government as a partial reimbursement for certain program expenses charged by
the Company. If the exempt status of any of these not-for-profit organizations
is revoked, the state governments, agencies or licensing authorities may be
denied federal matching funds and may reduce their placement of students with,
or the use of, such organization, causing a loss of gross revenues to the
Company. In addition, in such event, these organizations would be taxed on
their net income, if any, which could adversely affect their ability to pay the
Company pursuant to their subcontracts.
GOVERNMENT CONTRACTS AND CONTRACTING PROCESS
Many of the Company's contracts are with government agencies.
Government contracts generally are subject to audits and investigations by
government agencies. These audits and investigations involve a review of the
contractor's performance on its contracts, as well as its pricing practices,
its cost structure and its compliance with applicable laws, regulations and
standards. If any costs are improperly charged to a contract, the costs are
not reimbursable and, if already reimbursed, will have to be refunded to the
government agency. Furthermore, if improper or illegal activities are
discovered in the course of any audits or investigations, the contractor may be
subject to various civil and criminal penalties and administrative sanctions,
which may include termination of contracts, forfeitures of profits, suspension
of payments, fines and suspension or debarment from doing business with the
government agency.
Typically, the Company must invest significant time and resources to
prepare detailed analyses and proposals addressing the needs of a government
authority with which it seeks to do business. Such proposals must be reviewed
by appropriate government authorities before the contract is awarded.
Accordingly, new contracts tend to have long lead times from initiation of
marketing efforts to execution and are subject to significant uncertainty
regarding successful conclusion at all times during the process. There can be
no assurance that additional contracts will be obtained by the Company or
continued once they are obtained.
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<PAGE> 11
GOVERNMENTAL LIMITATIONS AND REGULATIONS
The industry in which the Company operates is subject to extensive
federal, state and local regulation including stringent licensing requirements.
Failure to comply with any applicable laws, rules or regulations or to maintain
its licenses could have a material adverse effect on the Company's business,
financial condition and results of operations. Furthermore, 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.
In the course of the Company's business, licensing authorities may place
certain provisions on program operations that are required to be resolved in
order to maintain a license. During such provisional period, the Company may
not be able to obtain approvals for increases in licensed capacity and may
experience other limitations.
The Company's ability to implement its business strategy may be
significantly affected by the legal power and structures of the state and local
governments with which the Company does or seeks to do business. The Company
believes that the laws of many states neither specifically authorize nor
prohibit governments from entering into contracts with private sector companies
for the types of services offered by the Company. It is possible that a third
party could challenge a government's decision to award a contract to the
Company in such a situation. In certain jurisdictions, governments may be
altogether precluded by law from entering into management contracts with
private sector companies. Also, while privatization of services has been used
in one form or another by many states, there can be no assurance that state and
local governments will continue to utilize private vendors to manage facilities
and/or programs for juvenile offenders. In addition, many state and local
governments are required to enter into a competitive bidding procedure before
awarding contracts for products or services. The laws of certain jurisdictions
may also require the Company to award subcontracts on a competitive basis and
to subcontract to varying degrees with businesses owned by women or minorities.
It is possible that a third party could challenge sole-source awards to the
Company or the Company's subcontracts as inconsistent with competitive bidding
or minority contracting requirements.
The health care industry is subject to extensive regulation by federal,
state and local governments, including regulations under Medicare, Medicaid and
Civilian Health and Medical Program of the Uniformed Services ("CHAMPUS")
programs. Certain of the Company's programs, including its RTC's, 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, CHAMPUS 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.
The Company believes it is in compliance in all material respects with
all applicable rules and regulations.
POTENTIAL THIRD-PARTY LIABILITY
Many aspects of the Company's operations involve risks of liability,
including potential third-party claims by students or other persons for
personal injury or other damage resulting from contact with the Company's
facilities, programs, personnel or students (including students who leave the
Company's facilities without Company authorization and cause bodily injury or
property damage). Furthermore, the Company's contracts often require the
Company to indemnify and hold the respective government agency harmless from
and against
- 9 -
<PAGE> 12
any damages to which the government agency may become subject by reason of the
Company's operations. The Company carries general liability insurance that
provides coverage for certain liability risks faced by the Company, including
accident and personal injury (including bodily injury or property damage to a
third party where the Company is found to be negligent in its supervision
practices). There can be no assurance, however, that the Company's insurance
will be adequate to cover any potential third-party claims.
Committed offenders often seek redress in federal courts pursuant to
federal civil rights statutes for alleged violations of their constitutional
rights caused by the overall condition of their confinement or by specific
conditions or incidents. The Company may be subject to liability if any such
claim or proceeding is made or instituted against the Company or the state with
which the Company contracts or subcontracts.
The operation of the Company's business also exposes it to a greater
than average risk of charges by employees of age or race discrimination filed
with the Equal Employment Opportunity Commission and equivalent state agencies
and related civil litigation. While the Company's management believes that
these claims and charges represent matters that arise in the ordinary course of
business for companies engaged in its industry, the defense of these claims can
be labor intensive and expensive.
PUBLIC SCRUTINY
The business of the Company is highly visible to the public and,
consequently, negative public reaction to the Company's policies or actions, or
to the statements or actions of juveniles in its care could adversely affect
the Company's ability to obtain additional programs or expand existing programs
or could otherwise adversely affect the Company's business. It is also
possible that, even absent such negative reaction to the Company, communities
may object to facilities such as the Company's which objections could
materially, adversely affect the ability of the Company to establish new
programs or expand existing programs.
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock has been volatile,
ranging in price from 5 1/2 to 27 5/6 over the past year. See "Price Range of
Common Stock." There also have been periods of extreme fluctuation in the
stock market that, in many cases, were unrelated to the operating performance
of, or announcements concerning, the issuers of the affected securities.
Securities of issuers having relatively limited capitalization or securities
recently issued in a public offering are particularly susceptible to change
based on the short-term trading strategies of certain investors. The trading
price of the Common Stock could be subject to wide fluctuation resulting from
quarter-to-quarter variations in operating results, new announcements,
legislative developments, trading volume, general market trends and other
factors. There can be no assurance that the price of the Company's Common
Stock will be maintained at its current level.
ANTITAKEOVER AND CHANGE-IN-CONTROL PROVISIONS
Pursuant to the Company's Charter, the Company's Board of Directors has
the authority to issue shares of preferred stock and to determine the rights,
preferences, privileges and restrictions of such shares without any further
vote or action by the stockholders. The issuance of preferred stock under
certain circumstances could have the effect of delaying or preventing a change
in control of the Company. In addition, the Maryland General Corporation Law
establishes special requirements with respect to "business combinations"
between Maryland corporations and "interested stockholders" unless exemptions
are applicable. Among other things, the law prohibits, for a period of five
years, after the date on which a stockholder becomes an "interested
stockholder," a merger and other transactions between a company and an
interested stockholder and requires a supermajority vote for such transactions
after the end of such five-year period. The Maryland General Corporation Law
also imposes limitations on the voting rights of shares of capital stock
acquired by stockholders in a "control share acquisition." These provisions of
the Maryland General Corporation Law could have the effect of delaying or
preventing a change in control of the Company.
- 10 -
<PAGE> 13
SHARES ELIGIBLE FOR FUTURE SALE
A sale of a substantial amount of the Company's Common Stock in the
public market, including "restricted" shares held by Company stockholders,
could adversely affect the market price of the Common Stock. Substantially all
of the Company's issued and outstanding shares are freely tradable, subject, in
certain circumstances, to Rule 144 under the Securities Act of 1933. No
prediction can be made as to the effect, if any, that future sales of
additional shares of Common Stock or the availability of such shares for sale
will have on the market price of the Common Stock prevailing from time to time.
Nevertheless, the possibility that substantial amounts of Common Stock may be
sold in the public market may adversely affect prevailing market prices for the
Common Stock and could impair the ability of the Company to raise capital
through the sale of its equity securities.
SUBORDINATION OF EXCHANGE OFFER DEBENTURES
The Exchange Offer Debentures are subordinated in right of payment to
all existing and future Senior Indebtedness (as defined) of the Company and its
subsidiaries. As of March 31, 1996, the Company and its subsidiaries had
approximately $12.1 million of Senior Indebtedness. See "Description of
Exchange Offer Debentures--Subordination." The Exchange Offer Debentures rank
pari passu with the Original Debentures and with the Company's 12% Subordinated
Debentures Due 2002.
DEPENDANT UPON CASH FLOW FROM SUBSIDIARIES
The Exchange Offer Debentures are obligations exclusively of the Company
and not of its subsidiaries. Because the operations of the Company are
currently conducted through subsidiaries, the cash flow and the consequent
ability to service debt of the Company, including the Exchange Offer
Debentures, are dependant, in part, upon the earnings of its subsidiaries and
distribution of those earnings to the Company or upon loans or other payments
of funds by those subsidiaries to the Company. The subsidiaries are separate
and distinct legal entities that have no obligation, contingent or otherwise,
to pay any amounts due under the Exchange Offer Debentures or to make any funds
available therefor, whether by dividends, loans or other payments. In
addition, the payment of dividends and the making of loans and advances to the
Company by its subsidiaries may be subject to statutory or contractual
restrictions, are contingent upon the earnings of those subsidiaries and are
subject to various business considerations. See "Description of Exchange Offer
Debentures--Subordination."
LACK OF PUBLIC MARKET FOR EXCHANGE OFFER DEBENTURES
The Exchange Offer Debentures are being issued during the period of the
exchange offer, from July 29, 1996 through September 3, 1996, in reliance on
certain exemptions from registration thereof under the Securities Act, including
Section 3(a)(9), Rule 144A and Regulation D. Accordingly, the Exchange Offer
Debentures may only be resold pursuant to an effective registration statement
or in reliance on an exemption therefrom. Neither the Exchange Offer
Debentures nor the Restricted Debentures obligates the Company to keep the
Registration Statement of which this Prospectus is a part effective after
January 29, 1999. In addition, the use of this Prospectus may be suspended
from time to time in certain circumstances relating to pending corporate
developments and public filings with the Commission and similar events. The
Company does not intend to apply for listing of the Exchange Offer Debentures
on any securities exchange or to seek approval for quotations through any
automated system. Accordingly, there can be no assurance that a liquid or
active market for the Exchange Offer Debentures will develop or that the
holders of the Exchange Offer Debentures will be able to sell such
Debentures. If any such market were to develop, the Exchange Offer
Debentures could trade at prices that may be substantially lower than the
principal amount thereof.
- 11 -
<PAGE> 14
USE OF PROCEEDS
The Selling Holders will receive all of the net proceeds from the
resales of the Exchange Offer Debentures and the Conversion Shares, and the
Company will not receive any of the proceeds from such sales.
PRICE RANGE OF COMMON STOCK
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 3:2
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>
Fiscal Year Ended June 30, 1995: High Low
------- ----
<S> <C> <C>
1st Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1/2 4 2/3
2nd Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1/3 3 2/3
3rd Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 6 7/12 3 11/12
4th Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1/12 6 1/4
Fiscal Year Ended June 30, 1996:
1st Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1/12 5 1/2
2nd Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1/3 6 3/4
3rd Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 17 10 1/6
4th Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . 27 5/6 11 5/6
</TABLE>
On July 26, 1996, the last reported sale price of the Common Stock in the
Nasdaq National Market was $ 17 3/4.
DIVIDEND POLICY
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.
- 12 -
<PAGE> 15
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) at
March 31, 1996, as reflected in the Company's Consolidated Financial Statements
and (ii) as adjusted to reflect the conversion of 100% of the Debentures at the
current conversion price. See "Selected Consolidated Financial Data."
<TABLE>
<CAPTION>
March 31, 1996
------------------------
100%
Actual Conversion
---------- ----------
(in thousands)
<S> <C> <C>
Short-term borrowings and current portion of long-term debt
and capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,046 $ 4,046
Long-term debt and capital lease obligations (net of
current maturities) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,019 8,019
7% Convertible Subordinated Debentures due 2006 (1) . . . . . . . . . . . . . . . . . . 37,950 --
12% Subordinated Debentures due 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . 981 981
Shareholders' equity:
Common stock, par value $.01 per share, authorized
20,000,000 shares, 8,367,597 shares issued and
outstanding; and approximately 11,410,900 shares issued
and outstanding assuming 100% conversion (1)(2). . . . . . . . . . . . . . . . 84 114
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,636 56,313
Unrealized loss on investments . . . . . . . . . . . . . . . . . . . . . (181) (181)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,759 3,759
------- -------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,298 60,005
------- -------
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $72,294 $73,051
======= =======
</TABLE>
- ------------
(1) In July 1996, holders of an aggregate principal amount of $5,750,000 of
Original Debentures (representing all of the Regulation S Debentures)
surrendered such Debentures for conversion and received in the aggregate
461,106 shares of Common Stock. If such conversion had occurred prior
to March 31, 1996, the aggregate principal amount of Debentures
outstanding would have been $32,200,000 and the shares issued and
outstanding would have been 8,828,703, at March 31, 1996.
(2) The shares issued and outstanding excludes options and warrants
outstanding at March 31, 1996 to purchase an aggregate of 1,780,529
shares of Common Stock at a weighted average exercise price of $4.49 per
share.
- 13 -
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company as of
and for (i) the period January 17, 1991 (date of inception) through June 30,
1991 and (ii) each of the years in the four year period ended June 30, 1995 are
derived from the audited consolidated financial statements of the Company. The
following selected consolidated financial data of the Company as of and for the
nine month periods ended March 31, 1995 and 1996 are derived from the
Company's consolidated books and records and include, in the opinion of
management, all normal and recurring adjustments necessary to present fairly
the Company's financial condition and results of operations for the periods
presented. The results for the interim periods presented below are not
necessarily indicative of the results to be expected for the full year. 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. See "Consolidated Financial Statements."
<TABLE>
<CAPTION>
Nine Months Ended
Fiscal Year Ended June 30, March 31
------------------------------------------------------ -----------------
1991 (1) 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
(in thousands, except share and per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Program . . . . . . . . . . . . . $ - $ 364 $ 8,827 $34,726 $52,162 $37,416 $60,123
Grant . . . . . . . . . . . . . . - 28 - 26 - - -
Consulting services and other . . - 44 68 140 925 - 1,153
------ ------ ------- ------- ------- -------- -------
- 436 8,895 34,892 53,087 37,416 61,276
------ ------ ------- ------- ------- ------- -------
Operating Expenses
Program expenses . . . . . . . . - 499 8,390 29,533 44,374 30,987 51,009
Program preopening costs . . . . - 122 392 40 280 716 58
Amortization of goodwill . . . . - - 7 286 583 434 749
Selling, general and
administrative . . . . . . . . 559 620 1,595 2,731 4,097 2,982 4,046
------ ------ ------- ------- ------- -------- -------
559 1,241 10,384 32,590 49,334 35,119 55,862
------ ------ ------- ------- ------- ------- -------
Income (loss) from operations . . . . (559) (805) (1,489) 2,302 3,753 2,297 5,414
Other income (expense) . . . . . . . 1 13 (182) (350) (242) (180) (1,302)
------ ------ ------- ------- ------- ------- -------
Income (loss) before income tax
(expense) benefit . . . . . . . . . . (558) (792) (1,671) 1,952 3,511 2,117 4,112
Income tax (expense) benefit . . . . - - - 140 (1,332) (798) (1,603)
------ ------ ------- ------- ------- -------- ---------
Net income (loss) . . . . . . . . . $ (558) $ (792) $(1,671) $ 2,092 $ 2,179 $ 1,319 $ 2,509
======= ======== ======== ======= ======= ======== ========
Earnings (loss) per common and common
equivalent share . . . . . . . . . $(.57) $ (.17) $ (.27) $ .29 $ .26 $ .16 $ .28
====== ======= ======= ======= ====== ======== =======
Weighted average common and common
equivalent shares outstanding 978,588 4,722,217 6,271,203 7,093,510 8,264,320 8,373,529 8,951,031
======= ========= ========= ========= ========= ========= =========
Ratio of Earnings to Fixed
Charges (2) . . . . . . . . . . . . N/A (791.00) (8.60) 5.78 13.81 3.94 13.68
======= ========= ========= ========= ========= ========= =========
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash . . . . . . . . . . . . . . . . $ 417 $ 369 $ 663 $ 3,816 $ 784 $ 571 $14,970
Working capital . . . . . . . . . . . 355 444 178 6,078 9,726 3,444 35,522
Total assets . . . . . . . . . . . . 429 742 4,704 18,130 29,050 22,623 79,792
Long-term obligations, net of
current portion . . . . . . . . . . -- 70 3,141 1,291 6,955 1,409 46,950
Total liabilities . . . . . . . . . . 62 258 5,452 4,315 11,382 7,378 58,494
Shareholders' equity (deficit) . . . 367 484 (748) 13,815 17,668 15,245 21,298
</TABLE>
(1) Reflects data for the period from January 17, 1991 (the date of
inception of the Company) through June 30, 1991.
(2) There were no fixed charges incurred during the period January 17,
1991 (date of inception) through June 30, 1991. For the years ended
June 30, 1992 and 1993, the Company's earnings were insufficient to
cover fixed charges by approximately $792,000 and $1,671,000,
respectively. Fixed charges consist of interest expense and the
amortization of fees and discounts related to debt financings.
- 14 -
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
As of March 31, 1996, YSI managed or operated 18 residential programs in
12 states. The Company operates its programs through wholly-owned subsidiaries
pursuant to contracts directly with government agencies and third party payors
or, alternatively, with unaffiliated not-for-profit entities that have
contracts with government agencies. See the Notes to the Company's
Consolidated Financial Statements.
The Company's programs are provided pursuant to fixed per diem contracts
based upon program occupancy, management contracts, including those management
contracts with not-for-profit entities and various third party payor
contractual reimbursement contracts. The Company recognizes revenues under all
contracts as the services are performed. Under certain contracts, some
contract costs, including indirect costs, are subject to audit and adjustment
by negotiations with government or third party payor representatives. Under
these contracts, contract revenues are recorded at amounts that are expected to
be realized.
"Program contribution margin" is defined by the Company as revenues less
direct program expenses, goodwill, depreciation and other amortization expense,
but before program preopening costs, selling, general and administrative
expenses, interest and income taxes. Program contribution margin, in general,
is lower in the initial stages of a program's development due to staffing
requirements to obtain licensing and other direct program expenses necessary
for the operation of the program. The Company earns greater program
contribution margins under some contractual arrangements with unaffiliated
not-for-profit entities because, in certain of these arrangements, the
not-for-profit entity is responsible for some elements of operating the program
and, therefore, incurs some of the costs that are reimbursed to the
not-for-profit entity. Accordingly, the amount of program contribution margin
earned by the Company depends in part on the nature and extent of the program
elements for which it is responsible and the size of the program.
RECENT DEVELOPMENTS
In July, 1996, the Company purchased Youth Quest, Inc., a Utah
corporation, for $815,000 in cash and the assumption of certain liabilities.
This program provides residential group care, therapeutic foster care, and
counseling services for approximately 100 youth.
In July 1996, holders of an aggregate principal amount of $5,750,000 of
Original Debentures (all of which were Regulation S Debentures) surrendered
such Debentures for conversion and received in the aggregate 461,106 shares of
Common Stock. The Company paid approximately $250,000 to these holders in
connection with such early conversion.
On May 24, 1996, the Company paid a stock dividend on its Common Stock
whereby each record holder received one share of Common Stock for every two
shares of Common Stock held by the record holder.
Effective March 1, 1996, YSI acquired the business and certain assets of
Tampa Bay Academy, Ltd. ("Tampa Bay Academy") and a management agreement
contract with a related entity for approximately 4,223,000 in cash and the
assumption of liabilities in the amount of $325,000. Tampa Bay Academy is
primarily a residential treatment center licensed for 104 youth. In connection
with this transaction, YSI entered into a lease of certain real property owned
by Tampa Bay Academy, Ltd. and acquired a mortgage rate on such property from
the lender for approximately $3,271,000.
In January 1996, YSI commenced operation of a 45 bed juvenile boot camp
in Walters, Virginia under a contract with the Commonwealth of Virginia and the
City of Richmond for youth who have committed crimes or are considered at risk
of being ajudicated.
- 15 -
<PAGE> 18
RESULTS OF OPERATIONS
The following table sets forth selected items from the Company's
consolidated financial statements expressed as a percent of revenues:
<TABLE>
<CAPTION>
Nine Months
Year Ended June 30, Ended March 31,
------------------------ -----------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0%
Program expenses . . . . . . . . . . . . . . . . . . . . . 94.4% 85.5% 84.7% 83.9% 84.5%
Program contribution margin . . . . . . . . . . . . . . . 5.6% 14.5% 15.3% 16.0% 15.5%
Selling, general and administrative expenses . . . . . . 17.9% 7.8% 7.7% 8.0% 6.6%
Total expenses . . . . . . . . . . . . . . . . . . . . . 116.7% 93.4% 92.9% 93.9% 91.2%
Income (loss) from operations . . . . . . . . . . . . . . (16.7%) 6.6% 7.1% 6.1% 8.8%
Net Income (loss) . . . . . . . . . . . . . . . . . . . . . (18.7%) 6.0% 4.1% 3.5% 4.1%
</TABLE>
NINE MONTHS ENDED MARCH 31, 1996 COMPARED TO NINE MONTHS ENDED MARCH 31, 1995
Revenues. Revenues increased $23,860,000, or 63.8%, to $61,276,000 for
the nine months ended March 31, 1996 from $37,416,000 for the nine months
ended March 31, 1995. This increase in revenues reflects a full nine months of
operations for Parc Place, Promise House, and Tarkio Academy which were
acquired or opened during the nine months ended March 31, 1995; the operations
of DBC, Desert Hills of New Mexico, Woodward Academy, the Virginia boot camp
and Tampa Bay Academy which were acquired or opened subsequent to the nine
months ended March 31, 1995; management agreements with respect to Desert Hills
of Arizona, Desert Hills of Nevada, and College Station which the Company
entered into subsequent to the nine months ended March 31, 1995; and an
expanded student population at existing academies. Revenues attributable to
programs that existed during the nine month period ended March 31, 1995
increased by $47,261,000, or 26.3%, for the nine months ended March 31, 1996
due to the increased average student population in these programs.
Program Expenses. Program expenses, including goodwill amortization,
increased $20,337,000, or 64.7%, to $51,758,000 for the nine months ended March
31, 1996 from $31,421,000 for the nine months ended March 31, 1995. The
increase in program expenses reflects the increase in the number of programs
operated by the Company and the number of students in the Company's existing
programs. Salaries and related employee benefits constituted approximately
65.7% of program expenses for the nine months ended March 31, 1996 compared to
60.2% of program expenses for the nine months ended March 31, 1995.
Program Contribution Margin. The program contribution margin earned by
the Company for the nine months ended March 31, 1996 was $9,518,000, or 15.5%
of revenues, compared to $5,995,000, or 16.0% of revenues, for the comparable
prior period. The decrease is primarily due to the programs at College
Station, Texas, the Virginia boot camp and Woodward which were in the early
stages of operation during the period.
Program Preopening Costs. Program preopening costs for the nine months
ended March 31, 1996 of $58,000 represent preopening costs related to the
opening of the Virginia boot camp. Program preopening costs for the nine
months ended March 31, 1995 of $716,000 represent preopening costs related
primarily to the opening of Tarkio Academy.
Selling, General and Administrative Expenses. For the nine months ended
March 31, 1996, selling, general and administrative expenses increased
$1,064,000 to $4,046,000, or 6.6% of revenues, from $2,982,000, or 8.0% of
revenues, for the comparable prior period. The most significant component of
these costs relates to the compensation expense associated with program and
business professionals necessary for the development and oversight of the
Company's programs and operations. The decrease as a percentage of revenues
between periods is primarily attributable to the outsourcing of new business
development and the increase in revenue between periods.
