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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM JULY 1, 1996 TO DECEMBER 31, 1996
COMMISSION FILE NUMBER 0-23284
YOUTH SERVICES INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MARYLAND 52-1715690
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2 PARK CENTER COURT, SUITE 200 21117
OWINGS MILLS, MARYLAND (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (410) 356-8600
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
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(NAME ON EACH EXCHANGE
(TITLE OF EACH CLASS) WHICH REGISTERED)
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None None
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SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates as of
June 30, 1996 was $120,080,338.
The registrant had shares of common stock outstanding as of June 30, 1996
of 10,079,477.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information from the registrant's Registration Statement on Form
SB-2 (registration number 33-71958) filed with the Securities and Exchange
Commission on November 19, 1993, as amended is incorporated by reference into
Part IV of this Form 10-K.
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YOUTH SERVICES INTERNATIONAL, INC.
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INDEX -- FORM 10-K
FOR THE TRANSITION PERIOD FROM JULY 1, 1996 TO DECEMBER 31, 1996
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PART I
ITEM 1. Business.................................................................... 1
ITEM 2. Properties.................................................................. 10
ITEM 3. Legal Proceedings........................................................... 11
ITEM 4. Submission of Matters to a Vote of Security Holders......................... 11
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Shareholder Matters... 11
ITEM 6. Selected Consolidated Financial Data........................................ 12
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation.................................................. 13
ITEM 8. Financial Statements and Supplementary Data................................. 18
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................ 20
PART III
ITEM 10. Directors and Executive Officers of the Company............................. 20
ITEM 11. Executive Compensation...................................................... 20
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.............. 20
ITEM 13. Certain Relationships and Related Transactions.............................. 20
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............. 20
SIGNATURES.............................................................................. 24
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On April 25, 1997, the Board of Directors approved a resolution to change
the Company's year-end from June 30 to December 31. Consequently, the Company
is filing this transition report on Form 10-K for the six month period ended
December 31, 1996.
PART I
ITEM 1. BUSINESS
Youth Services International, Inc. (the "Company" or "YSI") is a leading
national provider of private educational, developmental and rehabilitative
programs which are designed to impact dramatically the thinking and behavior of
troubled youth. The Company's programs focus on troubled youth who either have
been adjudicated as delinquents or suffer from behavioral problems with the
objective of effectively preparing them to become responsible self-sufficient
taxpayers. The Company develops and operates a wide range of programs designed
to promote accountability, respect and discipline through highly structured,
physically demanding, intensely scheduled and intellectually challenging
activities. In conjunction with these programs, the Company offers troubled
youth a broad range of residential programs including juvenile justice
academies, residential treatment centers, boot camps, group homes and foster
homes, as well as non-residential programs including aftercare, tracking,
counseling, partial care and day treatment services. As of December 31, 1996,
the Company operated 20 residential programs in 12 states serving approximately
2,200 enrolled students and conducted non-residential programs serving
approximately 800 additional youth. To date, the youth served by the Company
have been drawn from more than 35 states, with each of which the Company
maintains relationships.
Since its formation in 1991, the Company has expanded its base of
operations through a combination of external and internal growth by acquiring
complementary programs and businesses, by developing new programs in response to
privatization opportunities, by increasing student capacity at existing
facilities and by expanding program offerings.
Initially, the Company was established to capitalize on emerging
opportunities in the privatization of juvenile justice programs by state and
local governments. Management believes that increasing cost containment
pressures at all levels of government coupled with the inability of many
government agencies to deliver economic and effective programs to a rapidly
increasing number of juvenile offenders will continue to accelerate the
privatization of juvenile justice services within the youth care industry. Based
on its experience to date, the Company believes that it can operate its programs
at a lower cost while offering a higher quality of services as compared to
similar programs operated directly by government agencies.
Over the last three years, the Company began to acquire companies which
operate in the juvenile behavioral health business. In April 1997, the Company
announced that it had committed to a plan to dispose of the behavioral health
business and focus on the juvenile justice business. See "--Recent
Developments."
MARKET
The Company believes that the market for privately provided juvenile
justice residential programs continues to grow. Trends reflecting increases in
both the number of juvenile offenders and in the severity of the crimes
committed suggest that there is a shortage of residential capacity and a lack
of comprehensive programs to treat juvenile offenders. The Company expects that
as juvenile crime continues to receive increasing levels of visibility, the
need for youth care services will continue to increase. The Company also
believes that certain demographic trends such as annual increases in both the
number of teenagers and youth
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from single parent families will further contribute to the overall growth in the
population of troubled youth in the United States.
Programs for troubled youth generally are created in response to a Request
for Proposals ("RFP") from a state or state agency or created "de novo" by a
provider to accommodate the demand for a facility by placement authorities due
primarily to the lack of available effective programs operated by state agencies
or contracted by state agencies through an RFP. Historically, in the early
stages of privatization of the troubled youth care industry, "de novo" programs
were in demand because of the lack of effective programs and capacity.
In an RFP, the government agency determines the type of program and the
number of youth to be served and specifies factors such as operating and
licensing requirements in the RFP, which it publishes for competitive bidding. A
successful proposal by the Company under an RFP typically has resulted in a five
year contract between the Company and the government agency under which students
are placed in the Company's program by the government agency up to the licensed
capacity. Generally, the Company has little flexibility in admitting students to
facilities resulting from an RFP other than those placed by the contracting
agency or agencies. Historically under the RFP process, the government agency
also provided the facility for the program. These facilities typically were
vacant or under-utilized government-owned facilities that required minimal
renovation for conversion into a program facility. Very recently, the trend has
been developing whereby the RFP involves the design, construction and financing
of a new facility as well as the operation of the program (typically for periods
of five years or longer) upon its completion.
"De novo" programs are initiated by the Company to respond to the demand
for beds by placement authorities seeking to place youth in a youth care
facility. Placement authorities for adjudicated youth include state juvenile
services agencies, judges of juvenile and other courts and parole officers.
Placement authorities for behavioral health services include many of the same
services that place adjudicated youth as well as state welfare and child
protective agencies, doctors, psychiatrists, psychologists and hospitals.
Although the placement authorities generally prefer to place youth in a facility
in geographic proximity to the placement authority's jurisdiction, students are
often placed in facilities in other states due to the lack of facilities or
programs in the home state. The Company enters into purchase of service ("POS")
contracts with the agencies that control placement or placement authorities
which permit students to be placed with YSI, delineate the services to be
provided and describe the method of reimbursement. A POS contract generally has
an initial term of one year and is renewable on an annual basis by the
government agency. Student referrals normally are derived from many different
states, each of which has a separate POS contract.
BUSINESS STRATEGY
The Company's objective is to continue to expand the provision of its
high-quality, innovative and effective programs and services on a national basis
to a broad variety of troubled youth. The Company plans to achieve this
objective through the implementation of its growth and operating strategies. The
key elements of the Company's growth strategy are to: (i) develop new programs
through privatization; (ii) increase the licensed capacity of its programs;
(iii) expand its range of services; and (iv) pursue mergers and acquisitions.
The key elements of the Company's operating strategy are to: (i) improve
operating efficiencies; (ii) implement comprehensive information systems; and
(iii) limit capital deployment.
GROWTH STRATEGY
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Develop New Programs Through Privatization. The Company will continue to
pursue the development of new programs in response to privatization
opportunities. In addition, the Company will continue to work with government
agencies to help develop privatization opportunities. The Company has, and
believes it can continue to, facilitate and assist states and state agencies in
the process of determining to shift certain of its youth care services to
private industry. In some instances the development of privatization
opportunities may result in the opening or expansion of a "de novo" program by
the Company to service youth referred by placement authorities. Although the
Company believes that the growing trend is for most privatization opportunities
to be presented in a competitive bidding process in response to RFPs issued by
government agencies, the Company believes that factors such as experience and
the ability to provide effectively the desired services will continue to be
important determinants in RFP awards, and that involvement in the privatization
process can position the Company as the provider of choice and enhance its
ability to be the successful bidder. In addition, the Company believes that new
opportunities are arising to provide governmental agencies with services
relating to the design, construction and financing of new facilities for
troubled youth in connection with the award of an RFP to operate a program. The
Company is positioning itself to provide these development activities in order
to enhance its ability to win RFP awards to operate new programs.
Increase Licensed Capacity. The Company believes that its privatization
programs have been more successful than programs operated by governmental
agencies both in terms of better preparing youth to become productive members of
society and generating cost efficiencies. This success has enabled the Company
to increase the licensed capacity of many of its programs and should assist the
Company in obtaining governmental approval for further increases in licensed
capacity. The Company believes it has the physical facilities and campuses that
are capable of significant expansion of its current programs without significant
additional capital outlays. The Company generally has been able to add beds to
existing facilities at a cost that is substantially lower than the cost of new
construction, which results in lower costs per student.
Expand Range of Programs. The Company will continue to expand the types of
programs and the range of program components it offers in response to the demand
for more programs from its customers. The Company strives to be the full service
provider of programs within the continuum of care of programs necessary or
desirable to serve troubled youth. The Company will continuously evaluate the
effectiveness of its programs in preparing troubled youth to become responsible,
self-sufficient taxpayers. As the Company, or customers, identify new or more
effective programs or program components, the Company will strive to develop and
provide such programs and program components.
Pursue Mergers and Acquisitions. The Company will continue to evaluate and
selectively pursue merger and acquisition opportunities. Since its inception,
the Company has consummated ten acquisitions of programs that contained an
aggregate of 751 licensed beds at the time of acquisition. The Company's
objective is to acquire businesses that can be integrated into the Company's
high quality, cost-effective approach to servicing troubled youth in areas that
complement existing programs as well as in new markets.
OPERATING STRATEGY
Improve Operating Efficiencies. The Company believes that it has not yet
fully integrated its acquired programs to create more cost and operating
efficiencies or to capitalize on efficiencies resulting from its increased size
and scope of business. The Company recently has begun the process of
consolidating and rationalizing its organizational structure. As part of this
process, the Company continues to implement a centralized purchasing system
pursuant to which YSI seeks national contracts and takes advantage of volume
purchasing opportunities. It is management's objective to structure its overhead
costs and services so that the Company can leverage incremental growth in a more
efficient and accretive manner.
Implement Comprehensive Information Systems. In order to continue to
improve its business, YSI is developing and integrating an information
management system that will produce better and more timely information and
create cost efficiencies by enhancing the operation and control of the Company's
student data management, financial management, human relations and executive
management functions. The student data management function consists of
maintaining a student data base, gathering information regarding the students
upon arrival, monitoring and supplementing such information throughout their
stay and developing meaningful reports of such data that will assist the Company
in measuring the effectiveness of various programs and education and training
techniques. The financial management system is designed to integrate the various
financial systems from the Company's acquisitions and to develop consistent
accounting
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procedures and controls and financial reporting. Similarly, the human resource
system is designed to integrate the human resource functions for its
approximately 2,700 employees. The Company is in the early development stage of
an executive management system that will produce and summarize pertinent data
regarding the operations of the programs which will permit more timely
oversight and control by executive management.
Limit Capital Deployment. The Company has sought and will continue to seek
to minimize the amount of capital required to develop and operate programs,
particularly investment in real estate and facility costs. The Company seeks,
and consequently many of its existing facilities are comprised of, buildings
that were previously used for purposes that lend themselves to efficient
conversion to YSI programs, such as schools, hospitals and military bases.
Utilization of these facilities allows the Company to focus on the operation of
programs rather than the development and financing of real estate. However, the
Company, after careful review, will make such investments when it is
advantageous to do so in order to respond to an RFP that requires such
investment as a component of the bid or otherwise enhances the Company's chances
to be awarded a desired RFP, or in connection with an acquisition.
YSI PROGRAMS
PROGRAM COMPONENTS
YSI has developed programs which constitute a comprehensive approach
designed to address the multiple needs of troubled youth. YSI provides these
services by using its "Formula for Success" which teaches accountability,
respect and discipline through highly structured, physically demanding,
intensely scheduled and intellectually challenging activities. Educators, YSI
staff, parents, caseworkers and the students themselves participate in a
pre-entry evaluation of each student. Based upon this evaluation, a development
plan is designed for each student. The primary elements of YSI programs include:
- Positive Peer Culture. A positive peer culture is established by
well-trained, experienced staff who model desired behavior, immediately confront
negative behavior and encourage student development through daily group
counseling sessions. In a matured program, the peer culture is self-sustained
and regenerated by student leaders who model for all students the desired
behaviors and attitudes while they mentor and tutor the newer members of the
group. This culture reinforces the values and thinking patterns being taught to
the youth by immersing them in an environment in which such values and thinking
patterns are demonstrated by their peers and the benefits of such behavior and
the ramifications from unacceptable behavior are experienced. Further, the group
will be held accountable for the behavior of the individuals in the group. If a
group is held accountable for the behavior of an individual, the group will
pressure the individual to conform to acceptable behavior. YSI believes that
such behavior modification techniques will prepare the youth for integration
into the community.
- Thinking and Behavior Change. YSI emphasizes accountability in its
programs which the Company believes differentiates its programs from traditional
troubled youth programming. Students are held accountable for their past actions
as well as for their actions while enrolled in the program in order to teach
them to become responsible for their behavior in the future. Accordingly, these
programs include specific components intended to identify thinking errors, teach
emotion management and conflict resolution techniques, and make students aware
of the impact that their actions have on victims.
- Education Programs. Youth attend education programs either at Company
operated fully accredited schools or through attendance at public schools. YSI
teachers conduct a full day of intense school activities.
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All programs at non-foster care residential facilities are accredited by a local
or state education agency; therefore, academic credits earned at a YSI academy
count towards credits required for high school graduation. As an alternative,
many students prepare for a General Equivalency Diploma (a "GED"). The intensity
of this educational experience can produce significant results. The Company has
experienced increases in the number of its students that are achieving high
school diplomas, whether during their residency or afterwards.