- 16 -
<PAGE> 19
Interest Expense. Interest expense increased to $1,335,000 from $162,000
for the nine months ended March 31, 1996 from the comparable period in 1995.
This increase primarily resulted from increases in borrowings on the Company's
revolving line of credit to fund working capital needs, interest payable on the
debt incurred in connection with the acquisitions of DBC and Desert Hills New
Mexico, interest payable on the financing of the Company's personal property,
and interest payable on the 7% Convertible Subordinated Debentures.
Income Taxes. The provision for income taxes was $1,603,000 for the nine
months ended March 31, 1996 and $798,000 for the nine months ended March 31,
1995.
Net Income. Net income increased $1,190,000 from $1,319,000 for the nine
months ended March 31, 1995 to $2,509,000 for the same period this fiscal year.
YEAR ENDED JUNE 30, 1995 COMPARED TO YEAR ENDED JUNE 30, 1994
Revenues. Revenues increased $18,195,000, or 52.1%, to $53,087,000 for
fiscal 1995 from $34,892,000 for fiscal 1994. This increase in revenues
primarily is the result of the acquisitions of Parc Place, Promise House and
DBC, the opening of Tarkio Academy, and expanded student populations at existing
academies. Revenues for programs that existed in the prior year increased by
$9,854,000, or 28.3%, for fiscal 1995 primarily due to expansions resulting in
increased student populations in these programs. Consulting services and other
revenue includes the accrual of a management fee in the amount of $600,000,
earned by the Company for management services provided to Introspect during the
period January 1 through June 30, 1995 pursuant to the terms of a Management
Agreement the Company entered into with Introspect on June 30, 1995.
Program Expenses. Salaries and related employee benefits constituted
approximately 64.1% of program operating expenses for fiscal 1995 compared to
67.1% of program operating expenses for fiscal 1994. Program expenses
increased $15,138,000, or 50.8%, to $44,957,000 for fiscal 1995 from
$29,819,000 for fiscal 1994. The increase in program expenses is attributable
to the increase in both the number of programs operated by the Company and the
number of students in the Company's existing programs.
Program Contribution Margin. The overall program contribution margin
earned by the Company for fiscal 1995 was $8,130,000, or 15.3% of revenues,
compared to $5,073,000, or 14.5% of revenues, for the prior year. The fiscal
1995 contribution margin percentage increased as a result of increased margins
of $2,506,000, or 50.0%, at existing programs offset by operating losses of
$656,000 associated with Tarkio Academy during its first eight months of
operation as it was developing and expanding.
Program Preopening Costs. The increase in program preopening costs in
fiscal 1995 to $280,000 from $40,000 in fiscal 1994 resulted from additional
preopening costs related to the opening of Tarkio Academy of $260,000 and the
Woodward Academy of $20,000, which accepted its first student in July, 1995.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1,366,000 to $4,097,000, or 7.7% or
revenues, for fiscal 1995 from $2,731,000, or 7.8% of revenues, for fiscal
1994. This increase was primarily due to the addition of staff to effectively
manage the increased number of programs the Company operated in fiscal 1995.
Interest Expense. Interest expense was $268,000 for fiscal 1995 compared
to $403,000 for fiscal 1994. The decrease in interest expense during fiscal
1995 is due primarily to the repayment of debt associated with the acquisitions
of the Forest Ridge program and the Chamberlain and Springfield Academies near
the end of fiscal 1994.
Income Taxes. The provision for income taxes was $1,332,000 for fiscal
1995 as compared to an income tax benefit of $140,000 for fiscal 1994.
Net Income. Net income increased $87,000 from $2,092,000 for fiscal 1994
to $2,179,000 for fiscal 1995. The realization of net operating loss
carryforwards and other tax benefits favorably impacted net income for fiscal
1994, which,
- 17 -
<PAGE> 20
on a fully-taxed basis, would have been approximately $1,230,000, or $.17 per
common and common equivalent share as compared to $2,179,000, or $.27 per
common and common equivalent share for fiscal 1995.
YEAR ENDED JUNE 30, 1994 COMPARED TO YEAR ENDED JUNE 30, 1993
Revenues. Revenues increased $25,997,000, or 292.3%, to $34,892,000 for
fiscal 1994 from $8,895,000 for fiscal 1993. The increase in revenues is the
result of the addition of the Hickey School, and the acquisitions of YSI of
Utah, Chamberlain Academy, Springfield Academy and Western Youth (which was
subsequently combined into YSI of Utah) during fiscal 1994, as well as the
increased number of students in each of the Company's programs in operation
during the fiscal year. Revenues for programs which existed in the prior year
increased by $7,358,000, or 88.0%, for the year ended June 30, 1994.
Program Expenses. Program expenses increased $21,422,000, or 255.1%, to
$29,819,000 for fiscal 1994 from $8,397,000 for fiscal 1993. Salaries and
related employee benefits constitute approximately 67.1% of program operating
expenses for fiscal years 1994 and 1993. The increase in program expenses
reflects the increase in both the number of programs and the number of students
in the existing programs.
Program Contribution Margin. The overall program contribution margin
earned by the Company for fiscal 1994 was $5,073,000, or 14.5%, compared to
$498,000, or 5.6%, for the prior year. This increase in program contribution
margin was a result of the addition and increased maturity of the Hickey
School, YSI of Utah, Chamberlain Academy, Springfield Academy and Western Youth
programs, as well as the increased number of students in the Company's existing
programs.
Program Preopening Costs. Program preopening costs for fiscal 1994 of
$40,000 represent costs related to the opening of Tarkio Academy. Program
preopening costs for fiscal 1993 of $392,000 represent costs associated with
opening the Victor Cullen and Reflections programs in September 1992 and the
Hickey School program in July 1993.
Selling, General and Administration Expenses. Selling, general and
administrative expenses increased $1,136,000, or 71.2%, to $2,731,000 for
fiscal 1994 from $1,595,000 for fiscal 1993. Selling, general and
administrative expenses decreased as a percentage of program revenues to 7.8%
for fiscal 1994 from 17.9% for fiscal 1993 as a result of the addition of
substantial programs and program revenues during fiscal 1994 compared with a
relatively small amount of programs in operation during fiscal 1993. Fiscal
1993 was the Company's first full year of operation after accepting its first
student and revenues were not substantial but selling and administrative
efforts were significant.
Interest Expense. Interest expense of $403,000 for fiscal 1994 relates
to short-term borrowings, loans obtained from banks and economic development
agencies to partially fund the start-up costs of the Company's operating
programs, interest related to capital leases, interest on the Company's
Subordinated Debentures and interest payable on the debt incurred in connection
with the acquisitions of Forest Ridge, Chamberlain and Springfield programs.
Income Taxes. The Company realized an income tax benefit of $140,000 for
fiscal 1994 due to the realization of certain net operating loss carryforwards.
No tax provision or benefit was recorded for fiscal 1993 due to operating
losses of $1,671,000 for the year.
Net Income. Net income for fiscal 1994 was $2,092,000 as compared to a
net operating loss of $1,671,000 for fiscal 1993.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had $24,781,000 in cash, cash equivalents
and investments available for sale and working capital of $35,522,000. Net
cash provided by operating activities was $3,271,000 for the nine months ended
March 31, 1996 compared to net cash used in operating activities of $478,000
for the nine months ended March 31, 1995.
- 18 -
<PAGE> 21
Approximately $27,346,000 was invested during the nine months ended March
31,1996 of which approximately $10,112,000 was invested in liquid securities,
$4,246,000 was used to fund the Tampa Bay Academy acquisition and the purchase
of a related mortgage note receivable, $3,400,000 was used to fund the
acquisition of Desert Hills New Mexico and the transactions with Introspect
with respect to Desert Hills Arizona and Desert Hills Nevada (including costs
incurred therewith), $2,827,000 of deferred financing costs were incurred in
connection with the offering of the 7% Convertible Subordinated Debentures Due
2006 and $1,000,000 was advanced under the line of credit facility
provided to Introspect. The remaining approximately $5,761,000 of investments
were made in leasehold improvements, vehicles, computer equipment and other
capital expenditures in support of operating activities of existing programs
compared to $5,106,000 invested during the prior year. Capital expenditures
during the nine months ended March 31, 1996 include approximately $758,000 of
costs incurred in the construction of 116 additional beds at Clarinda Academy,
approximately $285,000 of costs incurred in the construction and renovation of
additional beds and classrooms at Tarkio Academy, approximately $123,000 of
costs incurred in the construction of additional beds and classrooms at various
other facilities at Woodward Academy, approximately $114,000 of costs incurred
in the construction and renovation of the Virginia boot camp, approximately
$249,000 of costs incurred in the renovation of additional beds and classrooms
at various other facilities, and approximately $261,000 of costs incurred in
renovations to the corporate conference center and offices.
The Company funded its cash needs with short-term and long-term
borrowings, cash generated from existing programs and funds raised from the 7%
Convertible Subordinated Debt Offering. As of March 31, 1996, the Company had
approximately $8,500,000 of credit available on its existing bank revolving
line of credit.
Total debt of $50,996,000 on March 31, 1996 consisted primarily of
$37,950,000 of 7% Convertible Subordinated Debentures Due 2006, $3,250,000 for
a note payable in connection with the Tampa Bay acquisition, $2,200,000
for a capital lease for the Company's personal property, $2,200,000 for a
capital lease assumed in the acquisition of Desert Hills of New Mexico,
$1,731,000 for a consulting note payable in connection with the Desert Hills
transaction and $981,000 of 12% subordinated debentures.
The Company believes the funds raised in its recent 7% Convertible
Subordinated Debt Offering and funds available under its revolving line of
credit, together with existing capital resources and cash flow from its
existing operations, will be sufficient to meet all indebtedness payments, to
make all planned capital additions and improvements and meet other working
capital needs for the next twelve months.
The Company had restricted cash of $517,000 as of March 31, 1996, of
which $389,000 was restricted pursuant to the Victor Cullen Academy contract
which provides for the payment of $5.00 per student per day to be deposited
equally into a facility renewal and equipment fund and an aftercare fund uses
of which are subject to the advance budgetary approval of the State of Maryland
Department of Juvenile Justice. Any residual funds, as well as any fixed
assets or capital improvements purchased from these funds, revert to the State
of Maryland Department of Juvenile Justice upon contract termination.
The Company's collection experience on accounts receivable continues to
be favorable. The Company receives monthly payments in advance under the
Hickey School contract.
The increase in net accounts receivable of $6,332,000, as well as the
increase in accounts payable and accrued expense of $2,251,000, from June 30,
1995 to March 31, 1996 is primarily attributable to the addition of the Desert
Hills, Woodward, Virginia and Tampa Bay programs, the expansion of the Tarkio
program and the increased number of students in the Company's other programs.
The increase in notes receivable of $4,273,000 from June 30, 1995, to
March 31, 1996, is attributable to the purchase of a $3,273,000 mortgage note
receivable in connection with the acquisition of Tampa Bay Academy and the
advancing of $1,000,000 under the line of credit facility provided to
Introspect Healthcare Corporation.
THE COMPANY
The Company is a leading national provider of private educational,
developmental and rehabilitative programs focusing on troubled youths who
either have been adjudicated as delinquents or suffer from behavioral problems.
The Company develops and operates a wide range of programs designed to promote
accountability, respect and discipline
- 19 -
<PAGE> 22
through highly structured, physically demanding, intensely scheduled and
intellectually challenging activities. In conjunction with these programs, the
Company offers troubled youths a broad range of residential services including
juvenile justice academies, residential treatment centers, boot camps, group
homes and foster homes, as well as non-residential services including
aftercare, tracking, counseling, partial care and day treatment services. As
of March 31, 1996, the Company operated 18 residential programs serving
approximately 2,100 enrolled students and conducted non-residential programs
serving approximately 1,800 additional youths. The youths served by the
Company are drawn from 36 states.
Since its formation in 1991, the Company has expanded its base of
operations through a combination of internal and external growth by expanding
program offerings, increasing student capacity at existing facilities,
developing new programs in response to privatization opportunities, and by
acquiring complimentary programs and businesses. The Company has experienced
significant revenue and earnings growth with revenues increasing from $8.9
million to $53.1 million and net income increasing from a loss of $1.7 million
to net income of $2.2 million for the fiscal years ended June 30, 1993 and June
30, 1995, respectively. For the nine months ended March 31, 1996, the Company
reported revenues of $61.3 million and net income of $2.5 million, reflecting
increases of approximately 64% and 90%, respectively, over performance in the
same period in fiscal year 1995.
COMPANY PROGRAM OFFERINGS
The residential programs operated by the Company are as follows:
<TABLE>
<CAPTION>
At March 31, 1996
-----------------
Program Initial/ % Increase Number
Types of Facilities Start Licensed Licensed in of
Program and Programs Date Source Capacity Capacity Capacity Students
------- ----------------- ------- ------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Clarinda Academy, IA Academy 2/92 de novo 60 209 248% 187
Victor Cullen Academy, MD Academy 9/92 RFP 60 184 207 184
Reflections Treatment, TN Sex Offender 9/92 RFP 26 40 54 40
Forest Ridge, IA Academy 2/93 Acq. 105 161 53 147
Hickey School, MD Academy 7/93 RFP 312 323 4 309
YSI-Utah, UT Foster Care and 7/93 Acq. 60 190 217 183
Group Home
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 40 -- 39
Tarkio Academy, MO Academy 9/94 de novo 103 308 199 306
Promise House, AZ Group Home 10/94 Acq. 28 55 96 37
Developmental Behavorial
Consultants, AZ Group Home 6/95 Acq. 80 80 -- 79
Woodward Academy, IA Boot Camp 7/95 RFP 25 74 196 30
Desert Hills New Mexico, NM RTC 7/95 Acq. 74 74 -- 74
Desert Hills Arizona, AZ RTC 7/95 * 120 120 -- 120
College Station, TX Academy and RTC 7/95 de novo 54 93 72 76
Virginia Boot Camp, VA Boot Camp 1/96 RFP 45 45 -- 31
Tampa Bay Academy, FL RTC 3/96 Acq. 104 104 -- 74
---- --- --- ---
Total/Percentage 1,426 2,262 59% 2,078
===== ===== ==== =====
</TABLE>
- ----------------------
* Concurrent with the Acquisition of Desert Hills, New Mexico, the Company
entered into a five-year management contract to operate the Desert Hills
Arizona program.
- 20 -
<PAGE> 23
In addition, the Company provides non-residential programs and services
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.
PROGRAM DESCRIPTION
The Company offers programs designed to address the multiple needs of
troubled youths. The foundation of the Company's programs incorporates
modification concepts and societal norms such as: positive peer culture;
thinking and behavior change; attendance at fully accredited educational
programs; vocational training (the "World of Work" program); life skills;
athletics; and public safety. Upon referral to the Company, an individual
development/treatment plan is designed for each youth. The fundamental Company
program is offered in each of the following facilities or settings:
Program Facilities and Settings
Residential Juvenile Justice Academies ("Academy") Academies
typically house troubled youths 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
Camps, Sex Offender and Detention programs.
Residential Treatment Centers ("RTCs") RTC's 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.
Residential Community-Based Facilities These facilities offer
behavioral health services to troubled youths 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 5 to 6 children.
Non-Residential Community-Based Programs These 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.
Specialized Programs
The Company also offers various specialized programs to compliment
the range of services offered at select 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 serve the special needs of youths involved in
sexual offenses. The programs are generally locked-secure and involve lengths
of stay from 12 to 24 months.
High Impact programs immerse youths 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.
- 21 -
<PAGE> 24
Boot Camp programs are similar to High Impact programs and are
conducted in a military format including uniforms and drills.
Detention programs are designed to house youths 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 serve troubled youths 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. These programs are similar to Detention programs except that the
youths are not adjudicated or accused of a crime.
Substance Abuse programs serve the special needs of youths that are
suffering, or in danger of suffering, from drug or alcohol addiction.
Long-Term Shelter programs offer housing services to those youths
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.
MANAGEMENT
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
W. James Hindman (1) . . . . . . . . . . 60 Chairman of the Board
Timothy P. Cole . . . . . . . . . . . 52 Vice Chairman of the Board and Chief Executive Officer
Henry D. Felton . . . . . . . . . . . . . 52 President and Chief Operating Officer
William P. Mooney . . . . . . . . . . . . 41 Chief Financial Officer, Senior Vice President - Finance
and Treasurer
Fletcher J. McCusker . . . . . . . . . . 46 Senior Vice President - Behavior Health Operations
David B. Dolch . . . . . . . . . . . . . 41 Senior Vice President - Juvenile Justice Operations
J. Donald Black (1)(3) . . . . . . . . . 60 Director
Jeffrey D. Davis (2) . . . . . . . . . . 53 Director
Mayer Kanter (1)(3) . . . . . . . . . . . 59 Director
George M. Ferris, Jr. (3) . . . . . . . . 68 Director
Cynthia K. Hindman, M.D. (2) . . . . . . 35 Director
Martin V. Marshall (4) . . . . . . . . . 73 Director
Jacques T. Schlenger (1)(4) . . . . . . . 67 Director
Miles G. Harrison, Jr., M.D. (2) . . . . 45 Director
</TABLE>
- -----------
(1) Member of the Executive & Nominating Committee
(2) Member of the Marketing & Program Operations Committee
(3) Member of the Finance & Audit Committee
(4) Member of the Organization & Compensation Committee
W. James Hindman founded the Company and served as Chairman of the Board
and Chief Executive Officer from its inception to August 5, 1996. Effective
August 5, 1996, Mr. Hindman resigned as Chief Executive Officer but continues
to serve as Chairman of the Board. In 1979, he founded Jiffy Lube
International, Inc. and served as its Chairman and Chief Executive Officer from
1979 to January 1990, at which time the company was sold to Pennzoil Company.
From 1967 to 1979, Mr. Hindman was involved in the health care industry as an
administrator, owner and operator of 25 nursing facilities. From 1983 to 1992,
Mr. Hindman served on the board of directors of Morningside College in Iowa.
Mr. Hindman served as a director of The Harbor Bank of Maryland, a Baltimore
banking institution, from June 1987 to June
- 22 -
<PAGE> 25
1989, and as a director of Transcrypt International, a high technology
electronics manufacturer in Lincoln, Nebraska, from January 1991 to June 1992.
Mr. Hindman's daughter, Dr. Cynthia K. Hindman, also serves as a director of
the Company.
Timothy P. Cole is the Vice Chairman of the Board and Chief Executive
Officer of the Company effective August 5, 1996. Mr. Cole previously served
as Chairman of the Board of Wackenhut Corrections Corporation, Executive Vice
President of The Wackenhut Corporation and as President of the Government
Services Group of The Wackenhut Corrections Corporation. Prior to joining
Wackenhut, he served as Program Director for Martin Marietta Corporation. Mr.
Cole is a graduate of the University of Oklahoma and received his MBA from
Pepperdine University. He is also a graduate of the Harvard University
Graduate School of Business in Advanced Management Program.
Henry D. Felton has served as a director of the Company since its
inception and is President and Chief Operating Officer. He previously served
the Company as President of the Company's Business Development Group and as
Vice Chairman of the Board. Prior to October 1990, he was an Executive Vice
President at Maryland National Bank. During his twenty-five year tenure at
Maryland National Bank, he managed various commercial lending departments, the
planning division, the treasury/investment divisions and the Institutional
Bank. From 1986 to 1988, Mr. Felton served on the board of directors of Jiffy
Lube International, Inc. Currently, he serves on the board of trustees for
Villa Julie College in Stevenson, Maryland and the board of directors of the
Bank of Maryland in Baltimore, Maryland.
William P. Mooney serves as Chief Financial Officer, Senior Vice
President - Finance and Treasurer of the Company, and previously served the
Company as Controller from November 1992 through March 1994. Mr. Mooney has 20
years of financial and management experience. From 1981 until he joined the
Company in November 1992, Mr. Mooney worked at ESPN, Inc., serving as Corporate
Controller, Assistant Secretary, and after 1990, as Director of New Business
financial operations. Prior to joining ESPN, Mr. Mooney was as internal
auditor and financial manager at Getty Oil Company from 1976 to 1981 and a
staff auditor with Arthur Andersen LLP, where he began his career in 1975.
Fletcher J. McCusker serves as Senior Vice President - Behavior Health
Operations. He joined the Company in June 1995 as Senior Vice President of
Managed Care and Executive Director of Desert Hills in Tucson. Mr. McCusker
served as Chief Executive Officer of Introspect Healthcare Corporation before
it was acquired by the Company. Prior to joining Introspect, Mr. McCusker was
the Chief Operating Officer of the Tulsa, Oklahoma-based Century Healthcare
Corporation, a $60 million company which owned and operated adolescent
psychiatric treatment facilities for children and adolescents in ten states.
Mr. McCusker holds a master's degree in Organizational Communication from
Arizona State University and a bachelor's degree in Rehabilitation from the
University of Arizona.
David B. Dolch serves as Senior Vice President - Juvenile Justice
Operations. He joined the Company in April, 1994 as Executive Director of
Victor Cullen Academy in Sabillasville, Maryland. In May, 1994 Mr. Dolch
received his doctorate in Education from La Salle University. Prior to joining
YSI, Mr. Dolch served as Athletic Director and Head Football Coach at
Morningside College from 1988 to 1994 and prior to that he was Head Football
Coach at Bowie State University from 1986 to 1988.
J. Donald Black has been a director of the Company since May 1993. Since
1985, Mr. Black has been President of R/B Development Corporation, which
operates Jiffy Lube Centers in Minneapolis, and since 1990, he has been
President of Ad/Mar Inc., an advertising company. He is also currently the
managing partner of BT Properties, an apartment management firm. From 1978 to
1991, Mr. Black served on the board of directors of the Northside Child
Development Center, a day care center providing services to parents and
children. From 1978 to 1990, Mr. Black served as President, Director and
Volunteer Counselor at the Bridge for Runaway Youth, a social service agency
which provides crisis and treatment services to runaway adolescents and their
families.
Jeffrey D. Davis has served as a director of the Company since May 1993.
In 1975, Mr. Davis founded Jefferson Davis Associates, Inc., which engages in
marketing research for United States and international companies, and currently
serves as its Chairman and Chief Executive Officer. Mr. Davis also is the
Chairman of The Davis Group, Inc., a marketing services company. From 1965 to
1974, Mr. Davis was Associate Director and principal of Frank Magid Associates,
a media research firm headquartered in Marion, Iowa. Mr. Davis is a board
member of Four Oaks Children's Home in Cedar Rapids, Iowa, an organization
which both domiciles and provides outreach programs for troubled young people
and their families.
- 23 -
<PAGE> 26
Mayer Kanter, Esq. has served as a director of the Company since May
1993. He is a partner in the law firm of Forker, Kanter, Forker and O'Brien
located in Sioux City, Iowa, where he has practiced law for 27 years. Mr.
Kanter has served as a Hospitalization Referee (Judge) since 1981 and in 1984
served as a Juvenile Referee (Judge) in Woodbury County, Iowa. He is currently
a member of the Iowa Supreme Court Advisory Commission for juvenile rules.
George M. Ferris, Jr. has served as a director of the Company since
February 1994. He is Chairman and Chief Executive Officer of Ferris, Baker
Watts, Incorporated, a position he assumed in 1971. Mr. Ferris has over 40
years experience with the firm and is a former governor of the New York Stock
Exchange. Since 1960, he has served as a consultant on international finance
and development issues to the U.S. Government and to foreign governments. Mr.
Ferris also serves as a director of J.L. Wickham Co. and Entron Industries.