- World of Work. YSI students are trained in the skills they will need to
apply for, secure and keep a job. The Company attempts to educate its youth in
the fundamental skills required in the workplace such as punctuality and
satisfaction of employer expectations. As part of the vocational training
provided by the Company, most of the programs teach computer literacy and
include a "World of Work" curriculum which can incorporate courses and hands-on
training in vocations such as carpentry, building maintenance, mechanical
drafting, automotive maintenance, auto body repair, small engine repair, and
certified nursing assistant. The "World of Work" curriculum can also encompass
the operation of a business that provides services or products to the public.
Some of these "World of Work" businesses include restaurants, furniture making,
greeting card business, telemarketing, auto repair and detailing, TV and
electronic appliance repair, remodeling and house painting and printing. This
curriculum provides real work training and experience that can be translated to
employment after graduation and in addition provides an opportunity to exhibit
and understand the work habit skills being taught in YSI programs.
- Life Skills. YSI educates its students in all phases of life so they can
succeed on their own in society. The students are trained in certain basic life
skills such as hygiene, time and money management, parenting and sexual
responsibility. Training in practical daily living and social skills is also
provided. The Company believes that achievement of these life skills is a
critical factor in reducing future recidivism. As part of the money management
training, most YSI students are made responsible for restitution, child care and
other obligations.
- Athletics. In addition to required physical education courses,
participation in team-oriented athletic activities is strongly encouraged in
most of the Company's programs. Athletics provides opportunities for youth to
heighten self-esteem, experience the values of sportsmanship, learn the virtues
of teamwork and leadership and to enhance other values that are important to
being a responsible citizen as well as provide helpful physical exercise.
Several of YSI's programs have become members of the regional high school
athletic associations and field teams that compete with other high schools in a
variety of interscholastic sports including football, baseball, basketball,
wrestling, cross-country and track and field.
- Public Safety. YSI programs are offered in both secure and open
settings. The Company's secure programs utilize security fences and locked doors
and windows to aid the staff in controlling the student population, and in the
open programs, security is maintained solely by staff. Each student's
whereabouts is constantly monitored by staff and the frequency of monitoring
depends upon the student's level of behavior. In both secure and open
facilities, students earn the trust of staff and receive greater freedom to move
about the campus as they successfully progress through the program. All programs
have comprehensive procedures in place to deal with unauthorized departures from
campus.
PROGRAM FACILITIES AND SETTINGS
Residential Juvenile Justice Academies. The Company's residential juvenile
justice academies ("Academy") typically house troubled youth who are 13 to 18
years old and who have been adjudicated delinquent or are considered at risk of
being adjudicated delinquent. These facilities range from medium security
residential academies to high security facilities for serious offenders. The
average length of stay in an Academy typically ranges from 6 to 24 months. The
goal of the programs offered in the Academy environment is to change
dramatically the thinking and behavior of the students and to provide them with
the skills required to continue their education or training successfully, obtain
employment and eventually become self-sufficient taxpayers. In addition, the
Company offers several specialized programs at selected academies, including
High Impact, Boot Camp, Sex Offender and Detention programs. See "-- Specialized
Programs."
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Residential Treatment Centers. The Company's residential treatment centers
("RTCs") typically house youths aged 11 through 18 with a variety of behavioral
and/or mental problems including chemical dependency, mental handicaps and
emotional disturbance. While certain of the Company's RTC facilities offer acute
inpatient care, most of its RTC facilities generally offer a range of less
costly and lower acuity care services as compared to more traditional forms of
behavioral health services. Students at RTC's can receive a wide range of
services, ranging from preventative care and outpatient counseling to intensive
psychiatric treatment. In addition, the Company offers several specialized
programs at selected RTC facilities, including Emergency Shelter, Sex Offender,
Substance Abuse and Long-Term Shelter. See "-- Specialized Programs."
Residential Community-Based Facilities. The Company's residential
community-based facilities offer services to troubled youth in group homes,
foster homes and independent living facilities. Community-based group homes are
staffed 24 hours a day with youth care professionals and usually house between 5
and 10 children.
SPECIALIZED PROGRAMS
The Company also offers various specialized programs at select residential
facilities. These programs are generally shorter term in nature and are designed
to motivate a dramatic change in behavior and attitude on the part of its
students. These programs range among the following:
Sex Offender Programs. The Company's sex offender programs serve the
special needs of youth involved in sexual offenses. The programs are generally
locked-secure and involve lengths of stay from 12 to 24 months.
High Impact Programs. The Company's high impact programs immerse youth who
have failed or performed below expectations in non-residential settings in a 30
to 90 day intense regimen of academic classes, physically demanding activities
and group therapy.
Boot Camp Programs. The Company's boot camp programs are intense,
physically demanding programs that are conducted in a military format including
uniforms and drills and involve lengths of stay from 30 to 150 days.
Detention Programs. The Company's detention programs are designed to house
youth for periods of 1 to 90 days as they await disposition of court cases or
determinations of placement. The Company's assessments of students in detention
programs are often used by courts and other placement authorities in making
placement decisions.
Emergency Shelter Programs. The Company's emergency shelter programs serve
troubled youth who are not adjudicated or accused of a crime but who are in need
of temporary residential facilities due to the lack of a home or other family
circumstances. The lengths of stay are generally short term, from 1 to 3 months.
Substance Abuse Programs. The Company's substance abuse programs serve the
special needs of youth that are suffering, or in danger of suffering, from drug
or alcohol addiction and involve lengths of stay from 3 to 45 days.
Long-Term Shelter Programs. The Company's long-term shelter programs offer
housing services to those youth who are wards of the State or who have been
removed from their own home by child protective services. This program is an
alternative to the traditional orphanage or large welfare institution. Youth
range in age from nine to eighteen years of age and lengths of stay range from 3
months to several years.
Non-Residential Community-Based Programs. The Company's non-residential
community-based programs are designed to assist those students who have
committed a minor offense and are capable of being treated in his/her own
community and those who have graduated from Company facilities seeking to
transition back into their communities. These non-residential programs include
tracking and counseling services, partial care and day treatment programs,
prevention classes and aftercare.
Foster Care Programs. The Company's foster care programs train potential
foster care families, place youth with families, counsel foster children and
their families during the foster care stay and provide other
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services in connection with the placement of youth in foster care environments.
Generally, lengths of stay in these programs vary from six months to one year.
PROGRAM OFFERINGS
The residential programs operated by the Company are as follows:
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AT DECEMBER 31, 1996
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INITIAL % INCREASE NUMBER
TYPE OF START LICENSED LICENSED IN OF
PROGRAMS FACILITY DATE SOURCE CAPACITY CAPACITY CAPACITY STUDENTS
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Clarinda Academy, IA.............. Academy 2/92 de novo 60 247 312% 246
Victor Cullen Academy, MD......... Academy 9/92 RFP 60 184 207 184
Reflections Treatment, TN......... Academy 9/92 RFP 26 42 62 42
Forest Ridge, IA.................. Academy 2/93 Acq. 105 161 53 115
Hickey School, MD................. Academy 7/93 RFP 312 323 4 315
YSI-Utah, UT...................... Community-Based 7/93 Acq. 60 209 248% 173
Chamberlain Academy, SD........... Academy 11/93 Acq. 60 78 30 88
Springfield Academy, SD........... Academy 11/93 Acq. 70 108 54 18
Parc Place, AZ.................... RTC 8/94 Acq. 46 46 -- 48
Tarkio Academy, MO................ Academy 9/94 de novo 103 308 199 308
Promise House, AZ................. Community-Based 10/94 Acq. 28 65 132 48
Developmental Behavioral
Consultants, AZ................. Community-Based 6/95 Acq. 97 97 -- 90
Woodward Academy, IA.............. Academy 7/95 RFP 25 98 292 42
Desert Hills New Mexico, NM....... RTC 9/96 Acq. (1) 72 72 -- 65
Desert Hills Arizona, AZ.......... RTC 7/95 Acq. 120 139 16 116
College Station, TX............... (2) 7/95 (2) 54 99 83 94
Camp Washington, VA............... Academy 1/96 RFP 45 95 111 72
Tampa Bay Academy, FL............. RTC 3/96 Acq. 104 104 -- 53
Everglades Academy, FL............ Academy 12/96 de novo 102 102 -- 30
Keweenaw Academy, MI.............. Academy 12/96 de novo 80 80 -- --
----- ----- --- -----
Total/Percentage.................. 1,629 2,657 63% 2,147
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(1) The Desert Hills Arizona program was operated by the Company pursuant to a
management agreement during the period of July 1, 1995 through September 1,
1996. As of September 1, 1996, the Company acquired this program.
(2) The College Station program is an Academy and an RTC. The Company assumed
the operation of this program from the prior operator in July 1995 based on
relationships the Company developed with the mortgagee of the real estate on
which the program operates. Therefore, this program was not acquired, was
not a true "de novo" program and was not obtained through an RFP.
In addition, the Company provides non-residential community-based programs
at some of the Company's residential facilities including aftercare, tracking,
consulting, partial care and day treatment services.
CONSULTING AND DEVELOPMENT SERVICES
CONSULTING SERVICES
Opportunities to provide consulting services have been presented to the
Company from time to time in projects to assist in the evaluation of problems of
youth, the improvement of youth care services, the implementation of programs
into a community, privatization and similar projects. The Company does not
actively pursue the provision of these services but is willing to respond to
opportunities if, after evaluating the project, the Company determines it
presents a profitable use of resources, permits the Company to participate in a
privatization process with potential to position the Company as the provider of
choice, assists in community acceptance of potential youth care programs or is
beneficial to the Company based on other similar factors.
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DEVELOPMENT SERVICES
The Company believes that new opportunities are arising to provide
governmental agencies with services relating to the design, construction and
financing of new troubled youth care facilities. The Company expects that
governmental agencies will continue to favor companies that can provide turnkey
services from designing and building a facility to creating and operating a
program. Specifically, such agencies are seeking companies that can provide the
design, construction and financing of a facility and can ultimately operate the
program upon completion of construction of the facility. The Company is
positioning itself to provide these development activities in order to be
awarded the contract to operate these new programs. However, even on projects
that do not afford a private operation opportunity, the Company may provide the
design, construction and financing of a facility for the state agency if the
Company believes it can benefit financially from these activities.
Development contracts generally require companies to assume responsibility
for overall project development and completion. These services require the
assembling of a team consisting of architects, operational experts from various
disciplines, and financial and legal advisors that participates in and
coordinates all aspects of the development from conceptual design through final
construction of the project.
The Company expects to act as the primary contractor and project manager on
construction contracts for facilities and to subcontract with local or other
known developers who act as the general contractor. The Company will develop a
decision team of management personnel and subcontractors to respond to these
opportunities and perform these functions. Eventually, the Company may employ
architects established in the design of youth care or correctional facilities to
assist and augment these efforts. The Company believes that it typically will
take 12 to 24 months to construct a facility after the contract is executed and
financing is approved.
As part of the development activities, the Company will facilitate the
arrangement of construction financing to contracting governmental agencies. The
governmental agency may finance the construction of such facilities through
various methods including, but not limited to, the following: (i) a one time
general revenue appropriation by the governmental agency for the cost of the new
facility, (ii) general obligation bonds that are secured by either a limited or
unlimited tax levy by the issuing governmental entity, or (iii) lease revenue
bonds or certificates of participation secured by an annual lease payment that
is subject to annual or bi-annual legislative appropriations. The Company will
not act as a source of financing nor as a broker in any regard with respect to
any of such methods of financing nor will it assume any risk associated with the
financing.
CUSTOMERS AND MARKETING
The Company's sales and marketing efforts are directed toward developing
new programs focused on payors and placement authorities. Placement authorities
consist of state juvenile services agencies, judges of juvenile and other
courts, parole officers, state welfare and child protective agencies, doctors,
psychiatrists, psychologists and hospitals. The Company's senior management and
its senior marketing personnel coordinate with personnel at the Company's
programs to pursue RFP and POS contracts with governments and government
agencies and contracts with private third party payors. The Company believes
that this combined sales and marketing effort ensures that its regional efforts
are consistent with the Company's overall business strategy and that sales
efforts conform to the condition of the market in each region. Further, the
Company believes that its local and regional executive directors and personnel
provide the Company with a competitive advantage through their local contacts
and understanding of local and regional business conditions.
The Company must market its services to governments and government agency
payors in order to capitalize on privatization opportunities. These agencies
contract with the Company to be an "authorized" or licensed provider of services
to troubled youth within their states. In the case of contracts resulting from
RFPs, the agency payor will also be the party responsible for placing the youth.
In the case of POS contracts, the placements need to be more actively sought by
the Company from various sources. In either event, the residential programs
require a concerted effort by the student admissions personnel to manage the
admissions and graduation of students in order to maintain high occupancy. The
student admissions personnel of each program must continually market to
placement authorities in order to obtain a steady flow of referrals.
8
<PAGE> 11
The Public Relations Department at YSI assists the individual programs in
developing local community involvement and relations activities, including
instituting Community Advisory Boards, Community Relations Groups, Foster
Grandparents Programs and Volunteer Programs. In addition, most of the YSI
programs include student involvement in local community service projects such as
park and highway clean-up, snow removal, holiday and festival set-up, feeding
the homeless, and charity races and marathons. The Public Relations Department
also directs a proactive marketing and communications program that includes
public relations, investor relations and media relations for the Company.