Cynthia K. Hindman, M.D. has served as a director of the Company since
February 1994. Dr. Hindman serves as a consultant for children with behavioral
and developmental problems at the Pediatric Center in Frederick, Maryland. Dr.
Hindman completed her pediatric residency and fellowship in Behavioral and
Developmental Pediatrics at the University of Maryland School of Medicine. Dr.
Hindman received her B.S. Degree from Dickinson College in Carlisle,
Pennsylvania and her M.D. from the Medical College of Pennsylvania. Dr.
Hindman is the daughter of W. James Hindman, the Company's Chairman and Chief
Executive Officer.
Martin V. Marshall has served as a director of the Company since November
1994. Mr. Marshall is the Henry R. Byers Professor of Business Administration,
Emeritus, Harvard University. Over the years, he has taught in all the major
programs of the Harvard Business School and from 1981 through 1993 chaired the
School's Owner/President Management Program and in management schools in
Europe, Mexico, and Asia. In addition, he has consulted or been a board member
with a variety of domestic and international companies and has written
extensively on marketing and long-term business planning.
Jacques T. Schlenger, Esq. has served as a director of the Company since
November 1994. Mr. Schlenger has been a partner in the law firm of Venable,
Baetjer and Howard since 1963, where he founded and served as head of the tax
department from 1963 to 1979 and as managing partner from 1979 to 1986.
Miles G. Harrison, Jr., M.D. has served as a director of the Company
since January 1995. Dr. Harrison is an Assistant Clinical Professor of Surgery
at the University of Maryland School of Medicine and has also been in private
practice in Baltimore, Maryland since 1983. Dr. Harrison received his
bachelor's degree from Morgan State University in Baltimore, Maryland and his
M.D. degree, with honors, in 1975 from the University of Pennsylvania. He
completed his surgical residency at the Hospital of the University of
Pennsylvania and the Graduate Hospital of the University of Pennsylvania. Dr.
Harrison is a fellow of the American College of Surgeons and the International
College of Surgeons, and currently serves as the President of Medical Staff at
Liberty Medical Center in Baltimore.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table summarizes certain information regarding the
Company's compensation of its Chief Executive Officer and its most highly
compensated executive officers during the fiscal years ended June 30, 1995
- 24 -
<PAGE> 27
, June 30, 1994 and June 30, 1993. No other executive officer of the Company
had salary and bonus which exceeded $100,000 during the fiscal year
ended June 30, 1995.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
Name and ------------------------- ------------ All Other
Principal Position Year Salary Bonus Other Options Granted Compensation
------------------ ---- ------ ----- ----- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
W. James Hindman 1995 $150,000 -- $ (1) 150,000 $ 2,409(2)
Chairman and Chief 1994 $143,750 -- $ (1) -- $20,362(3)
Executive Officer 1993 $ 82,500(4) $30,000 $ (1) 30,000(5) $ 8,238(6)
Henry D. Felton 1995 $125,000 -- -- 37,500 $ 273(2)
Vice Chairman, 1994 $118,750 -- -- -- $ 5,645(7)
President and Chief 1993 $100,000 $10,000 -- 11,250(5) $ 3,831(8)
Operating Officer
Harry G. Pappas, Jr. 1995 $100,000 -- -- 150,000 $20,000(10)
Chief Financial 1994 -- -- -- -- --
Officer(9) 1993 -- -- -- -- --
- ------------------------------
</TABLE>
(1) Mr. Hindman received certain perquisites and other personal
benefits, the aggregate dollar cost to the Company of which did not
exceed 10% of his total salary in 1995, 1994 or 1993.
(2) Represents amounts contributed by the Company pursuant to the
Company's 401(k) Retirement Plan.
(3) Includes $2,833 contributed by the Company pursuant to the
Company's 401(k)Retirement Plan and $17,529 as special compensation
for a personal guarantee of a loan to a Company subsidiary from the
Maryland Department of Economic and Employment Development in the
original principal amount of $500,000 bearing interest at the rate
of prime plus 1 1/2% per annum and payable in 55 equal monthly
installments of principal and interest (the "DEED Loan"). Such
compensation was based, in the aggregate, on 5% of the average
annual outstanding principal balance due on such loan.
(4) Mr.Hindman did not receive any salary prior to December 1992. In
December 1992, the Board of Directors determined to compensate
Mr.Hindman in cash in the amount of $20,000 for services provided
to the Company prior to that time.
(5) Represents stock options granted in lieu of cash compensation for
services rendered during certain periods in the Company's early
history.
(6) Represents special compensation for a personal guarantee of the
DEED Loan.
(7) Includes $1,750 contributed by the Company pursuant to the
Company's 401(k)Retirement Plan and $3,895 as special compensation
for a personal guarantee of the DEED Loan.
(8) Includes $2,000 contributed by the Company pursuant to the
Company's 401(k)Retirement Plan and $1,831 as special compensation
for a personal guarantee of the DEED Loan.
(9) Mr. Pappas joined the Company in September 1994 and served as the
Company's Chief Financial Officer until his resignation in May
1995.
(10) Represents compensation payable in connection with Mr. Pappas'
severance agreement and resignation from the Company and his
provision of consulting services to the Company.
- 25 -
<PAGE> 28
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information with respect to the
grant of stock options to the Company's named executive officers during the
fiscal year ended June 30, 1995.
<TABLE>
<CAPTION>
Percentage of Total Options
Number of Shares Granted to Employees in Exercise Expiration
Name Underlying Options Fiscal Year Price Date
---- ------------------ --------------------------- ------- ----------
<S> <C> <C> <C> <C>
W. James Hindman 150,000(1) 21.5% $5.00 2/23/05
Henry D. Felton 37,500(1) 5.4% $5.00 2/23/05
Harry G. Pappas, Jr. 150,000(2) 21.5% $3.75 2/23/96
</TABLE>
- ------------------------------
(1) The options granted were immediately exercisable.
(2) 75,000 of the options were immediately exercisable on the date of grant,
and the other 75,000 options were exercisable as of March 31, 1995.
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
The following table sets forth certain information with respect to the
exercise of stock options by the Company's named executive officers during the
fiscal year ended June 30, 1995 and information concerning the number and value
of unexercised stock options at June 30, 1995. The value of shares acquired on
exercise is based on the fair market value per share of Common Stock on the
date of exercise, and the value of unexercised stock options is based on the
closing price per share of Common Stock of $7.08 on June 30, 1995.
<TABLE>
<CAPTION>
Shares No. of Securities Underlying Value of Unexercised In-the
Acquired on Value Unexercised Options at 6/30/95 Money Options at 6/30/95
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- --------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
W. James Hindman -- -- 480,000 0 $2,401,600 --
Henry D. Felton -- -- 162,499 0 $ 880,747 --
Harry G. Pappas, Jr. 138,750 $485,000 11,250 0 $ 37,500 --
</TABLE>
COMPENSATION OF DIRECTORS
Directors of the Company who are salaried employees of the Company do not
receive any additional compensation for serving as a director. Directors who
are not officers of the Company receive a fee of $500 for each Board meeting
personally attended and are reimbursed for expenses incurred in connection with
attendance. Under the Company's 1995 Director Stock Option Plan (the "Director
Option Plan"), non-employee directors of the Company each year automatically
receive, as of the anniversary date of his or her election or appointment to
the Board of Directors, an option to purchase 7,500 shares of the Company's
Common Stock at an exercise price equal to the fair market value of the Common
Stock on the date of grant. Under the Company's Board of Directors
Compensation Plan, non-employee directors also receive quarterly an award equal
to the number of shares of the Company's Common Stock that equals $3,750. Mr.
Kanter received $15,200 from the Company during the fiscal year ended June 30,
1995, as well as certain other benefits available generally to the Company's
employees,in return for business development services he provided to the
Company. Harry G. Pappas, Jr., who served as a director of the Company during
a portion of the fiscal year ended June 30, 1995, entered into a consulting
agreement with the Company pursuant to which he provided services to the
Company normally performed by the Chief Financial Officer. Under the
consulting agreement, Mr. Pappas was compensated $10,000 per month, was paid a
retainer of $20,000, and was granted
- 26 -
<PAGE> 29
150,000 stock options. Mr. Black, Mr. Davis, Mr. Kanter, Mr. Ferris and Dr.
Hindman each were granted 7,500 stock options during the fiscal year
ended June 30, 1995 under the Director Option Plan, which options were
immediately exercisable at an exercise price equal to the fair market value of
the Company's common stock on the date of grant - $4.42 per share for Messrs.
Black, Davis and Kanter and $4.17 per share for Mr. Ferris and Dr. Hindman.
During the last completed fiscal year, the Organization & Compensation
Committee was comprised of Messrs. Black, Davis, Marshall and Schlenger, none
of whom is or has been an officer or employee of the Company.
SEVERANCE BENEFITS AND NON-COMPETITION AGREEMENTS
The Company has entered into non-competition and change in control or
severance benefits agreements with Messrs. Hindman, Felton and McCusker. The
agreements with Messrs. Hindman and Felton include provisions that restrict the
executive officer from engaging in activities which are competitive with the
business conducted by the Company for a three-year period commencing February
1, 1994 and for a two-year period following any termination of the executive
officer's employment with the Company during that three-year period, regardless
of whether the termination arises in connection with any change in control.
In exchange for the agreements not to compete with the Company, these
agreements also provide for the payment by the Company of certain specified
benefits in the event the employment of such executive officer terminates under
certain circumstances following any change in control of the Company. For
purposes of these agreements, a change in control is deemed to take place
whenever (i) a person, group of persons or other entities shall become the
beneficial owner, directly or indirectly, of securities of the Company having
20% or more of the combined voting power of the Company's then-outstanding
securities, (ii) there shall be certain significant changes in the composition
of the Company's Board of Directors, (iii)the Company enters into an agreement
that would result in a change in control, or (iv) the shareholders of the
Company approve certain extraordinary transactions.
Circumstances triggering payment of the specified benefits to an
executive officer under his agreement include (i) involuntary termination of
employment (for reasons other than death, disability, retirement or cause) or
(ii) voluntary termination by the employee in the event of certain significant
changes in the nature of his employment, including certain reductions made in
compensation and changes in responsibilities and authority. Benefits made
available to the executive employee under the terms of the agreements in the
event that his employment is terminated under the above-specified circumstances
may include (i) a lump sum severance payment equal to three times the sum of
the employee's annual base salary, (ii) maintenance of all life, disability,
accident and health insurance substantially similar to those benefits to which
the employee was entitled immediately prior to termination for a period of
three additional years, (iii) certain additional payments to cover any excise
tax imposed by Section 4999 of the Internal Revenue Code, and (iv)
reimbursement of legal fees and expenses, if any, incurred as a result of such
termination.
The agreements may have the effect of discouraging takeovers and
protecting such officers from removal, since such agreements increase the cost
that would be incurred by an acquiring company seeking to replace current
management.
The Company entered into an agreement with Mr. Pappas in May 1995 in
connection with his resignation as the Company's Chief Financial Officer and as
a director. Pursuant to such agreement, Mr.Pappas was compensated $100,000
through February 1996, was provided certain health insurance coverage and
medical benefits by the Company through that date, was reimbursed approximately
$5,000 for legal fees and expenses incurred in connection with his resignation
and was granted the right to exercise his stock options through February 29,
1996.
- 27 -
<PAGE> 30
PRINCIPAL STOCKHOLDERS AND MANAGEMENT OWNERSHIP
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of June 30, 1996 by (i) each person
or entity known by the Company to own beneficially more than 5% of the
Company's outstanding shares of Common Stock, (ii) each of the executive
officers, (iii) each of the directors of the Company, and (iv) all directors
and executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
----------------------------
Executive Officers and Directors NUMBER PERCENT
-------------------------------- ------ -------
<S> <C> <C>
W. James Hindman 2,179,942(2) 23.9%
Henry D. Felton 632,535(3) 7.2%
William P. Mooney 20,698(4) *
Fletcher J. McCusker 72,144(5) *
17,988(6)
David B. Dolch *
J. Donald Black 102,384(7) 1.2%
Jeffrey D. Davis 80,865(8) *
Mayer Kanter 145,986(9) 1.7%
George M. Ferris, Jr. 30,165(10) *
Cynthia K. Hindman, M.D. 137,331(11) 2.5%
Martin V. Marshall 9,622(12) *
Jacques T. Schlenger 10,986(13) *
Miles G. Harrison, Jr. 7,986(14) *
All directors and executive officers as a
group (13 persons) 3,448,632(15) 36.1%
OTHER 5% STOCKHOLDERS
---------------------
BAMCO, Inc.
Baron Capital Management, Inc.
450 Park Avenue, Suite 2800
New York, NY 10022 666,000(16) 7.7%
</TABLE>
- -----------
* Represents beneficial ownership of less than 1% of outstanding Common
Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes shares over which the
named individual has voting or investment power and shares issuable
pursuant to options and warrants exercisable within 60 days.
(2) Includes 480,000 shares issuable pursuant to options granted to Mr.
Hindman that are exercisable within 60 days. Excludes 105,000 shares
that are owned beneficially by Mr. Hindman's wife and 34,785 shares
issuable upon exercise of a Warrant issued to Mrs. Hindman in connection
with the purchase of a Subordinated Debenture.
(3) Includes 162,499 shares issuable pursuant to options granted to Mr.
Felton that are exercisable within 60 days.
(4) Includes 17,125 shares issuable pursuant to options granted to Mr. Mooney
that are exercised within 60 days.
- 28 -
<PAGE> 31
(5) Includes 67,500 shares issuable pursuant to options granted to Mr.
Fletcher that are exercised within 60 days.
(6) Includes 15,000 shares issuable pursuant to options granted to Mr. Dolch
that are exercised within 60 days.
(7) Includes 40,500 shares issuable pursuant to options granted to Mr. Black
that are exercisable within 60 days and 2,319 shares reserved for
issuance upon exercise of a Warrant issued to Mr. Black in connection
with his purchase of a Subordinated Debenture. In addition, includes
59,400 shares owned by Retirement Accounts, Inc., an individual
retirement account, for the benefit of Mr. Black.
(8) Includes 40,500 shares issuable pursuant to options granted to Mr. Davis
that are exercisable within 60 days, and 40,200 shares owned by the
Jeffrey DeForest Davis Revocable Inter Vivos Trust, of which Mr. Davis is
the trustee.
(9) Includes 40,500 shares issuable pursuant to options granted to Mr. Kanter
that are exercisable within 60 days.
(10) Includes 15,000 shares issuable pursuant to options granted to Mr. Ferris
that are exercisable within 60 days.
(11) Includes 15,000 shares issuable pursuant to options granted to Dr.
Hindman that are exercisable within 60 days, 11,595 shares issuable upon
exercise of a Warrant issued to Dr. Hindman in connection with her
purchase of a Subordinated Debenture, 5,250 shares owned by Dr. Hindman
as custodian for her son under the Uniform Gifts to Minors Act and 75,000
shares held by an Irrevocable Trust created by Mr. James Hindman of which
Dr. Hindman's son is the beneficiary.
(12) Includes 7,500 shares issuable pursuant to options granted to Mr.
Marshall that are exercised within 60 days.
(13) Includes 7,500 shares issuable pursuant to options granted to Mr.
Schlenger that are exercised within 60 days.
(14) Includes 7,500 shares issuable pursuant to options granted to Mr.
Harrison that are exercised within 60 days.
(15) Includes 916,124 shares issuable pursuant to options granted to directors
and executive officers that are exercisable within 60 days and 13,914
shares issuable upon the exercise of Warrants issued to directors and
executive officers in connection with purchases of Subordinated
Debentures.
(16) Based upon a Schedule 13G, dated June 19, 1996, filed by BAMCO, Inc. and
Baron Capital Management, Inc. as a group in accordance with Rule
13d-1(b)(1)(ii)(F), BAMCO, Inc. beneficially owns 555,750 shares and Baron
Capital Management, Inc. beneficially owns 110,250 shares, respresenting
6.45% and 1.28% of the outstanding Common Stock as of June 30, 1996,
respectively. According to the Schedule 13G, BAMCO, Inc. and Baron
Capital Management, Inc. are investment advisers registered under the
Investment Adviser Act of 1940 and Baron Asset Fund, an investment
company registered under the Investment Company Act of 1940 and an
advisory client of BAMCO, Inc., owns 495,750 (5.75%) of the shares
beneficially owned by BAMCO, Inc.
- 29 -
<PAGE> 32
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In the Company's initial public offering in February 1994, Ferris, Baker
Watts, Incorporated was the principal underwriter and received underwriting
discounts and commissions of $0.47 per share for an aggregate of $910,000.
George M. Ferris, Jr., a director of the Company, serves as the Chairman and
Chief Executive Officer, and is a 30% shareholder of Ferris, Baker Watts,
Incorporated. Mr. Ferris was a nominee for director of the Company at the time
of the Company's initial public offering.
Pursuant to a private placement transaction in 1993, the Company sold
shares of its Common Stock to, among others, J. Donald Black, a director of the
Company, who purchased 30,000 shares at $2.00 per share for an aggregate
purchase price of $60,000.
Dixie L. Hindman, the wife of W. James Hindman, and Cynthia K. Hindman, a
director of the Company and daughter of Mr. Hindman, made loans to the Company
in 1993 in the amount of $157,500 and $52,500, respectively. The loans carried
interest at the rate of 10% per annum, were secured by certain equipment owned
by the Company, and were repaid in full in February 1994.
Effective on the close of business June 30, 1995, the Company acquired
Desert Hills New Mexico from Introspect. In addition, the Company was
granted an option for a period of five years to purchase all of the outstanding
capital stock of Introspect and entered into a Management Agreement to manage
the business of Introspect and certain of its affiliates for a period of five
years. The Company also entered into a $1,000,000 Discretionary Line of Credit
Agreement with Introspect pursuant to which the Company in its discretion may
extend credit to Introspect at an annual interest rate equal to 2% over the
prime rate of interest. Fletcher J. McCusker, who is an executive officer of
the Company, was the chief executive officer and a director of Introspect
before joining the Company in connection with the transactions described above
and is a stockholder of Diversification Association, Inc., the parent company
of Introspect. Mr. McCusker was not a director, officer or otherwise
affiliated with the Company at the time the Company entered into these
arrangements.
In August 1995, the Company entered into a Lease with W. J. Hindman and
Dixie L. Hindman pursuant to which the Company leased from the Hindmans certain
property owned by the Hindmans and constructed on the leased property a
conference center and an apartment facility that is available for use by the
Company. The improvements on the property were constructed at the sole cost
and expense of the Company. The Company is responsible for payment of all
utilities used by the Company on the leased premises and is required to keep in
effect at its own expense public liability insurance in an amount not less than
$1,000,000 and employer's liability insurance in an amount not less than
$100,000. The Company is authorized to use the leased premises for the
operation of a conference and meeting center for employees and guests of the
Company. The term of the Lease is five years from the time of completion of
the improvements and may be extended at the Company's option for an additional
five-year period. During the original five-year term of the Lease, the Company
will not be required to pay any rent to the Hindmans. However, the Hindmans
will receive the benefit of the improvements on their property, and the Company
will surrender to the Hindmans, at the expiration of the Lease, the leased
premises as improved pursuant to the Lease. The Company estimates that the
value of the improvements to the Hindmans' property is approximately $200,000.
The Company believes that the terms of the transactions it has engaged in
with directors and officers are no less favorable to the Company than the terms
that would have been available to the Company from unaffiliated third parties.
These transactions were ratified by the independent outside members of the
Company's Board of Directors who do not have an interest in such transactions.
In connection with this ratification, the Board of Directors determined that
such transactions were fair and reasonable to the Company
- 30 -
<PAGE> 33
and confirmed the Company's policy that any future related party transactions
may be consummated only if such transactions are on terms as favorable to the
Company as terms that could be obtained from unaffiliated third parties and if
such transactions are approved by a majority of the independent outside members
of the Board of Directors who do not have an interest in the transaction.
DESCRIPTION OF EXCHANGE OFFER DEBENTURES
The Exchange Offer Debentures will be issued under and entitled to the
benefits of the Indenture (the "Indenture") dated as of ________, 1996, by and
between the Company and The Chase Manhattan Bank, N.A. as trustee (the
"Trustee").
The following statements under this heading are summaries of the detailed
provisions of the Exchange Offer Debentures and the Indenture, copies of which
will be available for inspection at the office of the Trustee in New York City.
Such statements do not purport to be complete and are qualified in their
entirety by reference to the Exchange Offer Debentures and the Indenture. The
definition of certain terms used in the following summary are set forth below
under "-- Certain Definitions."
The Exchange Offer Debentures and the Indenture will not limit the amount
of other indebtedness that may be incurred or securities that may be issued by
the Company or its subsidiaries and contain no financial covenants or similar
restrictions with respect to the Company or its subsidiaries and, therefore,
holders of the Exchange Offer Debentures will have no protection (other than
their rights upon an Event of Default as described in "--Events of Default"
below) from adverse changes in the Company's financial condition.
PRINCIPAL, MATURITY AND INTEREST
The Exchange Offer Debentures are limited in the aggregate principal
amount to $32,200,000 and will mature on February 1, 2006. The Exchange Offer
Debentures bear interest at a rate of 7.0% per annum, payable semi-annually in
arrears on each February 1 and August 1. Interest on the Exchange Offer
Debentures accrues from the most recent date to which interest has been paid
or, if no interest has been paid, from the date of original issuance. Interest
will be computed on the basis of a 360-day year comprised of twelve 30-day
months. The interest payable on each February 1 and August 1 will amount to
$35.00 per $1,000 aggregate principal amount of the Exchange Offer Debentures.
SUBORDINATION
The Exchange Offer Debentures are subordinate in right of payment to the
prior payment in full of all Senior Indebtedness of the Company and its
subsidiaries. As of March 31, 1996, there was approximately $12.1 million of
Senior Indebtedness. The Company has a bank revolving line of credit of up to
$10,000,000 that bears interest at a variable rate based upon, at the option of
the Company, the prime rate of interest or 2.25% above LIBOR. The Exchange
Offer Debentures do not limit the ability of the Company or its subsidiaries to
incur secured indebtedness or other Senior Indebtedness (including any
borrowings under such line of credit) or to contribute assets to its
subsidiaries. The Company's rights as a stockholder and the rights of its
creditors, including holders of the Exchange Offer Debentures, to participate
in the assets of any of the Company's subsidiaries upon a subsidiary's
liquidation or recapitalization would be subject to the prior claims of such
subsidiary's creditors.
The Exchange Offer Debentures are obligations exclusively of the Company
and not of its subsidiaries. Because the operations of the Company are
currently conducted through subsidiaries, the cash flow and the consequent
ability to service debt of the Company, including the Exchange Offer
Debentures, are dependent,
- 31 -
<PAGE> 34
in part, upon the earnings of its subsidiaries and the distribution of those
earnings to the Company or upon loans or other payments of funds by those
subsidiaries to the Company. The subsidiaries are separate and distinct legal
entities and have no obligation, contingent or otherwise, to pay any amounts
due pursuant to the Exchange Offer Debentures or to make any funds available
therefor, whether by dividends, loans or other payments. In addition, the
payment of dividends and the making of loans and advances to the Company by its
subsidiaries may be subject to statutory or contractual restrictions, are
contingent upon the earnings of those subsidiaries and are subject to various
business considerations.
The Exchange Offer Debentures are effectively subordinate to all
indebtedness and other liabilities, including current liabilities and
commitments under leases, if any, of the Company's subsidiaries. Any right of
the Company to receive assets of any of its subsidiaries upon liquidation or
reorganization of the subsidiary (and the consequent right of the holders of
the Exchange Offer Debentures to participate in those assets) are effectively
subordinate to the claims of that subsidiary's creditors, except to the extent
that the Company is itself recognized as a creditor of such subsidiary, in
which case the claims of the Company would still be subject to any security
interests in the assets of such subsidiary and subordinated to any indebtedness
of such subsidiary senior to that held by the Company.