PERSONNEL AND TRAINING
GENERAL
The Company has assembled an experienced team of managers and staff that
blends program expertise with business and financial experience in each area of
its operations. This team includes juvenile justice administrators, educators,
mental health professionals, retired military officers and collegiate coaches
and athletes, combined with human resource, financial, facilities and marketing
professionals. YSI prefers to recruit direct care staff who have obtained
undergraduate or graduate degrees in education and in behavioral or social
sciences. YSI believes that its team is fully qualified to carry out the
Company's mission.
YSI employed approximately 2,700 personnel as of December 31, 1996: 51% in
direct care workers; 40% in professional, teacher and manager positions; and 9%
in support functions. In addition, the Company routinely utilizes independent
contractors as needed for medical, educational, facility expansion, and support
services.
Newly hired direct care staff receive pre-service and continuing training.
Core training includes courses in the major YSI program components such as
behavior change education, positive peer culture, discipline and limit setting,
emotion management and the teaching of pro-social skills. Annual continuing
education also is required of all professional staff. In addition, YSI
demonstrates its commitment to its employees' professional development by
offering lectures, classes and training programs as well as tuition
reimbursement benefits.
YSI believes that its recruitment, selection and training programs provide
the Company with quality personnel experienced in YSI's approach to providing
behavior change and education programs. YSI also believes that these programs,
which are conducted throughout the YSI system, provide the Company with
management depth and consistency. These programs promote the cross training of
staff resources which, in turn, creates flexibility in managing the Company's
personnel resources as the number and location of programs expand. Management is
committed to programs that foster career planning and development and that
include elements such as succession planning, regularly scheduled and timely
performance reviews and promoting talented people as they move through the
organization.
QUALITY ASSURANCE
The Company utilizes Quality Improvement Committees at its various programs
in order to monitor and make recommendations and, if appropriate, take
corrective actions. The committees are comprised of employees at various levels
of authority and from various operating departments within each program. In
addition, from time to time, employees of one facility visit other facilities
and perform inspections and critique programs.
The Company's senior management includes a contract compliance officer who
ensures that the various programs are in compliance with their respective
contractual requirements. The contract compliance officer coordinates his
efforts with the Quality Improvement Committees at the Company's various
programs and provides senior management with periodic reports regarding the
overall status of the Company's programs. The Company believes that the contract
compliance officer provides senior management with a vital link to the programs
operations and helps ensure that the Company provides consistent, quality
service.
Governmental agencies perform audits of each operating program, its record
keeping, and the condition of the physical plant pursuant to the Company's
contract or as part of the licensing or license renewal process. In addition,
several programs operate with industry accreditations, such as the Joint
Commission on Accreditation of Healthcare Organizations (JCAHO). Periodic
inspections are undertaken by the accreditation organization in order for the
Company to maintain its accreditation.
9
<PAGE> 12
COMPETITION
YSI competes with a wide variety of organizations, including other
for-profit companies, not-for-profit companies and governmental agencies that
provide youth care services. The Company distinguishes itself from its
competitors by emphasizing growth and development through behavior change and
education programs as opposed to strictly punitive incarceration and
institutionalization. The Company competes primarily on the basis of the quality
and range of its programs, on price and on the professional reputation of its
programs and personnel. The industry is highly fragmented and the Company
believes that most providers of youth care services are very small and operate
on a local or regional basis. YSI believes that there are very few competitors
that can offer as broad an array of services on a national basis. Some of the
Company's competitors have financial resources greater than the Company and
could expand their operations and scope.
REGULATION
The industry in which the Company operates is subject to extensive federal,
state and local regulations that are administered by a variety of regulatory
authorities. Providers of youth services must comply with a variety of
applicable state and local regulations, including education, health care and
safety regulations. The Company must maintain appropriate licenses,
certifications and accreditation for its programs in order to conduct its
operations. In addition, many state and local governments are required to
conduct a competitive bidding procedure before awarding contracts for products
or services. The failure to comply with any applicable laws, rules or
regulations or the suspension, placement of provisions on or loss of a license
may have a material adverse effect on the Company's business, financial
condition and results of operations. Further, the current and future operations
of the Company may be subject to additional regulations as a result of, among
other factors, new statutes and regulations and changes in the manner in which
existing statutes and regulations are or may be interpreted or applied. Any such
additional regulations may have a material adverse effect on the Company's
business, financial condition and results of operations.
The health care industry is subject to extensive regulation by federal,
state and local governments, including regulations under Medicare and Medicaid
programs. Certain of the Company's behavioral health programs, are subject to
such regulation. Failure to comply with such laws and regulations can cause
fines and other penalties to the Company and can cause expulsion from Medicare,
Medicaid or other program involvement which sanctions could have a material
adverse affect on the Company. Government-imposed limitations on Medicare and
Medicaid reimbursement have placed downward pressures on rates charged under
these programs and have caused the private sector to bear a greater share of
increasing health care costs. As a result of the continued escalation of health
care costs and the inability of many individuals to obtain health insurance,
numerous proposals have been or may be considered in the United States Congress
and various state legislatures relating to health care reform. Certain measures,
if adopted, could affect the rates charged by the Company for certain of its
services, could affect the manner in which care must be provided or could
otherwise have a material adverse affect on the Company's business.
ITEM 2. PROPERTIES
Consistent with the Company's policy of limited capital deployment, most of
the Company's facilities are leased and the total cost to the Company for the
land and facilities that it owns was approximately $20.7 million as of December
31, 1996. Many of the lease arrangements are on terms the Company considers to
be favorable. Several leases provide for multiple renewal periods at the option
of the Company providing long-term availability for the Company without the
long-term commitment of resources.
In many cases, the Company leases the facilities it uses in connection with
its program from the customer with which it contracts for the services. In these
cases the lease terms are concurrent with the terms of the service contracts.
The rent varies based upon the terms of the service contract. For example,
facilities used by the Company in connection with the Hickey School and Victor
Cullen Academy programs are provided by the State of Maryland at a cost to the
Company of $1.00 per year each. The Company is responsible for the utilities,
maintenance and repair of the facilities.
10
<PAGE> 13
The Company's executive offices and headquarters are located in a 10,845
square foot leased facility located at 2 Park Center Court, Suite 200, Owings
Mills, Maryland. The lease for this facility expires in May 2002.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings other than routine
litigation which the Company does not believe is significant to its future
financial position or results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Reference is made to the Company's Form 10-Q for the quarter ended December
31, 1996 for the information required by this section.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed and traded on the Nasdaq National
Market under the symbol "YSII." On May 24, 1996, the Company affected a
three-for-two stock split through the declaration and payment of a stock
dividend of one share of Common Stock for every two shares of Common Stock
outstanding or reserved for issuance. The following table sets forth the high
and low sales prices of the Common Stock as reported on the Nasdaq National
Market after giving effect to the stock split.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR ENDED JUNE 30, 1995:
1st Quarter......................................................... 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
TRANSITION PERIOD FROM JULY 1, 1996 AND DECEMBER 31, 1996
July 1, 1996 to September 30, 1996 ................................. 24 13 7/8
October 31, 1996 to December 31, 1996............................... 17 3/4 10 7/8
</TABLE>
As of December 31, 1996 the approximate number of holders of record of
common stock of the Company was 430.