CONVERSION RIGHTS
The Exchange Offer Debentures may be converted at any time on or after
the effective date of the Registration Statement of which this Prospectus is a
part filed by the Company with the Commission. The right to convert Exchange
Offer Debentures called for redemption will terminate at the close of business
on the business day immediately preceding the date fixed for redemption, and
will be lost if not exercised prior to that time, even if such redemption
occurs at a time when conversion of the Exchange Offer Debentures is in the
best interests of the holders. The price at which Conversion Shares shall be
delivered upon conversion (herein called the "Conversion Price") is currently
$12.47 per Conversion Share. The Conversion Price shall be adjusted in
certain instances as provided in paragraph (c) of Section 4 of the Exchange
Offer Debentures.
The right of conversion attaching to any Debenture may be exercised by
the holder by delivering the Debenture at the specified office of the Trustee,
accompanied by a duly signed and completed notice of conversion. The conversion
date shall be the date on which the Debenture and the duly signed and completed
notice of conversion shall have been delivered. A holder delivering a
Debenture for conversion will not be required to pay any taxes or duties
payable in respect of the issue or delivery of Common Stock on conversion but
will be required to pay any tax or duty that may be payable in respect of any
transfer involved in the issue or delivery of the Common Stock in a name other
than that of the holder of the Debenture. Certificates representing shares of
Common Stock will not be issued or delivered unless all taxes and duties, if
any, payable by the holder have been paid. Such certificates will be delivered
to the address specified by the holder in his completed notice of conversion.
The conversion price will be subject to adjustment in certain events,
including (a) dividends (and other distributions) payable in Common Stock on
any class of capital stock of the Company, (b) the issuance to all holders of
Common Stock of rights or warrants entitling them to subscribe for or purchase
Common Stock at less than the then current market price (as determined in
accordance with the Exchange Offer Debentures) unless holders of Exchange Offer
Debentures are entitled to receive the same upon conversion, (c) subdivisions,
combinations and reclassifications of Common Stock, and (d) distributions to
all holders of Common Stock of evidences of indebtedness of the Company or
assets (including securities, but excluding those rights, warrants, dividends
and distributions referred to above and dividends and distributions paid in
cash out of the retained earnings of the Company and regular quarterly
dividends consistent with past practice). In addition to the foregoing
adjustments, the Company will be permitted to make such downward adjustments in
the conversion price as it considers to be advisable in order that any event
treated for United
- 32 -
<PAGE> 35
States Federal income tax purposes as a dividend of stock or stock rights will
not be taxable to the holders of Common Stock. Adjustments in the conversion
price of less than $.25 will not be required, but any adjustment that would
otherwise be required to be made will be taken into account in the computation
of any subsequent adjustment. Fractional shares of Common Stock are not to be
issued or delivered upon conversion, but, in lieu thereof, a cash adjustment
will be paid based upon the then current market price of Common Stock. Subject
to the foregoing, no payments or adjustments will be made upon conversion on
account of accrued interest on the Exchange Offer Debentures or for any
dividends or distributions on any shares of Common Stock delivered upon such
conversion. Notice of any adjustment of the conversion price will be given in
the manner set forth herein under "--Notices."
If at any time the Company makes a distribution of property to its
stockholders that would be taxable to such stockholders as a dividend for
United States Federal income tax purposes (e.g., distribution of evidences of
indebtedness or assets of the Company, but generally not stock dividends or
rights to subscribe for Common Stock) and, pursuant to the anti-dilution
provisions of the Exchange Offer Debentures, the conversion price of the
Exchange Offer Debentures is reduced, such reduction may be deemed to be the
payment of a taxable dividend to holders of Exchange Offer Debentures. Such a
deemed dividend might be subject to a 30% or then applicable United States
withholding tax unless the holder is entitled to a reduction of the tax under a
tax treaty.
In the event that the Company should merge with another company, become a
party to a consolidation or transfer all or substantially all of its assets to
another company, each Debenture then outstanding would, without the consent of
any holder, become convertible only into the kind and amount of securities,
cash and other property receivable upon the merger, consolidation or transfer
by a holder of the number of shares of Common Stock into which such Debenture
might have been converted immediately prior to such merger, consolidation or
transfer.
REDEMPTION
Unless previously redeemed, converted or purchased and cancelled by the
Company, the Exchange Offer Debentures will mature on February 1, 2006 and
shall be redeemed at their principal amount.
Optional Redemption
The Exchange Offer Debentures may be redeemed, at the option of the
Company, in whole or in part at any time on or after February 1, 1999 at a
redemption price equal to that percentage of their principal amount set forth
below, together with accrued and unpaid interest to the date fixed for
redemption, upon notice as described below:
<TABLE>
<CAPTION>
On or After February 1 Premium
---------------------- -------
<S> <C>
1999 103%
2000 102%
2001 101%
2002 and thereafter 100%
</TABLE>
In the event of a partial redemption, the Exchange Offer Debentures to be
redeemed will be selected by the Trustee not more than 75 days before the date
fixed for redemption, by such method as the Trustee shall deem fair and
appropriate.
The Exchange Offer Debentures may be redeemed, as a whole but not in
part, upon notice as described below, at the option of the Company at any time,
if the Company shall determine that as a result of any
- 33 -
<PAGE> 36
change in or amendment to the laws or any regulations or rulings of the United
States or any political subdivision or taxing authority thereof or thereon
affecting taxation, or any amendment to, or change in, an official application
or interpretation of such laws, regulations or rulings, which amendment or
change is announced or becomes effective on or after January 29, 1996, the
Company has or will become obligated to pay Additional Amounts on the Exchange
Offer Debentures, as described below under "--Payment of Additional Amounts,"
and such obligation cannot be avoided by the Company taking reasonable measures
available to it; provided that no such notice of redemption shall be given
earlier than 90 days prior to the earliest date on which the Company would be
obligated to pay such Additional Amounts were a payment in respect of the
Exchange Offer Debentures then due; and provided further, that at the time such
notice is given, such obligation to pay such Additional Amounts remains in
effect. In case of any such redemption, the redemption price will be 100% of
the principal amount of the Exchange Offer Debentures, together in each case
with accrued and unpaid interest to the date fixed for redemption. The Company
is required to deliver to the Trustee a certificate stating that the Company is
entitled to effect such redemption and that the conditions precedent to the
right of the Company to redeem the Exchange Offer Debentures have accrued and
an opinion of counsel stating that the legal conditions precedent to the right
of the Company to effect such redemption have occurred.
Mandatory Redemption
Except as set forth in the two preceding paragraphs and except as set
forth under "Change of Control" below, the Company is not required to make
mandatory redemption or sinking fund payments with respect to the Exchange
Offer Debentures.
Notices of Redemption
Notice of intention to redeem the Exchange Offer Debentures will be given
as described under "--Notices" below. In the case of redemption of all
Exchange Offer Debentures, notice will be given once not more than 60 nor less
than 30 days prior to the date fixed for redemption. In the case of a partial
redemption, notice will be given twice, the first such notice to be given not
more than 60 nor less than 45 days prior to the date fixed for redemption and
the second such notice to be given not more than 45 nor less than 30 days prior
to the date fixed for redemption.
Notices of redemption will specify the date fixed for redemption, the
applicable redemption price, the date the conversion privilege expires and, in
the case of a partial redemption, the aggregate principal amount of the
Exchange Offer Debentures to be redeemed and the aggregate principal amount of
the Exchange Offer Debentures that will be outstanding after such partial
redemption. In addition, in the case of a partial redemption, the first notice
will specify the last date on which exchanges or transfers of the Exchange
Offer Debentures may be made and the second notice will specify the serial
numbers of the Exchange Offer Debentures and the portions thereof called for
redemption.
In addition, the Company may at any time and from time to time repurchase
the Exchange Offer Debentures in the open market or in private transactions at
prices it considers attractive. The Exchange Offer Debentures repurchased by
the Company will be cancelled.
CHANGE OF CONTROL
Each holder of a Debenture will have the right, at such holder's option,
to cause the Company to purchase such Debenture, in whole but not in part, for
a cash amount equal to 100% of the principal amount, together with accrued
interest to the repurchase date, if a Designated Event (as defined below)
occurs or has occurred. Notice with respect to the occurrence of a Designated
Event will be given as described under "--Notices" below and not later than 30
days after the Exchange Date or the date of the occurrence of such
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<PAGE> 37
Designated Event. Such notice shall include, among other things, the
redemption price, the date fixed for redemption, the place of payment, that
payment will be made upon presentation of the Exchange Offer Debentures to be
redeemed; that interest accrued will be paid as specified in such notice; and
that on or after said date interest will cease to accrue; and that a holder
electing to revoke its election of redemption by delivering a written notice of
such revocation, together with the holder's non-transferable receipt for such
Exchange Offer Debentures, to the place of redemption not later than the date
fixed for such purpose. The date fixed for such purchase will be a date not
less than 30 nor more than 60 days after notice of occurrence of a Designated
Event is given (except as otherwise required by 60 days after notice of the
occurrence of a Designated Event is given (except as otherwise required by
law). Upon delivery of such notice, the holder submitting such notice shall
forfeit the conversion rights with respect to such Debenture. To be purchased,
a Debenture must be received with a duly executed written notice, substantially
in the form provided on the reverse side of such Debenture, at the office of
the Trustee not later than the fifth day prior to the date fixed for such
purchase. All Exchange Offer Debentures purchased by the Company will be
cancelled. Holders who have tendered a notice of purchase will be entitled to
revoke their election by delivering a written notice of such revocation to the
Trustee on or prior to the Holder Redemption Date. In addition, holders of the
Exchange Offer Debentures will retain the right to require such Exchange Offer
Debentures to be converted into Common Stock (or other securities, property or
cash, payable in lieu thereof by reference to the adjustment price as provided
under the adjustment provision. See "--Conversion") prior to the purchase
date, so long as notice to that effect, including the holder's nontransferable
receipt for the Exchange Offer Debentures from the Trustee, is delivered on or
prior to the close of business on the day prior to the purchase date to the
Trustee.
A "Designated Event" shall be deemed to have occurred, subject to the
provisions below, upon the consummation of a purchase, merger, acquisition,
transfer or transaction or series of transactions involving a "Change of
Control" as defined below.
The Company will comply with the provisions of Rule 13e-4 and any other
tender offer rules under the Exchange Act that may then be applicable and will
file a Schedule 13E-4 or any other schedule required thereunder in connection
with any offer by the Company to purchase Exchange Offer Debentures at the
option of holders upon a Change of Control. The Change of Control purchase
feature of the Exchange Offer Debentures may in certain circumstances make more
difficult or discourage certain mergers, tender offers and other takeover
attempts involving the Company. The Change of Control provisions will not
prevent a leveraged buyout led by the Company's management, a recapitalization
of the Company or change in a majority of the members of the Board of Directors
that is approved by the then-present Board of Directors. With respect to the
sale of assets, the phrase "all or substantially all" varies according to the
facts and circumstances of the subject transaction and is subject to judicial
interpretation. The Company believes that such a sale would be one that
requires the vote or concurrence of its stockholders. Accordingly, in certain
circumstances it may be unclear as to whether a Change of Control has occurred.
The determination of whether a Change of Control has occurred is a
determination based on the facts and circumstances of the subject transaction.
The Change of Control purchase feature is not, however, the result of
management's knowledge of any specific efforts to accumulate shares of Common
Stock or to obtain control of the Company by means of a merger, tender offer,
solicitation of proxies or consents or otherwise, or part of a plan to
implement a series of anti-takeover measures.
The Company, could, in the future, enter into certain transactions,
including certain recapitalizations of the Company, that would not constitute a
Change of Control under the Indenture, but that would increase the amount of
Senior Indebtedness (or any other indebtedness) outstanding at such time.
There are no restrictions in the Indenture on the creation of additional Senior
Indebtedness (or any other indebtedness), and, under certain circumstances, the
incurrence of significant amounts of additional indebtedness could have an
adverse effect on the Company's ability to service its indebtedness, including
the Exchange Offer Debentures. If such a Change of Control were to occur,
there can be no assurance that the Company would
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<PAGE> 38
have sufficient funds at the time of such event to pay the Change of Control
purchase price for all Exchange Offer Debentures tendered by the holders
thereof. A default by the Company on its obligation to pay the Change of
Control purchase price could, pursuant to cross-default provisions, result in
acceleration of the payment of other indebtedness of the Company outstanding at
that time.
Certain of the Company's existing and future agreements relating to their
indebtedness could prohibit the purchase by the Company of the Exchange Offer
Debentures pursuant to the exercise by a Debenture holder of the foregoing
option, depending on the financial circumstances of the Company at the time any
such purchase may occur, because such purchase could cause a breach of certain
covenants contained in such agreements. Such a breach may constitute an event
of default under such indebtedness and thereby restrict the Company's ability
to purchase the Exchange Offer Debentures. See "--Subordination."
PAYMENTS, PAYING AGENTS AND CONVERSION AGENTS
The Exchange Offer Debentures may be surrendered for conversion or
exchange at the corporate trust office of the Trustee in New York City or, at
the option of the holder and subject to applicable laws and regulations, at the
office of any of the conversion agents, if any.
The Company has initially appointed the Trustee as paying agent and
conversion agent. This appointment may be terminated at any time and
additional or other paying and conversion agents may be appointed, provided
that until the Exchange Offer Debentures have been delivered for cancellation,
or monies sufficient to pay the principal of and premium, if any, and interest
on the Exchange Offer Debentures have been made available for payment and
either paid or returned to the Company as provided in the Indenture, a paying,
conversion and transfer agent will be maintained in New York City for the
payment of the principal of and premium, if any, and for the surrender of
Exchange Offer Debentures for conversion. Notice of any such termination or
appointment and of any change in the office through which any paying,
conversion or transfer agent will act will be given in accordance with
"Notices" below.
All monies paid by the Company to the Trustee for the payment of
principal of and premium, if any, or interest on any Debenture that remain
unclaimed at the end of two years after such principal or interest shall have
become due and payable will be repaid to the Company, and the holder of such
Debenture will thereafter look only to the Company for payment thereof.
PAYMENT OF ADDITIONAL AMOUNTS
The Company will pay to the holder of any Debenture who is a United
States Alien (as defined below) such additional amounts ("Additional Amounts")
as may be necessary in order that every net payment of the principal of and
premium, if any, of and interest on such Debenture, and any cash payments made
in lieu of issuing shares of Common Stock upon conversion of a Debenture, after
withholding for or on account of any present or future tax, assessment or
governmental charge imposed upon or as a result of such payment by the United
States or any political subdivision or taxing authority thereof or therein,
will not be less than the amount provided for in such Debenture to be then due
and payable; provided, however, that the foregoing obligations to pay
Additional Amounts shall not apply to any one or more of the following:
(a) any tax, assessment or other governmental charge that would
not have been so imposed but for (i) the existence of any present or
former connection between such holder (or between a fiduciary, settlor,
beneficiary, member of such holder, or a person holding a power over,
such holder, if such holder is an estate or trust, partnership or
corporation) and the United States, including, without limitation, such
holder (or such fiduciary, settlor, beneficiary, member, stockholder or
person holding a power) being or having been a citizen or resident or
treated as a resident thereof or being or having been
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<PAGE> 39
engaged in a trade or business therein or being or having been present
therein or having had a permanent establishment therein, (ii) such
holder's present or former status as a personal holding company, foreign
personal holding company, passive foreign investment company, foreign
private foundation or other foreign tax-exempt entity, or controlled
foreign corporation for United States tax purposes or a corporation which
accumulates earnings to avoid United States Federal income tax, or (iii)
such holder's status as a bank extending credit pursuant to a loan
agreement entered into in the ordinary course of business;
(b) any tax, assessment or other governmental charge that would
not have been so imposed but for the presentation by the holder of such
Debenture for payment on a date more than 10 days after the date on which
such payment became due and payable or on the date on which payment
thereof is duly provided, whichever occurs later;
(c) any estate, inheritance, gift, sales, transfer or personal
property tax or any similar tax, assessment or other governmental charge;
(d) any tax, assessment or other governmental charge that would
not have been imposed but for the failure to comply with certification,
information, documentation or other reporting requirements concerning the
nationality, residence, identity or present or former connection with the
United States of the holder or beneficial owner of such Debenture if such
compliance is required by statute, regulation or ruling of the United
States or any political subdivision or taxing authority thereof as a
precondition to relief or exemption from such tax, assessment or other
governmental charge;
(e) any tax, assessment or other governmental charge that is
payable otherwise than by deduction or withholding from payments of
principal of and premium, if any, or interest on such Debenture;
(f) any tax, assessment or other governmental charge imposed on
interest received by a person holding, actually or constructively, 10
percent or more of the total combined voting power of all classes of
stock of the Company entitled to vote; or
(g) any tax, assessment or other governmental charge required to
be withheld by any paying agent from any payment of principal of, or
premium, if any, or interest on any Debenture if such payment can be made
without such withholding by any other paying agent;
nor will Additional Amounts be paid with respect to payment of the principal
of, or premium, if any or interest on any such Debenture (or cash in lieu of
issuance of shares of Common Stock upon conversion) to a person other than the
sole beneficial owner of such payment, or that is a partnership or a fiduciary,
to the extent such beneficial owner, member of such partnership or beneficiary
or settlor with respect to such fiduciary would not have been entitled to the
Additional Amounts had such beneficial owner, member, beneficiary or settlor
been the holder of such Debenture.
EVENTS OF DEFAULT
An Event of Default with respect to the Exchange Offer Debentures will be
any one of the following events: (a) default in any payment when due of the
principal of any such Debenture, (b) default for 30 days in the payment of any
installment of interest or any required payment of any Additional Amounts on
any such Debenture, (c) default for 60 days after appropriate notice in the
performance of any other covenant of the Company in the Exchange Offer
Debentures or the Indenture with respect to such Exchange Offer Debentures, (d)
certain events of bankruptcy, insolvency or reorganization or (e) acceleration
of, or failure to pay when due upon maturity, any indebtedness for money
borrowed by the Company as to which the Company has at
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<PAGE> 40
least $10,000,000 in aggregate principal amount of indebtedness outstanding,
which acceleration is not rescinded or annulled or which failure is not cured
within 30 days after notice of acceleration or after such failure, as the case
may be. If an Event of Default shall occur and be continuing, any holder of
any such Debenture may, at its option, declare the principal of and accrued
interest on such Debenture to be immediately due and payable.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company may consolidate with, merge into or sell or convey all or
substantially all of its property to, another corporation without the consent
of holders of the Exchange Offer Debentures provided that the successor
corporation assumes all obligations of the Company under the Exchange Offer
Debentures and under the Indenture and, provided further, that if such
successor corporation is not organized under the laws of the United States or
any political subdivision thereof or therein, such successor corporation agrees
to make payments on the Exchange Offer Debentures without deduction or
withholding for any and all then existing or future withholding taxes, levies,
imposts or charges whatsoever imposed by or for the account of the jurisdiction
where such successor corporation is generally subject to taxation or any
political subdivision or taxing authority therein, subject to certain
exceptions and, provided further, that certain other conditions are met. Upon
compliance with these provisions by a successor corporation, the Company would
be relieved of its obligations under the Exchange Offer Debentures and under
the Indenture. Therefore, if such conditions are satisfied, the Company may
consolidate with, merge into or sell or convey its property to the other
corporation. Under certain circumstances described above involving a Change of
Control, each holder of Exchange Offer Debentures may have the right to require
the Company to purchase such Exchange Offer Debentures. See "--Change of
Control."
MEETINGS, MODIFICATION AND WAIVER
The Indenture will contain provisions for convening meetings of the
holders of Exchange Offer Debentures to consider matters affecting their
interests.
The Indenture (including the terms and conditions of the Exchange Offer
Debentures) may be modified or amended by the Company and the Trustee, without
the consent of the holder of any Debenture, for the purposes of (a) adding to
the covenants of the Company for the benefit of the holders of Exchange Offer
Debentures or surrendering any right or power conferred upon the Company, (b)
providing for the conversion and redemption rights of holders of Exchange Offer
Debentures in the event of a consolidation, merger or sale of substantially all
of the assets of the Company, (c) curing any ambiguity or correcting or
supplementing any defective provision contained in the Indenture, (d) making
any other provisions that the Company and the Trustee may deem necessary or
desirable, and that will not adversely affect the interests of the holders of
Exchange Offer Debentures, or (e) evidencing the succession of another
corporation to the Company and the assumption by any successor of the covenants
of the Company in the Indenture or the Exchange Offer Debentures.
Modifications and amendments to the Indenture or to the terms and
conditions of the Exchange Offer Debentures may also be made and any past
default by the Company may be waived, either with the written consent of the
holders of not less than a majority in aggregate principal amount of the
Exchange Offer Debentures at the time outstanding (excluding for purposes of
such calculation the aggregate principal amount of Exchange Offer Debentures
held by the Company or any of its subsidiaries) or by the adoption of a
resolution, at a meeting of holders of the Exchange Offer Debentures at which a
quorum (as defined below) is present and acting throughout, by not less than a
majority in aggregate principal amount of the Exchange Offer Debentures present
or represented at such meeting (excluding for purposes of such calculation the
aggregate principal amount of Exchange Offer Debentures held by the Company or
any of its subsidiaries);
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<PAGE> 41
provided, however, that the amount approving such resolution is not less than
25% of the aggregate principal amount of the Exchange Offer Debentures then
outstanding (excluding for purposes of such calculation the aggregate principal
amount of Exchange Offer Debentures held by the Company or any of its
subsidiaries); and provided further that no such modification or amendment to
the terms and conditions of the Exchange Offer Debentures may, without the
consent or the affirmative vote of the holder of each Debenture affected
thereby (a) waive a default in the payment of principal or premium, if any, or
any installment of interest on any such Debenture; (b) change the stated
maturity of the principal or premium, if any, or any installment of interest on
any such Debenture; (c) reduce the principal amount of or any premium payable
upon redemption of or interest on any such Debenture; (d) change the obligation
of the Company to pay Additional Amounts as described above (except as
otherwise permitted by the Exchange Offer Debentures); (e) change the currency
of payment of such Debenture or interest thereon; (f) adversely affect the
right to convert or redeem any such Debenture; (g) modify the obligations of
the Company to maintain an office or agency in New York City and outside the
United States; (h) modify the subordination provisions of the Exchange Offer
Debentures in a manner adverse to the holders of Exchange Offer Debentures; (i)
reduce the requirements in the Indenture for quorum or voting, or reduce the
percentage in principal amount of outstanding Exchange Offer Debentures the
consent of whose holders is required for any amendment or modification of the
Indenture or the terms and conditions of the Exchange Offer Debentures or the
consent of whose holders is required for any waiver (of compliance with certain
provisions of the Indenture or the Debentures or certain defaults thereunder
and their consequences) provide for in the Exchange Offer Debentures; or (j)
modify the provisions of the Indenture related to amendments of the Exchange
Offer Debentures except to increase any such percentage or to provide that
certain other provisions of the Indenture or the Exchange Offer Debentures
cannot be modified or waived without the consent of the holder of each
outstanding Exchange Offer Debenture affected thereby. The quorum at any
meeting called to adopt a resolution will be the persons holding or
representing a majority in aggregate principal amount of the Exchange Offer
Debentures at the time outstanding (excluding for purposes of such calculation
the aggregate principal amount of Exchange Offer Debentures held by the Company
or any of its subsidiaries) and the quorum at any adjourned meeting will be
persons holding or representing 25% in aggregate principal amount of the
Exchange Offer Debentures at the time outstanding (excluding for purposes of
such calculation the aggregate principal amount of Exchange Offer Debentures
held by the Company or any of its subsidiaries). Any instrument given by or on
behalf of any holder of a Debenture in connection with any consent to any such
modification, amendment or waiver will be irrevocable once given and will be
conclusive and binding on all subsequent holders of such Debenture. Any
modifications, amendments or waivers to the Indenture or to the terms and
conditions of the Exchange Offer Debentures will be conclusive and binding on
all holders of Exchange Offer Debentures, whether or not they have given such
consent or were present at any meeting, and on holders of Exchange Offer
Debentures, whether or not notation of such modifications, amendments or
waivers is made upon the Exchange Offer Debentures.