The Company has never paid dividends on its Common Stock (other than the
stock dividend on May 24, 1996 to effect the stock split) and does not
anticipate paying any dividends in the foreseeable future as the Company intends
to retain all earnings, if any, for use in the expansion of its business. The
declaration and payment of dividends by the Company are subject to the
discretion of the Company's Board of Directors. Any declaration of dividends in
the future will depend upon the results of operations, capital requirements and
financial condition of the Company, contractual restrictions in loan and other
agreements and such other factors as the Company's Board of Directors may deem
relevant.
11
<PAGE> 14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company as of and
for each of the years in the five year period ended June 30, 1996 and for the
six month period ended December 31, 1996 are derived from the audited
consolidated financial statements of the Company. The consolidated financial
data for the six month period ended December 31, 1995 is unaudited. All of the
financial data presented in the following table should be read in conjunction
with the Company's Consolidated Financial Statements, including the notes
thereto, included herein and Management's Discussion and Analysis of Financial
Condition and Results of Operations. See "Consolidated Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JUNE 30, ENDED DECEMBER 31,
-------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1995 1996
------ ------- ------- ------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................ $ 436 $ 8,895 $34,892 $53,087 $100,353 $ 46,992 $ 57,043
Program expenses
Direct operating........................... 499 8,390 29,533 44,374 85,822 40,012 48,000
Amortization of goodwill................... -- 7 286 583 1,039 478 1,010
Start-up costs............................. 122 392 40 280 58 30 142
----- ------- ------- ------- -------- --------- ---------
Contribution from operations.................... (185) 106 5,033 7,850 13,434 6,472 7,891
Other operating expenses
Selling, general and administrative........ 620 1,595 2,731 4,097 5,760 2,801 3,761
Costs of attempted acquisitions............ -- -- -- -- 569 -- --
----- ------- ------- ------- -------- --------- ---------
Income (loss) from operations................... (805) (1,489) 2,302 3,753 7,105 3,671 4,130
----- ------- ------- ------- -------- --------- ---------
Other income (expense)
Interest expense........................... (1) (173) (403) (268) (3,160) (1,234) (1,908)
Interest income............................ 14 8 51 50 645 44 500
Other income (expense), net................ -- (17) 2 (24) (463) (233) (242)
----- ------- ------- ------- -------- --------- ---------
13 (182) (350) (242) (2,978) 1,423 (1,650)
----- ------- ------- ------- -------- --------- ---------
Income (loss) before income tax (expense)
benefit....................................... (792) (1,671) 1,952 3,511 4,127 2,248 2,480
Income tax (expense) benefit.................... -- -- 140 (1,332) (1,856) (978) (946)
----- ------- ------- ------- -------- --------- ---------
Net income (loss)............................... $(792) $(1,671) $ 2,092 $ 2,179 $ 2,271 $ 1,270 $ 1,534
===== ======= ======= ======= ======== ========= =========
Earnings (loss) per common and common equivalent
share......................................... $(.17) $ (.27) $ .29 $ .26 $ .25 $ .14 $ .15
===== ======= ======= ======= ======== ========= =========
Weighted average common and common equivalent
shares outstanding............................ 4,722 6,271 7,094 8,264 9,267 8,898 10,027
===== ======= ======= ======= ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
-------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996
----- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash............................................ $ 369 $ 663 $ 3,816 $ 784 $ 7,046 $ 3,037
Working capital................................. 444 178 6,078 9,624 29,923 12,795
Total assets.................................... 742 4,704 18,130 29,050 74,639 93,089
Long-term obligations, net of current portion... 70 3,141 1,291 6,955 43,145 36,940
Total liabilities............................... 258 5,452 4,315 11,382 51,188 60,499
Shareholders' equity (deficit).................. 484 (748) 13,815 17,668 23,451 32,590
</TABLE>
12
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
As of December 31, 1996, YSI operated 20 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, in
certain instances, with unaffiliated not-for-profit entities that have
contracts with government agencies. See the Notes to the Company's Consolidated
Financial Statements.
The Company's programs are operated pursuant to fixed per diem contracts
based upon program occupancy and management contracts, including management
contracts with not-for-profit entities, as well as various third party payor
reimbursement contracts. The Company recognizes revenues under all contracts as
the services are performed. Under certain cost-based reimbursement contracts,
certain costs may be subject to audit and adjustment as determined through
negotiations with government or third party payor representatives. Under these
contracts, contract revenues are recorded at amounts that are expected to be
realized. In addition, the Company recognizes revenue from its consulting and
development services as they are performed.
The contribution from operations, in general, is lower in the initial
stages of a program's development primarily due to costs associated with
staffing requirements needed to obtain licensing prior to admitting students
into a program as well as costs incurred during the period prior to the
achievement of stable program occupancy. The Company's contribution from
operations as a percentage of revenue is greater under some of its contractual
arrangements with unaffiliated not-for-profit entities because the
not-for-profit entity is responsible for certain elements of operating the
program and incurs some of the costs. Therefore, in these instances, the Company
earns its margin on a lower base of costs and revenues.
On May 24, 1996, the Company effected a three-for-two stock split through
the payment of a stock dividend of one share of common stock for every two
shares of common stock held by each record holder thereof.
On April 25, 1997, the Board of Directors approved a resolution to change
the Company's year-end from June 30 to December 31.
CERTAIN TRANSACTIONS
During the six months ended December 31, 1996, the Company restructured
its arrangement with International Youth Institute ("IYI"). The Company
began outsourcing its training of its child care staff workers from IYI as of
July 1, 1996. In connection with this arrangement, a number of YSI employees
who were trainers of other YSI employees were hired by IYI. In late calendar
year 1996, YSI renegotiated the arrangement in order to be compensated for the
knowledge, training materials and other intellectual property that had been
transferred to IYI by virtue of the transfer of former YSI employees to IYI.
Under the new agreement, IYI paid $700,000 for the transfer of such assets, and
will not be compensated for training services it provided prior to January 1,
1997. The sale amount of $700,000 has been included in revenues in the
accompanying statements of income for the six months ended December 31, 1996.
In addition, IYI grants YSI a perpetual, fully-paid and royalty-free license to
use the intellectual property in its operations. YSI and IYI also entered into
a training services agreement pursuant to which IYI will provide certain
training services to YSI for a period of five years at a rate of approximately
$34 per month per full-time employee of YSI.
During the second quarter, the Company reached agreement with Evergreen
National Development, Inc. ("Evergreen") regarding termination of its
agreement with YSI. YSI had entered into an agreement with Evergreen in early
calendar year 1996 for services relating to property and facility maintenance,
mergers and acquisitions, business development and general consulting matters.
The Company terminated the agreement in September 1996 in connection with its
determination that these services could more efficiently and effectively be
performed by Company personnel. As a result of the termination, Evergreen
agreed to pay the Company $648,000 of which approximately $360,000 was recorded
as revenue in the six months ended December 31, 1996.