NOTICES
Notices to holders of the Exchange Offer Debentures will be given by
publication in a leading daily newspaper in the English language of general
circulation in New York City. Such publication is expected to be made in The
Wall Street Journal (Eastern Edition). Such notices will be deemed to have
been given on the date of such publication or mailing or, if published in such
newspapers on different dates, on the date of the first such publication.
REPLACEMENT OF EXCHANGE OFFER DEBENTURES
The Exchange Offer Debentures that become mutilated, destroyed, stolen or
lost will be replaced by the Company at the expense of the holder upon delivery
to the Trustee of the Exchange Offer Debentures or evidence of the loss, theft
or destruction thereof satisfactory to the Company and the Trustee. In the
case of
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<PAGE> 42
a lost, stolen or destroyed Exchange Offer Debenture, an indemnity satisfactory
to the Company and the Trustee may be required at the expense of the holder of
such Debenture before a replacement Debenture will be issued.
GOVERNING LAW
The Exchange Offer Debentures and the Indenture will be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to its choice of law principles.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture.
Reference is made to the Indenture for a full disclosure of all such terms, as
well as any other capitalized terms used herein for which no definition is
provided.
A "Change of Control" will be deemed to have occurred at such time as any
of the following events occurs:
(a) Any person (for purposes of paragraph (a) of this definition
only, the term "person" shall mean a "person" as defined in or for
purposes of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act of
1934 (as defined herein), or any successor provision to either of the
foregoing, including any "group" acting for the purposes of acquiring,
holding or disposing of securities within the meaning of Rule 13d-5(b)(1)
under the Exchange Act of 1934), together with its Affiliates and
Associates (as defined herein) shall file or become obligated to file a
report under or in response to Schedule 13D or 14D-1 (or any successor
schedule, form or report) pursuant to the Exchange Act of 1934 disclosing
that such person has become the beneficial owner (as the term "beneficial
owner" is defined in Rule 13d-3 under the Exchange Act of 1934, or any
successor provision) of either (A) 50% or more of the shares of Common
Stock then outstanding or (B) 50% or more of the total voting power of
all shares of capital stock of the Company then outstanding; provided,
however, that for purposes of paragraph (a) of this definition, a person
shall not be deemed the beneficial owner of (1) any securities tendered
pursuant to a tender offer or exchange offer made by or on behalf of such
person, or its Affiliates or Associates, until such tendered securities
are accepted for purchase or exchange thereunder, or (2) any securities
in respect of which beneficial ownership by such person arises solely as
a result of a revocable proxy delivered in response to a proxy or consent
solicitation that is made pursuant to, and in accordance with, the
Exchange Act of 1934 and the applicable rules and regulations thereunder
and is not then reportable on Schedule 13D (or any successor schedule,
form or report) under the Exchange Act of 1934.
(b) There shall be consummated any sale, transfer, lease or
conveyance of all or substantially all of the properties and assets of
the Company to any other corporation or corporations or other person or
persons (other than a subsidiary of the Company).
(c) There shall be consummated any consolidation of the Company
with or merger of the Company with or into any other corporation or
corporations or entity or entities (whether or not affiliated with the
Company) in which the Company is not the sole surviving or continuing
corporation or pursuant to which the shares of Common Stock outstanding
immediately prior to the consummation of such consolidation or merger are
converted into cash, securities or other property, other than a
consolidation or merger in which the holders of shares of Common Stock
receive, directly or indirectly, (A) 75% or more of the common stock of
the sole surviving or continuing corporation outstanding immediately
following the consummation of such consolidation or merger and (B)
securities representing 75% or more of the combined voting power of the
voting stock of the sole surviving or continuing corporation outstanding
immediately following the consummation thereof of such consolidation or
merger.
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<PAGE> 43
"Senior Indebtedness" of the Company is defined as the principal of and
premium, if any, and interest (including interest accruing on or after the
filing of any petition in bankruptcy or for reorganization relating to the
Company, whether or not a claim for post-filing interest is allowed in such
proceeding) and other monetary obligations on (a) any indebtedness of the
Company (excluding the Debentures and indebtedness ranking pari passu with the
Debentures but including guarantees given by the Company), whether now
outstanding or subsequently created or incurred, for money borrowed, whether or
not evidenced by debentures, notes or similar instruments, issued, incurred or
assumed by the Company, (b) the Company's existing indebtedness (other than
existing subordinated indebtedness), including indebtedness under the Company's
principal revolving bank credit facilities, (c) secured indebtedness and (d)
renewals, extensions, refinancings, refundings, amendments and modifications of
any such indebtedness or obligations or any of the instruments creating or
evidencing such indebtedness or obligations, unless it is provided in any of
the foregoing that such indebtedness is not senior to the Debentures.
"United States" means the United States of America (including the states
and the District of Columbia), its territories, its possessions and other areas
subject to its jurisdiction. The term "United States Alien" means any person
who, for United States Federal income tax purposes, is a foreign corporation, a
nonresident alien individual, an estate or trust the income of which is not
subject to United States Federal income taxation regardless of its source or a
foreign partnership one or more of the members of which is, for United States
Federal income tax purposes, a foreign corporation.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital consists of 20,000,000 shares of Common
Stock, par value $.01 per share (the "Common Stock"). As of June 30, 1996,
there were issued and outstanding 8,614,494 shares of Common Stock that were
held of record by 542 persons.
SELLING SECURITY HOLDERS
The Restricted Debentures were originally issued by the Company in
transactions exempt from the registration requirements of the Securities Act.
The Company subsequently commenced an exchange offer exempt from the
registration requirements of the Securities Act pursuant to which holders of
the Restricted Debentures were offered the opportunity to exchange such
Debentures for an equal principal amount of the Exchange Offer Debentures
issued under the Indenture. The Selling Holders, which term includes their
transferees, pledgees, donees or their successors, may from time to time offer
and sell pursuant to this Prospectus any or all of the Exchange Offer
Debentures or the Conversion Shares.
The following table sets forth, as of July ___, 1996, with respect to
the Selling Holders, the respective principal amounts of the Restricted
Debentures beneficially owned by each Selling Holder that may be exchanged for
the Exchange Offer Debentures which may be offered pursuant to this Prospectus
and the number of Conversion Shares that are issuable upon conversion of the
Restricted Debentures (or the Exchange Offer Debentures) held by such Selling
Holder. Such information has been obtained from the Selling Holders. None of
the Selling Holders has, or within the past three years had, any position,
office or other material relationship with the Company or any of its
predecessors or affiliates, except as noted below. Because the Selling Holders
may offer all or some of the Exchange Offer Debentures or some or all of the
Conversion Shares pursuant to this Prospectus, no estimate can be given as to
the amount of the Exchange Offer Debentures or the Conversion Shares that will
be held by the Selling Holders upon the termination of any such sales. In
addition, the Selling Holders identified below may have sold, transferred or
otherwise disposed
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<PAGE> 44
of all or a portion of their Restricted Debentures since July ___, 1996 in
transactions exempt from the registration requirements of the Securities Act.
<TABLE>
<CAPTION>
Principal Amount of
Selling Holder Restricted Debentures Conversion Shares
- -------------- --------------------- -----------------
<S> <C> <C>
.
.
.
.
.
.
.
.
.
Total:
------------- ----------------
</TABLE>
PLAN OF DISTRIBUTION
The Exchange Offer Debentures and the Conversion Shares may be sold from
time to time to purchasers directly by the Selling Holders. Alternatively, the
Selling Holders may from time to time offer the Exchange Offer Debentures and
the Conversion Shares to or through underwriters, broker-dealers or agents, who
may receive compensation in the form of underwriting discounts, concessions or
commissions from the Selling Holders or the purchasers of the Exchange Offer
Debentures or the Conversion Shares for whom they may act as agents. The
Selling Holders and any underwriters, broker-dealers or agents that participate
in the distribution of the Exchange Offer Debentures or the Conversion Shares
may be deemed to be "underwriters," as such term is defined in Section 2(11) of
the Securities Act and any profit on the sale of the Exchange Offer Debentures
or the Conversion Shares by them and any discounts, commissions, concessions or
other compensation received by any such underwriter, broker-dealer or agent may
be deemed to be underwriting discounts and commissions under the Securities
Act.
The Exchange Offer Debentures and the Conversion Shares may be sold by
the Selling Holders from time to time, in one or more transactions at fixed
prices, at prevailing market prices at the time of sale, at varying prices
determined at the time of sale or at negotiated prices. Such prices will be
determined by the Selling Holders. The sale of the Exchange Offer Debentures
and the Conversion Shares may be effected in transactions (i) on any national
securities exchange or quotation service on which the Exchange Offer Debentures
or the Conversion Shares may be listed or quoted at the time of sale, (ii) in
the over-the-counter market, (iii) in transactions otherwise than on such
exchanges or in the over-the-counter market or (iv) through the writing of
options. At the time a particular offering of the Exchange Offer Debentures or
the Conversion Shares is made, if required, a prospectus supplement will be
distributed that will set forth the
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<PAGE> 45
names of the Selling Holders, the aggregate amount and type of the Exchange
Offer Debentures and the Conversion Shares, the number of such securities owned
prior to and after the completion of any such offering, and, to the extent
required, the terms of the offering, including the name or names of any
underwriters, broker-dealers or agents, any discounts, commissions and other
terms constituting compensation from the Selling Holders and any discounts,
commissions or concessions allowed or reallowed or paid to broker-dealers.
To comply with the securities laws of certain jurisdictions, if
applicable, the Exchange Offer Debentures and the Conversion Shares will be
offered or sold in such jurisdictions only through registered or licensed
broker- dealers. In addition, in certain jurisdictions, the Exchange Offer
Debentures and the Conversion Shares may not be offered or sold unless they
have been registered or qualified for sale in such jurisdictions or an
exemption from registration or qualification is available and is complied
therewith.
Under applicable rules and regulations under the Exchange Act, any person
engaged in a distribution of the Exchange Offer Debentures and the Conversion
Shares may be limited in its ability to engage in market activities with
respect to such Exchange Offer Debentures and the Conversion Shares. In
addition, without limitation on the foregoing, each Selling Holder will be
subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, which provisions may limit the timing of purchases and
sales by the Selling Holders of any of the Exchange Offer Debentures and the
Conversion Shares. All of the foregoing may affect the marketability of the
Exchange Offer Debentures and the Conversion Shares.
All expenses of the registration of the Exchange Offer Debentures and the
Conversion Shares will be paid by the Company, including, without limitation,
Commission filing fees and expenses of compliance with state securities or
"blue sky" laws; provided, however, that the Selling Holders will pay all
underwriting discounts and selling commissions, if any. The Selling Holders
will be indemnified by the Company against certain civil liabilities, including
certain liabilities under the Securities Act, or will be entitled to
contribution in connection therewith. The Company will be indemnified by the
Selling Holders against certain civil liabilities, including certain
liabilities under the Securities Act, or will be entitled to contribution in
connection therewith.
LEGAL MATTERS
The validity of the Exchange Offer Debentures and the Conversion Shares
will be passed upon for the Company by Miles & Stockbridge, A Professional
Corporation, 10 Light Street, Baltimore, Maryland 21202.
EXPERTS
The consolidated financial statements of the Company included in this
Prospectus and incorporated by reference to the Company's Annual Report on Form
10-KSB/A as of June 30, 1994 and 1995 and for each of years ended June 30,
1993, 1994 and 1995 have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report theron included therein and
incorporated herein by reference. Such financial statements have been included
herein and incorporated herein by reference in reliance upon the authority of
such firm as experts in accounting and auditing in giving said report.
The financial statements of Tampa Bay Academy, Ltd. as of and for the
years ended December 31, 1993, 1994 and 1995 incorporated in this Prospectus
by reference to the Company's Current Reports on Form 8-K dated March 27, 1996,
have been audited by Bair, Rupp, Simpson & Zorger, Inc., independent public
accountants, as indicated in their report with respect thereto, and are
incorporated by reference herein in reliance upon the authority of said firm as
experts in giving said report.
The financial statements of Desert Hills Center for Youth and Families,
Inc. as of and for the year ended June 30, 1995 incorporated in this Prospectus
by reference to the Company's Current Report on Form 8-K dated July 19, 1995,
as amended by Forms 8-K/A dated September 25, 1995 and October 2, 1995, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are incorporated by
reference herein in reliance upon the authority of said firm as experts in
giving said report. The financial statements of Desert Hills Center for Youth
and Families, Inc. and of and for the years ended June 30, 1993 and 1994
incorporated in this Prospectus by reference to the Company's Current Report on
Form 8-K dated July 19, 1995, as amended by Forms 8-K/A dated September 25,
1995 and October 2, 1995, have been audited by Addison, Roberts and Ludwig,
P.C., independent public accountants, as indicated in their report with respect
thereto, and are incorporated by reference herein in reliance upon the authority
of said firm as experts in giving said report.
The financial statements of Prestige Developments, Inc. as of and for the
years ended December 31, 1991 and 1992 incorporated in this Prospectus by
reference to the Company's Registration Statement on Form SB-2 as filed on
November 19, 1993 and thereafter amended, have been audited by Endorf Lurken
Olson & Co., independent public accountants, as indicated in their report with
respect thereto, and are incorporated by reference herein in reliance upon the
authority of said firm as experts in giving said report.
- 43 -
<PAGE> 46
At a meeting held on October 9, 1993, the Board of Directors of the
Company ratified the engagement of Arthur Andersen LLP as its independent
auditors for the fiscal year ending June 30, 1993 to replace the firm of Ernst
& Young who declined to stand for reelection as auditors of the Company by
mutual consent of the parties.
The reports of Ernst & Young on the Company's financial statements for
the years ended December 31, 1992 and 1991 (prior to the change in the
Company's fiscal year end) did not contain an adverse opinion or a disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope,
or accounting principles.
In connection with the audits of the Company's financial statements for
each of the two fiscal years ended December 31, 1991 and December 31, 1992, and
in the subsequent interim period, there were no disagreements with Ernst &
Young on any matters of accounting principles or practices, financial statement
disclosure, or auditing scope and procedures that, if not resolved to the
satisfaction of Ernst & Young would have caused Ernst & Young to make reference
to the matter in their report.
- 44 -
<PAGE> 47
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF YOUTH SERVICES INTERNATIONAL, INC. F-2
Report of Independent Public Accountants F-3
Balance Sheets F-4
Statements of Operations F-5
Statements of Shareholders' Equity (Deficit) F-7
Statements of Cash Flows F-9
Notes to Consolidated Financial Statements F-11
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF YOUTH SERVICES INTERNATIONAL, INC. F-29
Statements of Income F-30
Balance Sheets F-31
Statements of Cash Flows F-33
Notes to Unaudited Consolidated Financial Statements F-35
UNAUDITED FINANCIAL STATEMENTS OF TAMPA BAY ACADEMY, LTD. F-37
Balance Sheet F-38
Statements of Operations F-39
Statements of Partners' Capital F-40
Statements of Cash Flows F-41
Notes to Unaudited Financial Statements F-42
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN RESIDENTIAL CENTERS, INC. F-43
Balance Sheet F-44
Statement of Income F-45
Statements of Stockholders' Equity F-46
Statements of Cash Flows F-47
Notes to Unaudited Consolidated Financial Statements F-48
PRO FORMA FINANCIAL STATEMENTS F-49
Introduction to Pro Forma Consolidated Financial Statements F-49
Pro Forma Consolidated Statements of Income F-50
Notes to Pro Forma Consolidated Statements of Income F-52
</TABLE>
F-1
<PAGE> 48
YOUTH SERVICES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1994 AND 1995 AND
FOR THE YEARS ENDED JUNE 30, 1993, 1994 AND 1995
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
F-2
<PAGE> 49
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,
1994 and 1995, and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for the years ended June 30,
1993, 1994 and 1995. 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, 1994 and 1995, and the
results of their operations and their cash flows for the years ended June 30,
1993, 1994 and 1995, in conformity with generally accepted accounting
principles.
Baltimore, Maryland,
September 5, 1995
F-3
<PAGE> 50
Page 1 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1994 AND 1995
ASSETS
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 3,816,000 $ 784,000
Cash held in escrow (Note 19) - 2,543,000
Restricted cash (Notes 1 and 10) 221,000 656,000
Accounts receivable, net of allowance for doubtful
accounts of $100,000 and $175,000, respectively
(Notes 1, 2, 4, 13 and 19) 4,402,000 8,804,000
Tax refund receivable 177,000 40,000
Prepaid expenses and supplies 217,000 1,224,000
Deferred tax asset (Notes 1 and 12) 156,000 -
------------- -------------
Total current assets 8,989,000 14,051,000
------------- -------------
PROPERTY, EQUIPMENT AND IMPROVEMENTS
(Notes 1, 2 and 4):
Land 307,000 307,000
Leasehold improvements 753,000 2,280,000
Program equipment 591,000 1,135,000
Buildings 2,164,000 2,164,000
Office furniture and equipment 1,051,000 1,738,000
Vehicles 366,000 1,354,000
------------- -------------
5,232,000 8,978,000
Less- Accumulated depreciation (562,000) (1,726,000)
------------- -------------
4,670,000 7,252,000
------------- -------------
OTHER ASSETS (Notes 1, 12, 14 and 19):
Deposits 139,000 204,000
Organization costs, net 26,000 29,000
Deferred debt issue costs and other, net 45,000 190,000
Goodwill, net 3,897,000 5,874,000
Non-compete agreements, net 139,000 116,000
Deferred tax asset 225,000 392,000
Management fee receivable - 510,000
Other assets - 432,000
------------- -------------
4,471,000 7,747,000
------------- -------------
Total assets $ 18,130,000 $ 29,050,000
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE> 51
Page 2 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1994 AND 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 667,000 $ 1,927,000
Accrued payroll 1,086,000 538,000
Other accrued expenses (Notes 1, 9 and 10) 979,000 1,121,000
Short-term borrowings (Note 2) - 568,000
Current portion of long-term debt and capital lease
obligations (Notes 4 and 5) 179,000 133,000
Deferred tax liability (Notes 1 and 12) - 38,000
------------- -------------
Total current liabilities 2,911,000 4,325,000
DEFERRED REVENUE (Note 1) 113,000 102,000
LONG-TERM DEBT, less current portion (Note 4) 324,000 5,978,000
CAPITAL LEASE OBLIGATIONS, less current portion (Note 5) 2,000 3,000
12% SUBORDINATED DEBENTURES, net of unamortized
original issue discount of $35,000 and $26,000, respectively,
including debentures in the principal amount of $580,000,
held by shareholders or their close relatives (Note 3) 965,000 974,000
COMMITMENTS AND CONTINGENCIES (Notes 1, 7 and 8)
------------- -------------
Total liabilities 4,315,000 11,382,000
------------- -------------
SHAREHOLDERS' EQUITY (Notes 11 and 18):
Common stock, $.01 par value:
authorized shares - 20,000,000, issued and
outstanding 7,577,014 at June 30, 1994 and
8,056,081 at June 30, 1995, respectively 76,000 81,000
Additional paid-in capital 14,668,000 16,337,000
Accumulated (deficit) earnings (929,000) 1,250,000
------------- -------------
Total shareholders' equity 13,815,000 17,668,000
------------- -------------
Total liabilities and shareholders' equity $ 18,130,000 $ 29,050,000
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-5
<PAGE> 52
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
------------- ------------- -------------
<S> <C> <C> <C>
REVENUES (Notes 1, 16 and 19):
Program $ 8,827,000 $ 34,726,000 $ 52,162,000
Grant - 26,000 -
Consulting services and other 68,000 140,000 925,000
------------- ------------- -------------
8,895,000 34,892,000 53,087,000
------------- ------------- -------------
OPERATING EXPENSES (Notes 9, 13 and 16):
Program 8,390,000 29,533,000 44,374,000
Program start-up costs 392,000 40,000 280,000
Amortization of goodwill 7,000 286,000 583,000
Selling, general and administrative 1,595,000 2,731,000 4,097,000
------------- ------------- -------------
10,384,000 32,590,000 49,334,000
------------- ------------- -------------
(Loss) income from operations (1,489,000) 2,302,000 3,753,000
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest expense (173,000) (403,000) (268,000)
Interest income 8,000 51,000 50,000
Other income (expense) (17,000) 2,000 (24,000)
------------- ------------- -------------
(182,000) (350,000) (242,000)
------------- ------------- -------------
(Loss) income before income tax (expense)
benefit (1,671,000) 1,952,000 3,511,000
Income tax (expense) benefit (Note 12) - 140,000 (1,332,000)
------------- ------------- -------------
Net (loss) income $ (1,671,000) $ 2,092,000 $ 2,179,000
============= ============= =============
(Loss) earnings per common and common
equivalent share $ (0.27) $ 0.29 $ 0.26
============= ============= =============
Weighted average common and common
equivalent shares outstanding 6,271,203 7,093,510 8,264,320
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 53
Page 1 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1993, 1994 AND 1995
(Notes 3, 11, 12 and 18)
<TABLE>
<CAPTION>
Total
Additional Accumulated Shareholders'
Common Paid-in (Deficit) Equity
Stock Capital Earnings (Deficit)
----------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
BALANCE, June 30, 1992 $ 46,000 $ 1,788,000 $ (1,350,000) $ 484,000
Issuance of 78,000 shares at
$.67 per share and 108,999
shares at $2.00 per share, net
of issuance costs of $19,000 2,000 249,000 - 251,000
Issuance of 50,001 shares of
common stock at $2.00 per
share in connection with
Forest Ridge acquisition 1,000 99,000 - 100,000
Issuance of 66,920 shares of
common stock at $.57 per
share under the Employee
Stock Purchase Plan 1,000 37,000 - 38,000
Issuance of warrants to purchase
231,900 shares of common stock
(exercisable at $3.23 per share) - 50,000 - 50,000
Net loss - - (1,671,000) (1,671,000)
----------- ------------- ------------- -------------
BALANCE, June 30, 1993 50,000 2,223,000 (3,021,000) (748,000)
Repurchase of 5,294 shares of
common stock, at $2.00 - (11,000) - (11,000)
Tax benefit realized due to exercise
of employee stock options - 108,000 - 108,000
Issuance of 1,950,000 shares at
$6.67 per share, net of issuance
costs of $1,696,000, in connection
with initial public offering 20,000 11,284,000 - 11,304,000
Issuance of common stock
as follows:
91,500 shares at $.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 6,000 1,064,000 - 1,070,000
Net income - - 2,092,000 2,092,000
----------- ------------- ------------- -------------
BALANCE, June 30, 1994 76,000 14,668,000 (929,000) 13,815,000
----------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE> 54
Page 2 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1993, 1994 AND 1995
(Notes 3, 11, 12 and 18)
<TABLE>
<CAPTION>
Total
Additional Accumulated Shareholders'
Common Paid-in (Deficit) Equity
Stock Capital Earnings (Deficit)
----------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
BALANCE, June 30, 1994 $ 76,000 $ 14,668,000 $ (929,000) $ 13,815,000
Tax benefit realized due to exercise
of employee stock options - 554,000 - 554,000
Issuance of common stock as
follows:
182,499 shares at $.67, 8,000
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 5,000 1,115,000 - 1,120,000
Net income - - 2,179,000 2,179,000
----------- ------------- ------------- -------------
BALANCE, June 30, 1995 $ 81,000 $ 16,337,000 $ 1,250,000 $ 17,668,000
=========== ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE> 55
Page 1 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ (1,671,000) $ 2,092,000 $ 2,179,000
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Depreciation and amortization 163,000 799,000 1,841,000
Gain on disposal of property, equipment and
improvements - (13,000) -
(Increase) decrease in deferred taxes, net - (381,000) 27,000
Tax benefit realized due to exercise of employee
stock options - 108,000 554,000
Net change in operating assets and liabilities 61,000 (2,214,000) (8,578,000)
------------- ------------- -------------
Net cash (used in) provided by operating activities (1,447,000) 391,000 (3,977,000)
------------- ------------- -------------
INVESTING ACTIVITIES:
Purchases of property, equipment and
improvements (551,000) (2,522,000) (3,521,000)
Proceeds from sale of property, equipment
and improvements - 25,000 -
Organization costs (17,000) (4,000) (10,000)
Goodwill - (245,000) (1,827,000)
Noncompete agreement - - (40,000)
------------- ------------- -------------
Net cash used in investing activities (568,000) (2,746,000) (5,398,000)
------------- ------------- -------------
FINANCING ACTIVITIES:
Proceeds from short-term borrowings 225,000 710,000 202,000
Proceeds from borrowings on long-term debt 918,000 - 5,350,000
Issuance of 12% subordinated debentures 950,000 - -
Repayments of short-term borrowings, long-term
debt and capital lease obligations (123,000) (7,565,000) (238,000)
Proceeds from the issuance of common stock,
net 251,000 - -
Proceeds from issuance of warrants 50,000 - -
Proceeds from Initial Public Offering, net - 11,304,000 -
Proceeds from issuance of common stock under
the Employee Stock Purchase Plan, net 38,000 384,000 394,000
Repurchase of common stock - (11,000) -
Debt financing costs - - (91,000)
Proceeds from issuance of common stock
under the Stock Option Plan, net - 686,000 726,000
------------- ------------- -------------
Net cash provided by financing activities 2,309,000 5,508,000 6,343,000
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH 294,000 3,153,000 (3,032,000)
CASH, beginning of year 369,000 663,000 3,816,000
------------- ------------- -------------
CASH, end of year $ 663,000 $ 3,816,000 $ 784,000
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-9
<PAGE> 56
Page 2 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1993, 1994 AND 1995
<TABLE>
<CAPTION>
1993 1994 1995
------------- ------------- -------------
<S> <C> <C> <C>
CHANGES IN OPERATING ASSETS AND
LIABILITIES:
Cash held in escrow $ - $ - $ (2,543,000)
Restricted cash (51,000) (170,000) (435,000)
Accounts receivable (1,305,000) (2,730,000) (4,187,000)
Tax refund receivable - (177,000) 137,000
Prepaid expenses and supplies (57,000) (70,000) (948,000)
Deposits (52,000) (76,000) (65,000)
Deferred debt issue costs and other (19,000) (25,000) (69,000)
Management fee receivable - - (510,000)
Other long-term assets - - (432,000)
Accounts payable 418,000 6,000 1,122,000
Accrued payroll 390,000 636,000 (790,000)
Accrued transition costs 213,000 (213,000) -
Other accrued expenses 374,000 605,000 142,000
Deferred revenue 150,000 - -
------------- ------------- -------------
Net change in operating assets and liabilities $ 61,000 $ (2,214,000) $ (8,578,000)
============= ============= =============
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest $ 173,000 $ 403,000 $ 268,000
============= ============= =============
Cash paid for taxes $ - $ 310,000 $ 655,000
============= ============= =============
Noncash net asset acquisition through
assumption of liabilities, notes payable,
bank loan and mortgage assumption $ - $ 4,260,000 $ 1,440,000
============= ============= =============
Noncash reduction of accounts receivable
through application of advance payments
for services $ - $ 37,000 $ 38,000
============= ============= =============
Noncash acquisition of leasehold improvements
through a note payable $ - $ - $ 79,000
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-10
<PAGE> 57
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1993, 1994 AND 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Organization
Youth Services International, Inc. (YSI, Inc.) and its subsidiaries
(collectively, "the Company") are organized to manage and operate a broad range
of education and behavior change programs for troubled youths. The Company
commenced the operation of its first program in February, 1992.