In December 1996, the Company amended its Revolving Line of Credit
agreement with a bank to increase the loan amount to the lesser of $20,000,000
or the sum of 85% of the eligible accounts receivable and 95% of the cash and
cash equivalents on deposit with the bank. Amounts drawn under this line of
credit bear interest at prime plus one-half percent and are payable on demand.
As of December 31, 1996, YSI borrowed approximately $13,000,0000 to fund the
Introspect acquisition and repayment of related debt, and to fund general
working capital needs of the Company.
In October 1996, the Company was awarded a contract by the State of
Florida, Department of Juvenile Justice, to operate a 102 bed juvenile
corrections facility for adjudicated youth in Dade County, Florida. The
Company commenced operations in early December 1996.
In December 1996, the Company entered into an agreement with the State of
Michigan to operate an 80 bed juvenile facility in Michigan. The Company
commenced operations in March 1997.
RECENT DEVELOPMENTS
In March 1997, the board of directors approved, and management committed
to a plan to sell the nine programs that comprise the Company's behavioral
health business. As a result of this decision to dispose of the behavioral
health businesses, the Company recorded a restructuring charge of $27,000,000
in the quarter ending March 31, 1997 to reduce the carrying amount of
behavioral health assets to their estimated fair value based upon an
independent appraisal less selling costs. In July 1997, the Company entered
into a definitive agreement to sell the behavioral health business for $21.7
million. The Company expects to record a pre-tax gain of approximately $6.0
million from the sale. The Company will continue to operate its behavioral
health business until the closing of the sale which is expected to occur on
or before September 30, 1997.
In September 1996, the Company exercised its option (the "Option") to
acquire all of the stock of Introspect Healthcare Corporation ("Introspect") for
$4,000,000 in cash and the assumption of $15,668,000 of liabilities. In
addition, unamortized costs related to the purchase of the Option, notes and
other receivables due to the Company from Introspect and costs related to the
exercise of the Option, in the aggregate amount of approximately $3,000,000
million, will be considered as part of the purchase price. Upon exercise of the
Option, the Company retired approximately $9,700,000 of Introspect's
indebtedness with an average interest rate of approximately 11.7% utilizing
funds drawn against YSI's existing credit facilities.
The Company acquired the Option on July 1, 1995, in conjunction with
acquiring the Desert Hills New Mexico program from Introspect and entering into
a management agreement to manage Introspect for a period of five years.
Introspect is a provider of residential and non-residential behavioral health
services to troubled youth through the 120-bed Desert Hills Arizona program. In
addition, under the Company's management during fiscal year 1996, the Desert
Hills Arizona program added juvenile justice programs with a current capacity of
26 beds.
As a result of the "early" exercise of the Option effective as of September
1, 1996 (the Option was exercisable at any time during the five year period) and
the significant degree of Introspect's financial dependence on the Company,
accounting principles require that the operating results of Introspect be
consolidated with the Company's statement of income for fiscal year 1996 and the
first two months of the first quarter of fiscal year 1997. The acquisition
pursuant to the exercise of the Option will be recorded using the purchase
method of accounting with effect as of September 1, 1996. As a result, the
Company's balance sheet for fiscal year 1996 does not reflect the acquisition of
Introspect pursuant to the exercise of the Option.
13
<PAGE> 16
In July 1996, the Company completed a transaction whereby foreign holders
of an aggregate principal amount of $5,750,000 of the Company's 7% Convertible
Subordinated Debentures Due 2006 (the "Debentures") surrendered such Debentures
for conversion and received in the aggregate 461,106 shares of Common Stock,
accrued interest of $105,500 and a conversion premium of $297,000 (reflecting
the excess of the market value of the Debentures over the face amount at that
time). The Company elected to pay the accrued interest and the premium to induce
the early conversion of these Debentures because the Company believes the
transaction to be accretive to future earnings. Because the Company decided to
pursue this transaction during fiscal year 1996, the Company recorded the
conversion premium in the fourth quarter of fiscal year 1996; however, for
balance sheet purposes, because the transaction occurred in July 1996, the
conversion of the Debentures are not reflected in the Company's consolidated
balance sheet as of June 30, 1996.
RESULTS OF OPERATIONS
The following table sets forth selected items from the Company's
consolidated financial statements expressed as a percentage of total revenues:
<TABLE>
<CAPTION> SIX MONTHS
FISCAL YEAR ENDED JUNE 30, ENDED DECEMBER 31,
-------------------------- ------------------
1994 1995 1996 1995 1996
----- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C>
Revenues............................................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Program expenses:
Direct operating................................................ 84.6 83.6 85.5 85.1 84.1
Amortization of goodwill........................................ 0.9 1.1 1.0 1.0 1.8
Start-up costs.................................................. 0.1 0.5 0.1 0.1 0.2
----- ----- ----- ----- -----
Contribution from operations......................................... 14.4 14.8 13.4 13.8 13.9
Other operating expenses:
Selling, general and administrative............................. 7.8 7.7 5.7 6.0 6.6
Costs of attempted acquisitions................................. -- -- 0.6 -- --
----- ----- ----- ----- -----
Income from operations............................................... 6.6 7.1 7.1 7.8 7.3
Other income (expense):
Interest expense................................................ (1.2) (0.5) (3.1) (2.6) (3.3)
Interest income................................................. 0.2 0.1 0.6 0.1 0.9
Other income (expense), net..................................... -- (0.1) (0.5) (0.5) (0.4)
----- ----- ----- ----- -----
Income before income tax benefit (expense)........................... 5.6 6.6 4.1 4.8 4.5
Income tax benefit (expense)......................................... 0.4 (2.5) (1.8) (2.1) (1.8)
----- ----- ----- ----- -----
Net income........................................................... 6.0% 4.1% 2.3% 2.7% 2.7%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 1995
Revenues. Revenues increased $10,051,000, or 21.4%, to $57,043,000
for the six months ended December 31, 1996 from $46,992,000 for the six months
ended December 31, 1995 primarily as a result of the addition of new programs
operated by the Company during each period and the continued expansion of
existing facilities. Of the total increase in revenues, $4,605,000 was
attributable to the operations of four programs that were acquired, opened or
managed after the second quarter of fiscal 1996; $5,519,000 was attributable to
the sixteen programs that were operated by the Company in both the six months
ended December 31, 1996 and 1995; $700,000 was attributable to the sale of the
Company's training material and other intellectual property to IYI (see
"Certain Transactions"); and $360,000 was attributable to the termination of
the Company's agreement with Evergreen (see "Certain Transactions"). The
increase in revenues was partially offset by a decrease in revenues of
$1,262,000 resulting from the closing of one program in fiscal 1996. The
average daily enrollment for all of the Company's programs increased 22.1% to
2,172 youth for the six months ended December 31, 1996 from 1,779 youth for the
six months ended December 31, 1995, including a 15.7% increase in average daily
enrollment in the sixteen programs that the Company operated for both the six
months ended December 31, 1996 and 1995 to 2,059 youth from 1,779 youth. The
Company reported an occupancy rate of 91.7% for the six months ended December
31, 1996 compared to 91.8% for the six months ended December 31, 1995 based on
an average daily licensed capacity of 2,368 beds for the six months ended
December 31, 1996 and 1,937 beds for the six months ended December 31, 1995.