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); Western Youth, Inc. (WY); 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); Southwestern Children's Health Services (SWCHS) and its wholly-owned
subsidiaries Promise House, Inc. and Developmental Behavioral Consultants, Inc.
(DBC). YSICI and SWCHS began operations during fiscal 1995 and, as such, had
no operating activity through June 30, 1994. Significant intercompany accounts
and transactions have been eliminated in consolidation.
YSII, YSINI, YSISD and Touchstone, a division of SWCHS, manage and operate
programs that provide rehabilitative services to troubled youths in Iowa, South
Dakota and Arizona under contracts with Clarinda Youth Corporation (CYC),
Estherville Youth Corporation (EYC), Missouri River Adolescent Development
Center (MRADC) and Touchstone Community, Inc. (TCI), respectively. CYC and EYC
are Iowa not-for-profit entities, MRADC is a South Dakota not-for-profit entity
and TCI is an Arizona not-for-profit entity. These not-for-profit entities
hold contracts with the state of Iowa, South Dakota and Arizona, respectively,
to provide such services and choose to subcontract this management
responsibility to YSII, YSINI, YSISD and Touchstone. CYC, EYC, MRADC and TCI
are each controlled by independent Boards of Directors which have the right to
terminate their contract with YSII, YSINI, YSISD and Touchstone, respectively,
under certain circumstances. The accompanying consolidated balance sheets
include net accounts receivable pursuant to these contracts of $2,438,000 and
$3,753,000, as of June 30, 1994 and 1995, respectively.
The Company is currently negotiating contracts and recruiting students to begin
operations of YSICI in Central Iowa. The Company expects program operations to
begin during the first quarter of fiscal 1996.
F-11
<PAGE> 58
Revenue Recognition and Contract Provisions
The Company's programs are typically provided pursuant to contracts with
governmental entities. YSIT, YSIM, YSIU, WY, Promise House and DBC operate
under fixed per diem contracts based upon program occupancy. Revenues on fixed
per diem contracts are recognized as the services are performed.
YSIB 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.
The YSIM contract provides 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. 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 $157,000
and $349,000 as of June 30, 1994 and 1995, respectively, and is included in
restricted cash and other accrued expenses in the accompanying consolidated
balance sheets.
YSII, YSINI, YSISD and Touchstone operate under management contracts with CYC,
EYC, MRADC and TCI, respectively. Revenues related to these management
contracts are recognized as the services are performed.
Contract terms generally range from one to five years in duration and expire at
various dates through June 1998. 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.
Parc Place, a division of SWCHS, provides inpatient and outpatient chemical
dependency and behavioral health programs for adolescents under various third
party payor contractual reimbursement programs. Revenues related to these
contractual reimbursement programs are recognized as services are performed.
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.
Concentration of Credit Risk
Accounts receivable are uncollateralized and are due primarily from state and
local governments and not-for-profit entities under contracts.
Property, Equipment and Improvements
Property and equipment is recorded at cost and is depreciated using the
straight-line method over estimated useful lives, or if leasehold improvements,
over the term of the related lease, if shorter.
F-12
<PAGE> 59
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
and other
Goodwill 10 years
Non-compete agreements 3-5 years
Purchase Option 5 years
Management Services Contract 5 years
</TABLE>
Amortization expense for the years ended June 30, 1993, 1994 and 1995 was
$24,000, $341,000 and $676,000, respectively. Accumulated amortization at June
30, 1995 was $1,042,000.
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 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 12).
F-13
<PAGE> 60
2. 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 cancelled in fiscal 1995 and replaced with the
line of credit facility described in Note 4. During fiscal year 1995, the
Company entered into a line of credit agreement with a bank, under which it may
borrow up to $80,000. Amounts drawn under this line of credit bear interest at
10% and are payable on demand. The line is guaranteed by the former owners of
DBC (see Note 14).
Borrowings information for the fiscal years ended June 30, 1994 and 1995, is as
follows:
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Balance as of end of year $ - $ 70,000
Maximum amount outstanding during the year 275,000 3,070,000
Average outstanding month-end balance during the
year 183,000 820,000
Weighted average interest rate during the year 7.8% 9.4%
</TABLE>
Term Loan
During fiscal 1994, the Company entered into a term loan arrangement with a
bank, under which it borrowed $500,000. The term loan bore interest at prime
plus 1.5% and was paid off during fiscal 1994.
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 bears interest at 8.678% and provides for monthly
payments of principal plus accrued interest through November 1, 1996. The
unpaid principal balance was $58,000 as of June 30, 1995.
During fiscal 1995, the Company issued a short-term promissory note in
connection with its purchase of DBC (see Note 14). The note is non-interest
bearing with a face value of $450,000. The note has been discounted to
$440,000 using an imputed interest rate of 8%. The note is payable in full
September 1995.
F-14
<PAGE> 61
3. 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 154,600
shares of common stock at an exercise price of $4.85 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.
4. LONG-TERM DEBT:
Long-term debt consists of the following at June 30:
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<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 accounts receivable and cash balances on
deposit, bearing interest at the prime rate or LIBOR plus 2.25%,
(8.3%). $ - $ 5,300,000
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. - 7,000
DBC Purchase Note (Note 14):
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. - 393,000
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. 135,000 105,000
</TABLE>
F-15
<PAGE> 62
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
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%, principal and interest due in
annual installments through October 1997.
$ 194,000 $ 148,000
Forest Ridge Purchase Note (Note 14):
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. 92,000 70,000
Western Youth Notes (Note 14):
Notes payable to various individuals, bearing interest at 8%,
paid in full during fiscal 1995. 50,000 -
Other:
Note payable to Tarkio Development Group, bearing interest at 3%
per annum, principal and interest due August 1997.
- 50,000
------------- -------------
471,000 6,073,000
Less: Current portion 147,000 95,000
------------- -------------
Total $ 324,000 $ 5,978,000
============= =============
</TABLE>
Borrowings information with respect to the revolving line of credit for the
fiscal year ended June 30, 1995, is as follows:
<TABLE>
<S> <C>
Balance as of end of year $ 5,300,000
Maximum amount outstanding during the year 5,300,000
Average outstanding month-end balance during the
year 5,300,000
Weighted average interest rate during the year 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, 1995, the Company was in compliance with these
covenants.
F-16
<PAGE> 63
The aggregate maturities of long-term debt at June 30, 1995, are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended June 30,
--------------------------
<S> <C>
1996 $ 95,000
1997 5,645,000
1998 273,000
1999 15,000
2000 15,000
2001 and thereafter 30,000
-------------
Total $ 6,073,000
=============
</TABLE>
5. CAPITAL LEASE OBLIGATIONS:
The Company leases computer and office equipment under capital leases expiring
through fiscal 1997. Included in property, equipment and improvements at June
30, 1995, is $44,000 related to these leases, net of accumulated amortization
of $109,000.
Future minimum lease payments, by year and in the aggregate, under capital
lease obligations are as follows:
<TABLE>
<CAPTION>
Fiscal Year
Ended June 30,
--------------
<S> <C>
1996 $ 41,000
1997 3,000
-------------
44,000
Less- Amounts representing interest 3,000
-------------
41,000
Less- Current portion 38,000
-------------
$ 3,000
=============
</TABLE>
6. 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 and 1995, the Company expensed $72,000 and $115,000, respectively,
in matching contributions and administrative fees related to the Plan.
F-17
<PAGE> 64
7. COMMITMENTS:
The Company has operating leases for equipment and office space. Future
minimum annual rents under noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
Fiscal Year
Ended June 30,
--------------
<S> <C>
1996 $ 1,180,000
1997 796,000
1998 555,000
1999 491,000
2000 454,000
2001 and thereafter 1,048,000
-------------
Total $ 4,524,000
=============
</TABLE>
Rent expense for the fiscal years ended June 30, 1993, 1994 and 1995, was
$249,000, $353,000 and $940,000, respectively.
8. 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.
9. 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,
1994 and 1995, were $209,000 and $275,000, respectively, and are included in
other accrued expenses in the accompanying consolidated balance sheets.
Self-insurance activity for the years ended June 30, 1994 and 1995, is
summarized below:
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Balance, beginning of year $ - $ 209,000
Claims expense 804,000 2,368,000
Claims payments (595,000) (2,302,000)
------------- -------------
Balance, end of year $ 209,000 $ 275,000
============= =============
</TABLE>
F-18
<PAGE> 65
10. 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.
11. 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 750,000 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 500,000 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 50,000 shares of common stock to nonemployee members
of the Board of Directors. The 1995 Director Stock Option Plan provides for
the granting of 5,000 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-19
<PAGE> 66
The following table summarizes the option activity under the Stock Option
Plans.
<TABLE>
<CAPTION>
1995 Director Stock
1992 Stock Option Plan 1995 Stock Option Plan Option Plan
--------------------------- --------------------------- ----------------------------
1994 1995 1995 1995
------------ ------------ ------------ ------------
Option Price Number Number Option Price Number Option Price Number
Per Share of Shares of Shares Per Share of Shares Per Share of Shares
----------- ------------ ------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Granted and
outstanding $ .67 723,599 528,501 $ 8.45 84,511 $4.17 15,000
1.67 53,250 45,250 11.25 265,425 4.42 22,500
2.00 196,500 143,001 15.20 199,500 - -
5.25 13,500 13,500 - - - -
5.33 26,500 26,501 - - - -
------------ ------------ ----------- -----------
1,013,250 756,753 549,436 37,500
============ ============ =========== ===========
Cancelled 2.00 (33,750) (5,001) - - - -
5.25 - (3,000) - - - -
------------ ------------ ----------- -----------
(33,750) (8,001) - -
============ ============ =========== ===========
Exercised .67 (91,500) (182,499) 8.45 (148,476) - -
1.33 (7,500) - - - - -
1.67 - (7,999) - - - -
2.00 (11,750) (38,499) - - - -
------------ ------------ ----------- -----------
(110,250) (228,997) (148,476) -
============ ============ =========== ===========
Available for
granting 1,500 28,999 52,087 37,500
============ ============ =========== ===========
Exercisable .67 446,005 523,501 8.45 50,647 4.17 15,000
1.67 45,251 41,250 11.25 265,425 4.42 22,500
2.00 60,250 48,249 - - - -
5.33 - 8,832 - - - -
------------ ------------ ----------- -----------
551,506 621,832 316,072 37,500
============ ============ =========== ===========
</TABLE>
Stock Purchase Plans
In fiscal 1993, the Board of Directors approved the establishment of the Youth
Services International, Inc. 1994 Employee Stock Purchase Plan (the 1994 Stock
Purchase Plan), under which the Company was authorized to grant to eligible
employees opportunities to purchase 300,000 shares of common stock beginning
July 1, 1993. The 1994 Stock Purchase Plan allowed for the purchase of common
stock at 85% of the fair market value of the common stock at the date of grant.
In fiscal 1994, the Board of Directors approved the establishment of the Youth
Services International, Inc. 1995 Employee Stock Purchase Plan (the 1995 Stock
Purchase Plan). Under the 1995 Stock Purchase Plan, the Company was authorized
to grant to eligible employees opportunities to purchase 225,000 shares of
common stock beginning July 1, 1994. The 1995 Stock Purchase Plan allowed for
the purchase of common stock at 85% of the fair market value of the common
stock at the date of grant.
F-20
<PAGE> 67
The following table summarizes the activity under the Stock Purchase Plans:
<TABLE>
<CAPTION>
1994 Stock Purchase Plan 1995 Stock Purchase Plan
---------------------------- ----------------------------
Share Number Share Number
Price of Shares Price of Shares
--------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Granted $1.70 170,412 $3.40 4,600
2.83 29,145 4.18 115,649
4.53 6,906 5.31 5,848
------------- -------------
206,463 126,097
============= =============
Exercised 1.70 170,200 3.40 2,797
2.83 29,075 4.18 95,196
4.53 6,885 5.31 3,600
------------- -------------
206,160 101,593
============= =============
Forfeited 93,525 95,902
============= =============
</TABLE>
12. INCOME TAXES:
The income tax (expense) benefit for the fiscal year ended June 30, 1994 and
1995, included the following components:
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Federal income tax benefit (expense) $ 125,000 $ (1,110,000)
State income tax benefit (expense) 15,000 (222,000)
------------- -------------
Total $ 140,000 $ (1,332,000)
============= =============
Current income tax expense $ (241,000) $ (1,305,000)
Deferred income tax benefit (expense) 381,000 (27,000)
------------- -------------
Total $ 140,000 $ (1,332,000)
============= =============
</TABLE>
There was no provision for income taxes for the fiscal year ended June 30,
1993.
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
(loss) before income tax expense is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------------- ------------- -------------
<S> <C> <C> <C>
Income tax provision (benefit) at federal
statutory rate (34.0)% 34.0% 34.0%
State income taxes, net of federal income
tax effect (4.6) 5.0 4.6
Change in valuation allowance 38.6 (44.8) -
Other 0.0 (1.4) (.7)
---------- ---------- ----------
Total 0.0% (7.2)% 37.9%
========== ========== ==========
</TABLE>
F-21
<PAGE> 68
Deferred tax assets (liabilities) are comprised of the following as of June 30:
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Net operating loss carryforwards $ 257,000 $ 242,000
Depreciation and amortization 18,000 147,000
Accounts receivable valuation 39,000 53,000
Medical self-insurance accrual 65,000 88,000
Start-up losses 13,000 89,000
Prepaid expenses (8,000) (41,000)
Finders fee (23,000) (2,000)
Prepaid supplies - (180,000)
Program contract reserves 20,000 8,000
Accrued expenses - (50,000)
------------- -------------
Deferred tax asset $ 381,000 $ 354,000
============= =============
</TABLE>
At June 30, 1995, the Company had net operating loss carryforwards of
approximately $406,000 and $2,084,000 for federal and state income tax
purposes, respectively, that expire through 2010.
13. RELATED PARTY TRANSACTIONS:
Included in selling, general and administrative expenses for fiscal 1993, 1994
and 1995 are $137,000, $-0- and $-0-, respectively, paid to certain of the
Company's shareholders in exchange for consulting services.
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 youths
pursuant to an informal agreement with a not-for-profit entity. The Company's
president 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. 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 as of June 30, 1995 and are included in
accounts receivable in the accompanying consolidated balance sheets.
14. ACQUISITIONS:
Forest Ridge Community Youth Services
Effective February 1, 1993, the Company purchased the assets of a sole
proprietorship which operated under the trade name Forest Ridge Community Youth
Services (Forest Ridge). Forest Ridge is a provider of juvenile residential
and emergency shelter rehabilitative services in Estherville, Iowa. The
Company purchased substantially all of the assets of Forest Ridge for $77,500
in cash, 33,334 shares of the Company's common stock and two notes payable with
a net present value of $1,590,000 (see Note 4). The purchase method of
accounting was used to record the transaction.
F-22
<PAGE> 69
The fair market values assigned to the purchased assets are as follows:
<TABLE>
<S> <C>
Land $ 102,000
Equipment 134,000
Buildings 1,231,000
Vehicles 83,000
Non-compete agreement 100,000
Goodwill 117,000
-------------
$ 1,767,000
=============
</TABLE>
In connection with this purchase, the sellers signed a covenant not to compete
for a period of three years from the date of the transaction closing (see Note
1 for amortization policy).
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 in the
amount of $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:
<TABLE>
<S> <C>
Land $ 189,000
Building 851,000
Equipment 200,000
Non-compete agreement 100,000
Goodwill 3,703,000
-------------
$ 5,043,000
=============
</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.
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).
F-23
<PAGE> 70
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:
<TABLE>
<S> <C>
Leasehold improvements $ 3,000
Office furniture and equipment 120,000
Vehicles 19,000
Prepaid expenses and supplies 30,000
Goodwill 1,085,000
-------------
$ 1,257,000
=============
</TABLE>
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 3 and 4) and the assumption of $405,000 in
liabilities.
F-24
<PAGE> 71
The fair market values assigned to the purchased assets are as follows:
<TABLE>
<S> <C>
Cash $ 233,000
Accounts receivable 389,000
Prepaid expenses and supplies 59,000
Fixed assets 123,000
Goodwill 534,000
-------------
$ 1,338,000
=============
</TABLE>
15. 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 call for payments to the Company of $48,675,000 (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;
however, as of June 30, 1993, revenues and expenses of $489,000 related to
reimbursable transition costs were recognized.
16. REVENUES AND EXPENSES:
Approximately 99% of the Company's revenues for each of the three years ended
June 30, 1995, 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 rehabilitative services to troubled
youths.
The Company earned revenues of 48%, 72% and 76% from state and local
governments and 51%, 27% and 23% from local not-for-profit entities for the
years ended June 30, 1993, 1994 and 1995, respectively.
Salaries and related benefits represented 67%, 67% and 64% of operating
expenses for the years ended June 30, 1993, 1994 and 1995, respectively.
F-25
<PAGE> 72
17. PRO FORMA INFORMATION (UNAUDITED):
Assuming the acquisitions of Prestige, Western Youth, Parc Place and Desert
Hills had been consummated at the beginning of fiscal year 1993, the unaudited
pro forma consolidated results of operations would have been as follows for the
years ended June 30, 1993, 1994 and 1995 (see Notes 14 and 19). 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>
1993 1994 1995
------------- ------------- -------------
<S> <C>
Revenues $ 22,692,000 $ 46,771,000 $ 57,616,000
Net (loss) income (1,916,000) 2,233,000 1,719,000
Net (loss) income per share (.23) .31 .21
Weighted average common and common
equivalent shares outstanding 8,221,203 7,093,510 8,264,320
</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 year 1993. The weighted average common and
common equivalent shares have been adjusted to give effect to the issuance of
the common stock offered in the Company's initial public offering (see Note
18).
Assuming the acquisition of Desert Hills had been consummated on June 30, 1995,
the unaudited pro forma consolidated financial position would have been as
follows. Such information reflects adjustments to record the acquisition of
Desert Hills (see Note 19).
<TABLE>
<S> <C>
Total current assets $ 14,062,000
=============
Total assets $ 36,452,000
=============
Total current liabilities $ 8,192,000
=============
Total liabilities $ 18,784,000
=============
Total shareholders' equity $ 17,668,000
=============
Total liabilities and shareholders' equity $ 36,452,000
=============
</TABLE>
18. INITIAL PUBLIC OFFERING:
On February 3, 1994, the Company sold 1,300,000 shares of common stock at
$10.00 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.
F-26
<PAGE> 73
19. SUBSEQUENT EVENTS:
Effective at the close of business on June 30, 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 $2,629,000 in cash and the assumption of
$4,515,000 in liabilities. In connection with this acquisition, the Company
transferred $2,543,000 into an escrow account as of June 30, 1995. Acquisition
costs of $258,000 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:
<TABLE>
<S> <C>
Cash $ 1,000
Property, equipment and improvements 5,314,000
Prepaid expenses and supplies 10,000
Goodwill 2,077,000
-------------
$ 7,402,000
=============
</TABLE>
Effective at the close of business on June 30, 1995, the Company entered into
an Option Agreement whereby the Company has 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, $3,825,000 in the Company's common stock and the
assumption of up to $1,500,000 in liabilities. 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 $100,000 in additional costs related to the
Option Agreement as of June 30, 1995.
Introspect is a provider of services to behaviorally disturbed and at-risk
children and adolescents. Desert Hills - NV operates a community mental health
center for behaviorally disturbed and at-risk adolescents. Desert Hills - HI
currently is not operational.
Simultaneous with the Option Agreement, the Company entered into a Management
Agreement effective at the close of business on June 30, 1995, pursuant to
which the Company will 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 will 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 consulting services and other in the
accompanying consolidated statements of operations. 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,
F-27
<PAGE> 74
1995, and prior to December 31, 1995 to $100,000 at the expiration of the
Management Agreement if the option is not exercised. The Company has incurred
$332,000 in costs related to the Management Agreement as of June 30, 1995.
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 corresponds to the Option Agreement.
Credit extended under this line of credit will bear interest at prime plus 2%.
No advances had been made under this line of credit as of June 30, 1995.
F-28
<PAGE> 75
YOUTH SERVICES INTERNATIONAL, INC
AND SUBSIDIARIES
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE NINE MONTH PERIODS ENDED MARCH 31, 1995 AND 1996
F-29
<PAGE> 76
YOUTH SERVICES INTERNATIONAL, INC AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in 000's except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------- -------------------
1996 1995 1996 1995
--------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES $ 21,552 $13,818 $61,276 $37,416
--------- ------- ------- -------
OPERATING EXPENSES
Program 17,809 11,449 51,009 30,987
Amortization of goodwill 271 159 749 434
Program preopening and start-up cost 28 - 58 716
Selling, general and administrative 1,246 1,036 4,046 2,982
--------- ------- ------- -------
19,354 12,644 55,862 35,119
--------- ------- ------- -------
Income from operations 2,198 1,174 5,414 2,297
OTHER INCOME (EXPENSE)
Interest expense (691) (72) (1,335) (162)
Other 254 18 33 (18)
--------- ------- ------- -------
(437) (54) (1,302) (180)
--------- ------- ------- -------
INCOME BEFORE INCOME TAXES 1,761 1,120 4,112 2,117
PROVISION FOR INCOME TAXES 657 444 1,603 798
--------- ------- ------- -------
NET INCOME $ 1,104 $ 676 $ 2,509 $ 1,319
========= ======= ======= =======
EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE $ 0.12 $ 0.08 $ 0.28 $ 0.16
========= ======= ======= =======
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 9,349 8,530 8,950 8,373
========= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE> 77
Page 1 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in 000's)
ASSETS
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
--------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash & cash equivalents $ 14,970 $ 784
Cash held in escrow - 2,543
Restricted cash 517 656
Investments available for sale 9,811 -
Accounts receivable, net of allowance for doubtful
accounts of $703 and $175, respectively 15,136 8,804
Tax refund receivable 40 40
Notes receivable 4,273 -
Prepaid expenses, supplies and other 2,272 1,224
--------- --------
Total current assets 47,019 14,051
--------- --------
PROPERTY, EQUIPMENT AND IMPROVEMENTS:
Land 622 307
Leasehold improvements 4,166 2,280
Program equipment 3,392 1,135
Buildings 6,904 2,164
Office furniture and equipment 2,428 1,738
Vehicles 1,136 1,354
--------- --------
18,648 8,978
Accumulated depreciation (2,713) (1,726)
--------- --------
15,935 7,252
--------- --------
OTHER ASSETS:
Deposits 248 204
Other deferred charges 3,311 219
Goodwill, net 10,026 5,874
Consulting agreement 1,673 -
Non-compete agreements, net 303 116
Deferred tax asset 614 392
Management fee receivable 450 510
Other assets, net 213 432
--------- --------
16,838 7,747
--------- --------
Total assets $ 79,792 $ 29,050
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
<PAGE> 78
Page 2 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in 000's)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, June 30,
1996 1995
-------- --------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,190 $ 1,927
Accrued payroll 2,092 538
Other accrued expenses 4,109 1,121
Short-term borrowings 3,250 568
Current portion of long-term debt and
capital lease obligations 796 133
Deferred tax liability 60 38
-------- --------
Total current liabilities 11,497 4,325
DEFERRED REVENUE 47 102
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, net of current portion 8,019 5,981
12% SUBORDINATED DEBENTURES, net of
unamortized discount 981 974
7% CONVERTIBLE SUBORDINATED DEBENTURES 37,950 -
-------- --------
Total liabilities 58,494 11,382
-------- --------
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 20,000,000
authorized shares; issued and outstanding
8,367,597 at March 31, 1996 and
8,056,081 at June 30, 1995 84 81
Additional paid-in capital 17,636 16,337
Unrealized loss on investments (181) -
Retained earnings 3,759 1,250
-------- --------
Total shareholders' equity 21,298 17,668
-------- --------
Total liabilities and shareholders' equity $ 79,792 $ 29,050
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
<PAGE> 79
Page 1 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in 000's)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-----------------------
1996 1995
------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,509 $ 1,319
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 2,255 1,296
Net change in operating assets and liabilities (1,574) (3,093)
Loss on disposal of assets 81 -
------- -------
Net cash provided by (used in) operating activities 3,271 (478)
------- -------
INVESTING ACTIVITIES:
Purchases of property, equipment and improvements, net (7,399) (2,931)
Purchase of available for sale securities (10,112) -
Purchase of notes receivable (4,273) -
Proceeds from sale of assets 378 -
Other deferred charges (3,269) (324)
Non-compete (250) -
Other assets (250) (267)
Purchase of goodwill (2,171) (1,584)
------- -------
Net cash used in investing activities (27,346) (5,106)
------- -------
FINANCING ACTIVITIES:
Proceeds from borrowings 8,206 2,050
Repayments of long-term debt and capital lease obligations (9,197) (168)
Proceeds from the issuance of convertible subordinated
debentures 37,950 -
Proceeds from the issuance of common stock under
the Employee Stock Option Plan and the Employee
Stock Purchase Plan, net 1,302 220
Other - (109)
------- -------
Net cash provided by financing activities 38,261 1,993
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 14,186 (3,591)
CASH AND CASH EQUIVALENTS, beginning of period 784 3,816
------- -------
CASH AND CASH EQUIVALENTS, end of period $14,970 $ 225
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
<PAGE> 80
Page 2 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in 000's)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-----------------------
1996 1995
------- -------
<S> <C> <C>
CHANGE IN OPERATING ASSETS AND LIABILITIES:
Cash held in escrow $ 2,543 $ -
Restricted cash 139 (125)
Accounts receivable (6,387) (3,245)
Tax refund receivable - 126
Prepaid expenses, supplies and other (1,048) (772)
Deferred tax asset (222) (64)
Deposits (44) -
Management fee receivable 60 -
Deferred tax liability 142 -
Accounts payable and accrued expenses 1,800 1,124
Accrued payroll 1,443 (137)
------- -------
Net change in operating assets and liabilities $(1,574) $(3,093)
======= =======
SUPPLEMENTAL DISCLOSURES:
Noncash reduction of accounts receivable through
application of advance payments for services $ 55 $ 29
======= =======
Noncash asset acquisition through notes payable,
bank loan and mortgage assumption $ 9,315 $ 278
======= =======
Noncash unrealized loss on investments available for sale $ 302 $ -
======= =======
Cash paid for interest $ 887 $ 163
======= =======
Cash paid for taxes $ 1,589 $ 280
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-34
<PAGE> 81
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) financial position at March 31, 1996 and
the results of its operations for the three months and nine months ended March
31, 1996 and 1995 and its cash flows for the nine months ended March 31, 1996
and 1995. The accompanying consolidated balance sheet at June 30, 1995 is
presented herein as set forth in YSI's Annual Report on Form 10-KSB/A for the
year ended June 30, 1995. These statements are presented in accordance with
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in YSI's annual
consolidated financial statements have been omitted from these statements, as
permitted under the applicable rules and regulations. Readers of these
statements should refer to the consolidated financial statements and notes
thereto as of June 30, 1995 and 1994 and for the years then ended filed with
the Securities and Exchange Commission on Form 10-KSB/A.
Operating results for the three months and nine months ended
March 31, 1996 and 1995 are not necessarily indicative of the results that may
be expected for a full fiscal year.
2. SIGNIFICANT AGREEMENTS
In January, 1996, YSI issued 7% Convertible Subordinated
Debentures due February 1, 2006, in the principal amount of $37.95 million.
Interest is payable semi-annually commencing August 1, 1996. The Debentures,
not callable for three years, are convertible into shares of the Company's
Common Stock at a conversion price of $18.70 per share.
In January, 1996, YSI commenced operation of a 45 bed juvenile
boot camp program in Walters, Virginia for youth who have committed crimes or
are considered at risk of being adjudicated.
Effective March 1, 1996, YSI acquired the business and certain
assets of Tampa Bay Academy, L.P. ("Tampa Bay Academy) and a management
agreement contract with a related entity for approximated $4,223,000 in cash
and the assumption of liabilities in the amount of $325,000. Tampa Bay Academy
is primarily a residential treatment center licensed for 104 youth. In
connection with this transaction , YSI entered into a lease of certain real
property owned by Tampa Bay Academy, Ltd. and acquired a mortgage note on such
property from the lender for approximately $3,271,000.
3. PRO FORMA INFORMATION
The unaudited consolidated results of operations for the three
months and nine months ended March 31, 1996 include the operating results of
Desert Hills of New Mexico which was acquired as of the close of business June
30, 1995. Tampa Bay Academy was acquired effective March 1, 1996; accordingly,
the unaudited consolidated results of operations for the three months and nine
months ended March 31, 1996 include the operating results of Tampa Bay Academy
for the one month period ended March 31, 1996. Assuming the acquisition of
Desert Hills of New Mexico and Tampa Bay Academy had been consummated at the
beginning of fiscal year 1995, the unaudited pro forma consolidated results of
operations would have been as follows:
F-35
<PAGE> 82
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ---------------------------
March 31, March 31,
---------------------- ---------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $23,101 $17,441 $67,576 $48,182
Net Income 1,116 792 2,593 1,842
Net Income per share .12 .09 .29 .22
Weighted average common and common
equivalent shares outstanding 9,349 8,530 8,950 8,373
</TABLE>
The above information reflects adjustments, net of tax
effects, to recognize additional goodwill amortization expense, interest
expense, lease expense, and depreciation expense on fair market value write-up
of fixed assets, as well as reflect reduced amortization expense on deferred
assets not acquired.
The unaudited pro forma information presented above may not be
indicative of the results of operations which actually would have occurred if
the transaction had taken place as of the beginning of fiscal year 1995.
4. SUBSEQUENT EVENTS
On April 11, 1996, the Company entered into a binding letter
of intent to acquire Three Springs, Inc. Three Springs conducts outdoor
adventure programs and residential treatment centers for over 500 youth. The
letter of intent contemplates that the parties will enter into a definitive
agreement and close the acquisition by June 30, 1996, subject to the Company's
due diligence review and the acquisition qualifying as a "pooling of interests"
for the Company. The letter of intent provides that YSI will acquire Three
Springs, Inc. for 800,000 shares of YSI Common Stock (1,200,000 shares after
giving effect to the three-for-two stock split discussed below).
On April 30, 1996, the Company's Board of Directors declared a
three-for-two split of the Company's outstanding common stock. Shareholders
will receive a stock dividend on the outstanding shares of common stock in the
amount of one-half of one share of common stock for each share of common stock
held by the shareholder on the record date. Cash will be paid in lieu of
fractional shares based upon the price of common stock on the record date of
the split. The number of shares outstanding after the split will be
approximately 8,453,000 based on the number of shares of YSI common stock
currently outstanding. All periods presented have been retroactively restated to
give effect to this three-for-two stock split.
F-36
<PAGE> 83
UNAUDITED FINANCIAL STATEMENTS
OF TAMPA BAY ACADEMY, LTD.
AS OF AND FOR
THE TWO MONTHS ENDED FEBRUARY 29, 1996.
<PAGE> 84
The Tampa Bay Academy, Ltd.
UNAUDITED BALANCE SHEET
AS OF FEBRUARY 29, 1996
<TABLE>
<S> <C>
ASSETS:
Current assets
Cash $118,911
Accounts receivable, net of allowance for doubtful
accounts of $475,000 1,740,393
Accounts receivable other 942
Prepaid expenses and supplies inventory 95,153
------------
Total current assets 1,955,399
Property, plant and equipment, net of accumulated depreciation
of $1,950,280 3,382,770
Other assets 115,553
------------
Total assets 5,453,722
============
LIABILITIES:
Current liabilities
Current portion of long-term debt and capital lease obligation 350,000
Line of credit note payable 150,000
Accounts payable trade 187,132
Accounts payable other 69,027
Accrued payroll taxes 61,485
Accrued salaries and wages 52,009
Accrued employee compensated absences 86,156
Accrued property tax 2,000
Accrued management fee 69,866
------------
Total current liabilities 1,027,675
Notes payable and capital lease obligation, net of current portion 3,603,403
------------
Total liabilities 4,631,078
Partners' capital 822,644
------------
Total liabilities and partners' capital $5,453,722
============
</TABLE>
The accompanying notes to unaudited financial statements are an integral part
of this statement.
F-38
<PAGE> 85
The Tampa Bay Academy, Ltd.
UNAUDITED STATEMENTS OF OPERATIONS
FOR THE TWO MONTHS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
<TABLE>
<CAPTION>
For the Two Months Ended
----------------------------
February 29, February 28,
1996 1995
------------ ------------
<S> <C> <C>
REVENUES:
Fees for services, net $1,548,882 $1,705,108
Other income 1,347 0
------------ ------------
1,550,229 1,705,108
------------ ------------
OPERATING EXPENSES:
Salaries, wages and benefits 892,895 862,889
Contracted services 164,068 137,345
Supplies 91,732 78,029
Utilities and telephone 35,728 25,645
Property taxes and insurance 19,352 30,870
General and administrative 75,856 51,214
Management fees 126,833 129,815
Provision for bad debts 38,965 155,030
Depreciation and amortization 55,714 61,614
------------ ------------
1,501,143 1,532,451
------------ ------------
Income from operations 49,086 172,657
------------ ------------
OTHER INCOME (EXPENSE):
Interest income 3,404 7,143
Interest expense (54,900) (61,938)
------------ ------------
(51,496) (54,795)
------------ ------------
Net (loss) income ($2,410) $117,862
============ ============
</TABLE>
The accompanying notes to unaudited financial statements are an integral part
of these statements.
F-39
<PAGE> 86
The Tampa Bay Academy, Ltd.
UNAUDITED STATEMENTS OF PARTNERS' CAPITAL
For the Year Ended December 31, 1995 and the Two Months Ended February 29, 1996
<TABLE>
<CAPTION>
American
Residential
Centers, Inc.
(General Limited
Partners) Partners Total
--------------- ------------- --------------
<S> <C> <C> <C>
Capital Account December 31, 1994 $330,114 $829,784 $1,159,898
Net income 175,586 175,587 351,173
Distributions to partners (274,008) (274,009) (548,017)
------------ ------------ --------------
Capital Account December 31, 1995 231,692 731,362 963,054
Net loss (1,205) (1,205) (2,410)
Distributions to partners (69,000) (69,000) (138,000)
------------ ------------ --------------
Capital Account February 29, 1996 $161,487 $661,157 $822,644
============ ============ ==============
</TABLE>
The accompanying notes to unaudited financial statements are an integral part
of these statements.
F-40
<PAGE> 87
The Tampa Bay Academy, Ltd.
UNAUDITED STATEMENTS OF CASH FLOWS
FOR THE TWO MONTHS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
<TABLE>
<CAPTION>
For the Two Months Ended
-----------------------------
February 29, February 28,
1996 1995
------------ ------------
<S> <C> <C>
Cash Flows Provided By Operating Activities
Net (loss) income ($2,410) $117,862
Adjustments to reconcile net(loss) income to
cash provided by operating activities:
Depreciation and amortization 55,714 61,614
Changes in assets and liabilities:
Accounts receivable 75,046 161,118
Prepaid expenses and supplies (16,598) 10,357
Accounts payable 104,872 (66,619)
Accrued expenses (61,071) (108,537)
----------- ----------
Net Cash Provided By Operating Activities 155,553 175,795
----------- ----------
Cash Flows Used In Investing Activities
Purchase of property, plant and equipment (4,509) (9,255)
Addition to reserve for fixed asset replacement (487) (15,360)
----------- ----------
Net Cash Used In Investing Activities (4,996) (24,615)
----------- ----------
Cash Flows Used In Financing Activities
Principal payments of long-term debt (28,097) (86,482)
Repayment of advances from related parties (35,877) (32,389)
Distributions to partners (138,000) 0
----------- ----------
Net Cash Used In Financing Activities (201,974) (118,871)
----------- ----------
Net (decrease)increase in cash (51,417) 32,309
----------- ----------
Cash, beginning of period 170,327 843,150
----------- ----------
Cash, end of period $118,911 $875,459
=========== ==========
</TABLE>
The accompanying notes to unaudited financial statements are an integral part
of these statements.
F-41
<PAGE> 88
TAMPA BAY ACADEMY, LTD.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
The Tampa Bay Academy Ltd. (TBA), located in Riverview, Florida, operates a
residential psychiatric treatment facility for children and adolescents.
Billings are made primarily to insurance companies, with patient's families
responsible for copay and deductible amounts. A substantial amount of TBA's
revenues are received from a provider contract with one medical insurance
carrier which represents significant concentration of credit risk.
In the opinion of management, the accompanying interim financial statements
present fairly TBA's financial position at February 29, 1996 and the results of
its operations and cash flows for the two month periods ended February 28, 1995
and February 29, 1996, and include all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of the financial
position as of February 29, 1996 and results of operations and cash flows for
the two month periods ended February 28, 1995 and February 29, 1996. Theses
financial statements are unaudited, and certain information and footnote
disclosures normally included in TBA's annual financial statements have been
omitted. Readers of these financial statements should refer to the financial
statements and notes thereto as of December 31, 1995. The results of
operations presented in the accompanying financial statements are not
necessarily representative of operations for an entire year.
2. SUBSEQUENT EVENT
Effective March 1, 1996, TBA sold the business and certain assets of the
business to Youth Services International, Inc.
F-42
<PAGE> 89
UNAUDITED FINANCIAL STATEMENTS
OF AMERICAN RESIDENTIAL CENTERS, INC.
AS OF AND FOR THE TWO MONTHS ENDED
FEBRUARY 29, 1996.
F-43
<PAGE> 90
American Residential Centers, Inc.
UNAUDITED CONSOLIDATED BALANCE SHEET
AS OF FEBRUARY 29, 1996
<TABLE>
<S> <C>
ASSETS:
Current assets
Cash $177,171
Accounts receivable, net of allowance for doubtful
accounts of $475,000 1,740,393
Accounts receivable other 942
Prepaid expenses and supplies inventory 95,153
------------
Total current assets 2,013,659
Property, plant and equipment, net of accumulated depreciation
of $1,950,280 3,382,770
Other assets 164,968
------------
Total assets 5,561,397
============
LIABILITIES:
Current liabilities
Current portion of long-term debt and capital lease obligation 350,000
Line of credit note payable 150,000
Accounts payable trade 196,132
Accounts payable other 69,027
Accrued payroll taxes 61,485
Accrued salaries and wages 52,009
Accrued employee compensated absences 86,156
Accrued property tax 2,000
------------
Total current liabilities 966,809
Notes payable and capital lease obligation, net of current portion 3,603,403
------------
Total liabilities 4,570,212
Fifty percent (limited partners) interest in subsidiary
partnership capital 661,157
Stockholders' equity 330,028
------------
Total liabilities and stockholders' equity $5,561,397
============
</TABLE>
The accompanying notes to unaudited consolidated financial statements are an
integral part of this statement.
F-44
<PAGE> 91
American Residential Centers, Inc.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
FOR THE TWO MONTHS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
<TABLE>
<CAPTION>
For the Two Months Ended
-------------------------------
February 29, February 28,
1996 1995
-------------- -------------
<S> <C> <C>
REVENUES:
Fees for services, net $1,548,882 $1,705,108
Other income 747 0
------------ ------------
1,549,629 1,705,108
OPERATING EXPENSES:
Salaries, wages and benefits 908,636 876,532
Contracted services 164,068 137,345
Supplies 91,732 78,029
Utilities and telephone 35,949 25,841
Property taxes and insurance 19,352 30,870
General and administrative 84,856 71,082
Provision for bad debts 38,965 155,030
Depreciation and amortization 55,714 61,614
------------ ------------
1,399,272 1,436,343
------------ ------------
Income from operations 150,357 268,765
------------ ------------
OTHER INCOME (EXPENSE):
Interest income 3,527 7,143
Interest expense (54,900) (61,938)
------------ ------------
(51,373) (54,795)
------------ ------------
Income before fifty percent interest 98,984 213,970
FIFTY PERCENT (LIMITED PARTNERS) INTEREST IN
PARTNERSHIP 1,205 (58,931)
------------ ------------
Net income $100,189 $155,039
============ ============
</TABLE>
The accompanying notes to unaudited consolidated financial statements are an
integral part of these statements.
F-45
<PAGE> 92
American Residential Centers, Inc.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
For the Year Ended December 31, 1995 and the Two Months Ended February 29, 1996
<TABLE>
<CAPTION>
Total
Common Retained Stockholder's
Stock Earnings Equity
---------- ------------- ---------------
<S> <C> <C> <C>
Balance, December 31, 1994 $1,000 $537,482 $538,482
Net income 0 834,367 834,367
Distributions to partners 0 (1,074,010) (1,074,010)
---------- ------------- --------------
Balance, December 31, 1995 1,000 297,839 298,839
Net income 0 100,189 100,189
Distributions to partners 0 (69,000) (69,000)
---------- ------------- --------------
Balance, February 29, 1996 $1,000 $329,028 $330,028
========== ============= ==============
</TABLE>
The accompanying notes to unaudited consolidated financial statements are an
integral part of these statements.
F-46
<PAGE> 93
American Residential Centers, Inc.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWO MONTHS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1995
<TABLE>
<CAPTION>
For the Two Months Ended
------------------------------
February 29, February 28,
1996 1995
------------- ------------
<S> <C> <C>
Cash Flows Provided By Operating Activities
Net income $100,189 $155,039
Fifty percent interest in partnership (1,205) 58,931
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 55,714 61,614
Changes in assets and liabilities:
Accounts receivable 75,256 161,287
Prepaid expenses (16,598) 10,421
Accounts payable 108,134 (95,464)
Accrued expenses (126,426) (99,671)
------------ ------------
Net Cash Provided By Operating Activities 195,064 252,157
------------ ------------
Cash Flows Used In Investing Activities
Purchase of property, plant and equipment (4,509) (9,253)
Addition to reserve for fixed asset replacement (487) (15,360)
------------ ------------
Net Cash Used In Investing Activities (4,996) (24,613)
------------ ------------
Cash Flows Used In Financing Activities
Principal payments of long-term debt (28,097) (55,769)
Repayment of advances from related parties (35,999) 0
Distributions to stockholders (69,000) (88,000)
Distributions to limited partners (69,000) 0
------------ ------------
Net Cash Used In Financing Activities (202,096) (143,769)
------------ ------------
Net (decrease)increase in cash (12,028) 83,775
Cash, beginning of period 189,199 911,822
------------ ------------
Cash, end of period $177,171 $995,597
============ ============
</TABLE>
The accompanying notes to unaudited consolidated financial statements are an
integral part of these statements.
F-47
<PAGE> 94
AMERICAN RESIDENTIAL CENTERS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
American Residential Centers, Inc. (ARC) provides management services to Tampa
Bay Academy, located in Riverview, Florida, under a contractual arrangement.
The Tampa Bay Academy operates a residential psychiatric treatment facility for
children and adolescents. The Academy's billings are made primarily to
insurance companies with patient's families responsible for copay and
deductible amounts. A substantial amount of the Tampa Bay Academy's revenues
are received from a provider contract with one medical insurance carrier which
presents a significant concentration of credit risk.
In the opinion of management, the accompanying interim consolidated financial
statements present fairly ARC's financial position at February 29, 1996 and the
results of its operations and cash flows for the two month periods ended
February 28, 1995 and February 29, 1996, and include all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation
of the financial position as of February 29, 1996 and results of operations and
cash flows for the two month periods ended February 28, 1995 and February 29,
1996. Theses financial statements are unaudited, and certain information and
footnote disclosures normally included in ARC's annual financial statements
have been omitted. Readers of these financial statements should refer to the
financial statements and notes thereto as of December 31, 1995. The results of
operations presented in the accompanying financial statements are not
necessarily representative of operations for an entire year.
2. SUBSEQUENT EVENTS
Effective March 1, 1996, TBA sold the business and certain assets of the
business to Youth Services International, Inc. In addition, the ARC
management agreement was sold to Youth Services International, Inc.
F-48
<PAGE> 95
YOUTH SERVICES INTERNATIONAL, INC.
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following pro forma consolidated statements of income include the unaudited
pro forma consolidated statements of income for the year ended June 30, 1995
and for the nine months ended March 31, 1996 (the "Pro Forma Consolidated
Statements of Income"). The unaudited Pro Forma Consolidated Statements of
Income are adjusted to give effect to the consummation of the acquisition of
Desert Hills Center for Youth and Families of New Mexico, Inc. ("Desert
Hills"), American Residential Centers, Inc. and Tampa Bay Academy, Ltd. as if
such transactions had occurred on July 1, 1994.
The pro forma adjustments are based upon available information and certain
assumptions that the Company believes are reasonable. The pro forma
consolidated financial statements should be read in conjunction with the
Company's Consolidated Financial Statements and related notes thereto and the
financial statements and related notes of Desert Hills, American Residential
Centers, Inc. and Tampa Bay Academy, Ltd. The unaudited pro forma
consolidated financial statements do not purport to represent what the
Company's results of operations would have been had the acquisitions occurred
on July 1, 1994 or to project the Company's results of operations for any
future period.
F-49
<PAGE> 96
Youth Services International, Inc. and Subsidiaries
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED JUNE 30, 1995 (9)
<TABLE>
<CAPTION>
YSI Desert Hills Acquisition Post
Historical New Mexico Adjustments (8) Acquisition
-------------- --------------- ------------------ ----------------
<S> <C> <C> <C> <C>
REVENUES:
Program $52,162,000 $5,383,000 $0 $57,545,000
Consulting services and other 925,000 8,000 0 933,000
------------- ------------- ----------- --------------
53,087,000 5,391,000 0 58,478,000
OPERATING EXPENSES:
Program 44,374,000 5,542,000 (190,000)(1,5) 49,726,000
Program start-up costs 280,000 0 0 280,000
Amortization of goodwill 583,000 0 206,000 (1) 789,000
Selling, general and administrative 4,097,000 0 0 4,097,000
------------- ------------- ----------- --------------
49,334,000 5,542,000 16,000 54,892,000
Income (loss) from operations 3,753,000 (151,000) (16,000) 3,586,000
OTHER INCOME (EXPENSE):
Interest expense (268,000) (580,000) 132,000 (4) (716,000)
Interest income 50,000 0 0 50,000
Other (24,000) 0 0 (24,000)
------------- ------------- ----------- --------------
(242,000) (580,000) 132,000 (690,000)
FIFTY PERCENT (LIMITED PARTNERS) INTEREST 0 0 0 0
------------- ------------- ----------- --------------
Income (loss) before income tax (expense)
benefit 3,511,000 (731,000) 116,000 2,896,000
Income tax (expense) benefit (1,332,000) 273,000 (41,000)(7) (1,100,000)
------------- ------------- ----------- --------------
Net income (loss) $2,179,000 ($458,000) $75,000 $1,796,000
============= ============= =========== ==============
Pro forma earnings per common and
common equivalent share
Pro forma weighted average common and
common equivalent shares outstanding
</TABLE>
<TABLE>
<CAPTION>
American
Residential
Centers, Inc. Acquisition Post
(Consolidated) Adjustments (8) Acquisition
---------------- -------------- --------------
<S> <C> <C> <C>
REVENUES:
Program $10,453,000 $0 $67,998,000
Consulting services and other 0 0 933,000
------------- ----------- --------------
10,453,000 0 68,931,000
OPERATING EXPENSES:
Program 8,425,000 607,000 (1,2) 58,758,000
Program start-up costs 0 0 280,000
Amortization of goodwill 0 256,000 (1) 1,045,000
Selling, general and administrative 0 0 4,097,000
------------- ----------- --------------
8,425,000 863,000 64,180,000
Income (loss) from operations 2,028,000 (863,000) 4,751,000
OTHER INCOME (EXPENSE):
Interest expense (412,000) 407,000 (4) (721,000)
Interest income 20,000 448,000 (6) 518,000
Other 18,000 0 (6,000)
------------- ----------- --------------
(374,000) 855,000 (209,000)
FIFTY PERCENT (LIMITED PARTNERS) INTEREST (519,000) 519,000 (3) 0
------------- ----------- --------------
Income (loss) before income tax (expense)
benefit 1,135,000 511,000 4,542,000
Income tax (expense) benefit 0 (629,000)(7) (1,729,000)
------------- ----------- --------------
Net income (loss) $1,135,000 ($118,000) $2,813,000
============== =========== ==============
Pro forma earnings per common and
common equivalent share (10) $0.34
==============
Pro forma weighted average common and
common equivalent shares outstanding (10) 8,264,321
==============
</TABLE>
The accompanying notes to pro forma consolidated statement of income are an
integral part of this pro forma statement.
F-50
<PAGE> 97
Youth Services International, Inc. and Subsidiaries
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED MARCH 31, 1996 (9)
<TABLE>
<CAPTION>
American
Residential
YSI Centers, Inc. Acquisition Post
Historical (Consolidated) Adjustments (8) Acquisition
-------------- ------------------ ------------- --------------
<S> <C> <C> <C> <C>
REVENUES: $61,276,000 $6,300,000 0 $67,576,000
-------------- ------------- ----------- -------------
OPERATING EXPENSES:
Program 51,009,000 5,525,000 420,000 (1,2) 56,954,000
Program start-up costs 58,000 0 0 58,000
Amortization of goodwill 749,000 0 171,000 (1) 920,000
Selling, general and administrative 4,046,000 85,000 0 4,131,000
-------------- ------------- ----------- -------------
55,862,000 5,610,000 591,000 62,063,000
Income from operations 5,414,000 690,000 (591,000) 5,513,000
-------------- ------------- ----------- -------------
OTHER INCOME (EXPENSE):
Interest expense (1,335,000) (239,000) 239,000 (4) (1,335,000)
Interest income 33,000 38,000 0 71,000
-------------- ------------- ----------- -------------
(1,302,000) (201,000) 239,000 (1,264,000)
FIFTY PERCENT (LIMITED PARTNERS) INTEREST 0 (39,000) 39,000 (3) 0
-------------- ------------- ----------- -------------
Income before income tax expense 4,112,000 450,000 (313,000) 4,249,000
Income tax expense (1,603,000) 0 (53,000)(7) (1,656,000)
-------------- ------------- ----------- -------------
Net income $2,509,000 $450,000 ($366,000) $2,593,000
============== ============= =========== =============
Pro forma earnings per common and
common equivalent share (10) $0.29
=============
Pro forma weighted average common and
common equivalent shares outstanding (10) 8,951,346
=============
</TABLE>
The accompanying notes to pro forma consolidated statement of income
are an integral part of this pro forma statement.
F-51
<PAGE> 98
Youth Services International, Inc. and Subsidiaries
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE FISCAL YEAR ENDED JUNE 30, 1995 AND
THE NINE MONTHS ENDED MARCH 31, 1996
(1) To record depreciation and amortization expense related to the
acquisitions of Desert Hills Center for Youth and Families of New Mexico,
Inc. (Desert Hills), American Residential Centers, Inc. and Tampa Bay
Academy, Ltd.:
<TABLE>
<CAPTION>
June 30 March 31
1995 1996
--------- -----------
<S> <C> <C>
DESERT HILLS
Goodwill (10 year life) $206,000 $0
Depreciation expense (reduction in expense) (58,000) 0
---------- -----------
$148,000 $0
========== ===========
AMERICAN RESIDENTIAL CENTERS, INC. AND
TAMPA BAY ACADEMY, LTD.
Goodwill (10 year life) $256,000 $171,000
Non-compete agreement 50,000 33,000
Depreciation and amortization expense (reduction
in expense) (43,000) (13,000)
---------- -----------
$263,000 $191,000
========== ===========
</TABLE>
(2) To record lease payments for the Tampa Bay, Ltd. facilities.
(3) To reverse elimination of income allocated to 50% interest of the limited
partners of Tampa Bay Academy, Ltd.
(4) To eliminate interest expense related to Desert Hills, American
Residential Centers, Inc. and Tampa Bay Academy, Ltd. debt not assumed,
and to record interest expense related to debt incurred in connection with
the acquisitions as follows:
<TABLE>
<CAPTION>
June 30 March 31
1995 1996
----------- -----------
<S> <C> <C>
Desert Hills interest related to debt assumed
with an average balance of
$1,401,000 @ 12.06% ($169,000) $0
Actual interest expense recorded 580,000 0
----------- -----------
Interest on debt not assumed 411,000 0
Additional 1/2% charged upon assumption of
$1,401,000 (7,000) 0
Acquisition related debt incurred (179,000) 0
Additional interest expense on capital lease (93,000) 0
----------- -----------
$132,000 $0
=========== ===========
Tampa Bay Academy, Ltd. interest related to debt
not assumed 418,000 239,000
Interest from acquisition related debt incurred 11,000
----------- -----------
$407,000 $239,000
=========== ===========
</TABLE>
(5) To eliminate intercompany management fees.
F-52
<PAGE> 99
(6) To record interest income on the note receivable related to the purchase
of Tampa Bay Academy Ltd.'s mortgage note payable.
(7) To record income tax effect of acquisition adjustments.
(8) The asset purchase agreements provide for the payment of additional
consideration contingent upon achieving specified earnings levels in
future periods. Given the contingent nature of the earn out, no related
adjustments have been included in the accompanying consolidated pro forma
financial statements.
(9) The fiscal year ended June 30, 1995 is comprised of the twelve month
period July 1, 1994 through June 30, 1995. The nine month period ended
March 31, 1996 is comprised of the nine month period July 1, 1995 through
March 31, 1996.
(10) Share and per share amounts have been adjusted to reflect a 3-for-2 stock
split effected May 24, 1996.
F-53
<PAGE> 100
No dealer, salesperson or other individual has been authorized to give
any information or to make any representations other than those contained or
incorporated by reference in this Prospectus, and, if given or made, such
information or representation must not be relied upon as having been authorized
by the Company or any of its agents. Neither the delivery of this Prospectus
nor any sale made hereunder shall under any circumstances create any
implication that there has been no change in the affairs of the Company since
the date as of which information is given in this Prospectus. This Prospectus
does not constitute an offer or solicitation by anyone in any jurisdiction in
which such offer or solicitation is not authorized or in which the person
making such offer or solicitation is not qualified to do so or to anyone to
whom it is unlawful to make such solicitation.
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 3
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE . . . . . . . . . . . . 3
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
PRICE RANGE OF COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . 12
DIVIDEND POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SELECTED CONSOLIDATED FINANCIAL DATA . . . . . . . . . . . . . . . . . . 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . 15
THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
PRINCIPAL STOCKHOLDERS AND MANAGEMENT OWNERSHIP . . . . . . . . . . . . . 28
DESCRIPTION OF EXCHANGE OFFER DEBENTURES . . . . . . . . . . . . . . . . 31
DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . 41
SELLING SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . 41
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . 42
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
YOUTH SERVICES INTERNATIONAL, INC.
7% CONVERTIBLE SUBORDINATED
DEBENTURES DUE 2006
COMMON STOCK
-------------------
PROSPECTUS
------------------
Dated __________, 1996
<PAGE> 101
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses expected to be incurred in
connection with the offering described in this Registration Statement. There
are no underwriting discounts or commissions in connection with the offering
described in this Registration Statement. All amounts are estimated except the
Securities and Exchange Commission registration fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee . . . . . . . . . . . . . . . . . . . . . . . . . $11,104
Legal fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
Accounting fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
Transfer Agents' fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
Printing and engraving fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
Trustee fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
--------
$
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Charter and Bylaws of the Company provide that, among other matters,
to the fullest extent permitted by the Maryland General Corporation Law as it
may be amended from time to time, current and former directors, officers,
employees and agents of the Company, and those persons who serve or have
served, at the Company's request, as a director, officer, partner, trustee,
employee or agent of another entity or enterprise shall be indemnified against
any and all liabilities and expenses incurred in connection with their services
in such capacities. Other provisions of the Charter and Bylaws provide that
the Company shall advance expenses to its officers and directors and other
persons to the same extent it shall indemnify such persons.
Furthermore, the Charter of the Company provides that, to the fullest
extent permitted by the Maryland General Corporation Law as it may be amended
from time to time, no director or officer of the Company shall be liable to the
Company or its stockholders for monetary damages arising out of events
occurring at the time such person is serving as a director or officer,
regardless of whether such person is a director or officer at the time of a
proceeding in which liability is asserted. Under current Maryland law, the
effect of this provision is to eliminate the rights of the Company and its
stockholders to recover monetary damages from a director or officer except (i)
to the extent that it is proved that the director or officer actually received
an improper personal benefit in money, property or services, or (ii) to the
extent that a judgment or other final adjudication adverse to the person is
entered in a proceeding based on a finding in the proceeding that the person's
action, or failure to act, was the result of active and deliberate dishonesty
and was material to the cause of action adjudicated in the proceeding. In
situations to which the Charter provision applies, the remedies available to
the Company or a stockholder are limited to equitable remedies such as
injunction or rescission.
The Company currently maintains director and officer liability
insurance coverage for officers and directors.
ITEM 16. EXHIBITS.
<TABLE>
<S> <C>
4(a) Articles of Incorporation of the Company, as amended (Incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement on Form SB-2 (Reg. No. 33-71958) filed with the Commission on November
19, 1993, as amended.)
4(b) Bylaws of the Company, as amended and restated.*
4(c) Form of Exchange Offer Debentures.*
4(d) Indenture, dated ____, 1996, by and between the Company and The Chase Manhattan Bank, N.A., as
trustee (the "Trustee").*
5 Opinion of Miles & Stockbridge, A Professional Corporation.
12 Computation of Ratio of Earnings to Fixed Charges.
23(a) Consents of Arthur Andersen LLP.
23(b) Consent of Addison, Roberts & Ludwig, P.C.
23(c) Consent of Bair, Rupp, Simpson & Zorger, Inc.*
23(d) Consent of Endorf Lurken Olson & Co.*
23(e) Consent of Miles & Stockbridge, A Professional Corporation (included in Exhibit 5).
</TABLE>
<PAGE> 102
<TABLE>
<S> <C>
25 Form T-1, Statement and Qualification Under the Trust Indenture Act of 1939.*
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed by the registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered that remain
unsold at the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934 that is incorporated by reference
in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(h) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange
II-2
<PAGE> 103
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(i) The undersigned registrant hereby undertakes:
(1) For determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(j) The undersigned registrant hereby undertakes to file an
application for the purpose of determining the eligibility of the trustee to
act under subsection (a) of Section 310 of the Trust Indenture Act (the
"Indenture Act") in accordance with the rules and regulations prescribed by the
Commission under Section 305(b)(2) of the Indenture Act.
II-3
<PAGE> 104
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Baltimore, State of Maryland, the 26th day of
July, 1996.
YOUTH SERVICES INTERNATIONAL, INC.
By: /s/ W. JAMES HINDMAN
---------------------------------
W. James Hindman
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ W. JAMES HINDMAN Chairman and Chief July 29, 1996
- --------------------------- Executive Officer
W. James Hindman (Principal Executive
Officer)
/s/ WILLIAM P. MOONEY Chief Financial July 29, 1996
- --------------------------- Officer & Treasurer
William P. Mooney (Principal Financial
Officer and Principal
Accounting Officer)
/s/ HENRY D. FELTON Vice Chairman of the July 29, 1996
- --------------------------- Board and President,
Henry D. Felton Business Development
Group
Director July 29, 1996
- ---------------------------
J. Donald Black
</TABLE>
II-4
<PAGE> 105
<TABLE>
<S> <C> <C>
/s/ JEFFREY D. DAVIS Director July 29, 1996
- ---------------------------
Jeffrey D. Davis
/s/ MAYER KANTER Director July 29, 1996
- ---------------------------
Mayer Kanter
Director July 29, 1996
- ---------------------------
George M. Ferris, Jr.
Director July 29, 1996
- ---------------------------
Cynthia K. Hindman, M.D.
Director July 29, 1996
- ---------------------------
Miles G. Harrison, Jr., M.D.
Director July 29, 1996
- ---------------------------
Martin V. Marshall
/s/ JACQUES T. SCHLENGER Director July 29, 1996
- ---------------------------
Jacques T. Schlenger
</TABLE>
II-5
<PAGE> 1
EXHIBIT 5
July 29, 1996
Youth Services International, Inc.
2 Park Center Court, Suite 200
Owings Mills, Maryland 21117
Gentlemen:
In connection with the registration for resale under the Securities Act
of 1933 (the "Act") of the Exchange Offer Debentures issued as part of the 7%
Convertible Subordinated Debentures Due 2006 issued by Youth Services
International, Inc., a Maryland corporation (the "Company"), and up to
2,582,197 shares of common stock, par value $.01 per share (the "Common
Stock"), of the Company issuable upon conversion of the Exchange Offer
Debentures and the Restricted Debentures, we have examined such corporate
records, certificates and documents as we deemed necessary for the purpose of
rendering this opinion. Capitalized terms used but not otherwise defined
herein shall have the meanings given them in the registration statement
covering the securities the subject of this opinion.
Based on the foregoing, we are of the opinion that the Exchange Offer
Debentures will, when sold, be a binding obligation of the Company, and the
Common Stock issuable upon conversion of the Exchange Offer Debentures and the
Restricted Debentures have been duly and validly authorized and, when issued
upon the terms set forth in the Exchange Offer Debentures and the Restricted
Debentures, will be legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
registration statement covering the securities the subject of this opinion.
In giving our consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act of 1933
or the rules and regulations promulgated by the Securities and Exchange
Commission thereunder.
Very truly yours,
Miles & Stockbridge,
a Professional Corporation
By: /s/ MARK S. DEMILIO
--------------------------
Principal
/rdc
<PAGE> 1
EXHIBIT 12
Computation of Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 3/31/96 3/31/95
---- ---- ---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings
--------
Pretax income from continuing
operations (558,000) (792,000) (1,671,000) 1,952,000 3,511,000 4,112,000 2,117,000
----------------------------------------------------------------------------------
Adjustments:
(+) fixed charges per S-K 503(d)(4) 0 1,000 174,000 408,000 274,000 1,398,000 167,000
(-) interest capitalized during period 0 0 0 0 0 0 0
(-) preferred stock dividend reqs. 0 0 0 0 0 0 0
----------------------------------------------------------------------------------
= adjusted fixed charges 0 1,000 174,000 408,000 274,000 1,398,000 167,000
(-) income from majority owned subs
attributable to minority ownership 0 0 0 0 0 0 0
(-) undistributed income of less than 50%
owned persons 0 0 0 0 0 0 0
(+) full amt of losses of majoriry owned subs 0 0 0 0 0 0 0
(+) previously capitalized interest amortized
during the period 0 0 0 0 0 0 0
----------------------------------------------------------------------------------
Total adjustments 0 1,000 174,000 408,000 274,000 1,398,000 167,000
----------------------------------------------------------------------------------
Adjusted pretax income from continuing operations (558,000) (791,000) (1,497,000) 2,360,000 3,765,000 5,510,000 2,284,000
==================================================================================
Fixed Charges
-------------
Interest expense 0 1,000 173,000 403,000 268,000 1,335,000 162,000
Interest capitalized 0 0 0 0 0 0 0
Amortization of debt expense 0 0 1,000 5,000 6,000 63,000 5,000
Amortization of debt discount/premium
Portion of rental expense representing interest
Preferred stock dividend requirements of majority 0 0 0 0 0 0 0
owned subs and 50% owned persons 0 0 0 0 0 0 0
(excluding items eliminated in consolidation)
Debt guarantee adjustments 0 0 0 0 0 0 0
----------------------------------------------------------------------------------
Total Fixed Charges 0 1,000 174,000 408,000 274,000 1,398,000 167,000
==================================================================================
Ratio of Earnings to Fixed Charges N/A (791.00) (8.60) 5.78 13.81 3.94 13.68
==================================================================================
Excess (Deficiency) (558,000) (792,000) (1,671,000) 1,952,000 3,511,000 4,112,000 2,117,000
==================================================================================
</TABLE>
Page 1
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated September 5, 1995 on the financial statements of Youth Services
International, Inc. and subsidiaries (and to all references to our Firm)
included in or made a part of this registration statement.
/s/ ARTHUR ANDERSEN LLP
- -----------------------
Baltimore, Maryland,
July 26, 1996
<PAGE> 2
EXHIBIT 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated November 15, 1995 on the financial statements of Desert Hills Center for
Youth and Families of New Mexico, Inc. as of June 30, 1995 and for the year
then ended included in or made a part of this registration statement.
/s/ ARTHUR ANDERSEN LLP
- -----------------------
Tucson, Arizona,
July 25, 1996
<PAGE> 1
EXHIBIT 23(b)
[ADDISON, ROBERTS & LUDWIG, P.C. LETTERHEAD]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
We hereby consent to the Incorporation by reference in this Registration
Statement of on Form S-3 of our report dated November 28, 1994, execept for
notes 11, 12 and 13 as to which the date is May 23, 1995 of the financial
statements of Desert Hills Center for Youth and Families of New Mexico, Inc. (a
wholly-owned subsidiary of Introspect HealthCare Corporation).
/s/ ADDISON, ROBERTS & LUDWIG, P.C.
Tucson, Arizona
July 25, 1996
<PAGE> 1
EXHIBIT 23(c)
[BAIR, RUPP, SIMPSON & ZORGER LETTERHEAD]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Registration Statement of our reports dated February 22,
1996, and February 23, 1995 included in Youth Services International, Inc.'s
Form 8-K filed April 10, 1996, and to all references to our Firm included in
this registration statement.
/s/ BAIR, RUPP, SIMPSON & ZORGER, INC.
July 25, 1996 Bair, Rupp, Simpson & Zorger, Inc.
Fort Wayne, Indiana
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1994
<PERIOD-END> JUN-30-1995
<CASH> 784
<SECURITIES> 0
<RECEIVABLES> 8,804
<ALLOWANCES> 175
<INVENTORY> 0
<CURRENT-ASSETS> 14,051
<PP&E> 8,978
<DEPRECIATION> 1,726
<TOTAL-ASSETS> 29,050
<CURRENT-LIABILITIES> 4,325
<BONDS> 6,952
0
0
<COMMON> 81
<OTHER-SE> 17,587
<TOTAL-LIABILITY-AND-EQUITY> 29,050
<SALES> 0
<TOTAL-REVENUES> 53,087
<CGS> 0
<TOTAL-COSTS> 49,654
<OTHER-EXPENSES> 4,680
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 268
<INCOME-PRETAX> 3,511
<INCOME-TAX> 1,332
<INCOME-CONTINUING> 2,179
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,179
<EPS-PRIMARY> .26
<EPS-DILUTED> 0
</TABLE>