Program Direct Operating Expenses. Program direct operating expenses
increased $7,988,000, or 19.9%, to $48,000,000 for the six months ended
December 31, 1996 from $40,012,000 for the six months ended December 31, 1995
primarily as a result of the addition of new programs operated by the Company
during each period and the continued expansion of existing facilities. Of the
total increase in expenses, $4,599,000 is attributable to the operations of
four programs that were acquired, opened or managed after the second quarter of
fiscal 1996. The increase in expenses was partially offset by a decrease in
expenses of $1,270,000 resulting from the closing of one program in fiscal
1996. Salaries and related employee benefits constituted approximately 66.4%
of program direct operating expenses for the six months ended December 31, 1996
compared to 64.5% of program direct operating expenses for the six months ended
December 31, 1995.
Contribution from Operations. Contribution from operations for the
six months ended December 31, 1996 increased $1,419,000, or 21.9%, to
$7,891,000 from $6,472,000 for the six months ended December 31, 1995.
Contribution from operations decreased as a percentage of revenues to 13.9% for
the six months ended December 31, 1996 compared to 13.8% for the six months
ended December 31, 1995.
Selling, General and Administrative Expenses. For the six months
ended December 31, 1996, selling, general and administrative expenses increased
$960,000, or 34.3%, to $3,761,000 from $2,801,000 for the six months ended
December 31, 1995. As a percentage of revenues, selling, general, and
administrative expenses increased to 6.6% for the six months ended December 31,
1996 from 6.0% for the six months ended December 31, 1995. The most
significant components of these costs relate to the compensation expense and
consulting fees associated with business professionals necessary for the
development and oversight of the Company's operations. The increase as a
percentage of revenue for the six months ended December 31, 1996 as compared to
the six months ended December 31, 1995 is primarily attributable to the
Company's efforts to develop the infrastructure necessary to enhance its
current operations and continue its growth.
Interest Expense. Interest expense increased $674,000 to $1,908,000
for the six months ended December 31, 1996 from $1,234,000 for the six months
ended December 31, 1995. Of the increase in interest expense, $1,127,000 was
attributable to the 7% Convertible Subordinated Debentures Due 2006 that were
issued on January 29, 1996, and the remaining increase of $308,000 was
attributable to interest payable on the financing of the Company's personal
property and increases in borrowings on the Company's revolving line of credit.
The increase in interest expense was partially offset by a decrease in interest
expense of $761,000 resulting from paying off debt incurred in connection with
the acquisitions of Desert Hills of New Mexico and Introspect.
Interest Income. Interest income increased $456,000 to $500,000 for
the six months ended December 31, 1996 from $44,000 for the six months ended
December 31, 1995. The increase is primarily attributable to $292,000 of
dividend income earned on temporary investments, and $135,000 of interest
income earned on the mortgage note receivable related to the Tampa Bay Academy
acquisition.
Income Taxes. The provision for income taxes was $946,000, representing
an effective tax rate of 38.1% for the six months ended December 31, 1996 as
compared to $978,000, representing an effective tax rate of 43.5% for the six
months ended December 31, 1995. The decrease in the effective tax rate was
attributable to a $264,000 increase in the pre-acquisition operating results
of Introspect. These operating results were not taxable to the Company, and
therefore, had a favorable impact on the Company's effective tax rate.
Net Income. Net income was $1,534,000, or $.15 per share for the six
months ended December 31, 1996 compared to $1,270,000, or $.14 per share for
the six months ended December 31, 1995.
FISCAL YEAR ENDED JUNE 30, 1996 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1995
Revenues. Revenues increased $47,266,000, or 89.0%, to $100,353,000 for
fiscal year 1996 from $53,087,000 for fiscal year 1995 primarily as a result of
the addition of new programs operated by the Company during each period. Of the
total increase in revenues, $12,931,000 is attributable to the full year of
operations of four programs that were acquired or opened during fiscal year
1995; $12,713,000 relates to the operations of two programs that were acquired
during fiscal year 1996; and $4,214,000 is attributable to the operations of
three programs that the Company opened or began operating during fiscal year
1996. In addition, $16,131,000 of the increase resulted from the consolidation
of the operations of Introspect for the full fiscal year 1996. An increase in
revenues of $2,497,000 was attributable to programs that were operated by the
14
<PAGE> 17
Company for both the full fiscal years 1995 and 1996. The increase in revenues
was partially offset by a decrease in revenues of $885,000 resulting from the
closing of one program in 1996 and a decrease in consulting services and other
revenues of $335,000 as compared to the previous period. The average daily
enrollment for all of the Company's programs increased 51.2% to 1,901 youth in
fiscal year 1996 from 1,257 youth in fiscal year 1995, including a 5.2% increase
in average daily enrollment in programs that the Company operated for both the
full fiscal years 1996 and 1995 to 1,180 youth from 1,122 youth. The Company
reported an occupancy rate of 92.1% in fiscal year 1996 compared to 92.2% in
fiscal year 1995 based on an average daily licensed capacity of 2,065 beds for
fiscal year 1996 and 1,364 beds for fiscal year 1995.
Program Direct Operating Expenses. Program direct operating expenses
increased $41,448,000, or 93.4%, to $85,822,000 for fiscal year 1996 from
$44,374,000 for fiscal year 1995 primarily as a result of the addition of new
programs operated by the Company during each period. Of the total increase in
expenses, $9,868,000 is attributable to the full year of operations of four
programs that were acquired or opened during fiscal year 1995; $8,681,000
relates to the operations of two programs that were acquired during fiscal year
1996, and $5,236,000 is attributable to the operations of three programs that
the Company opened or began operating during fiscal year 1996. In addition,
$15,235,000 of the increase resulted from the consolidation of the operations of
Introspect for the full fiscal year 1996. Salaries and related employee benefits
decreased to approximately 64.5% of program direct operating expenses for fiscal
year 1996 compared to 70.6% of program direct operating expenses for fiscal year
1995. This decrease primarily is due to an increase in the number of behavioral
health programs operated by the Company which require a greater proportion of
higher skilled contracted professionals.
Contribution from Operations. Contribution from operations for fiscal year
1996 increased $5,584,000, or 71.1%, to $13,434,000 from $7,850,000 for fiscal
year 1995. Contribution from operations decreased as a percentage of revenues to
13.4% of revenues in fiscal year 1996 compared to 14.8% of revenues in fiscal
year 1995. This decrease is primarily attributable to the consolidation of the
operations of Introspect in fiscal year 1996. In fiscal year 1996, the
contribution from operations with respect to Introspect operations was $896,000
representing 5.6% of revenues from Introspect operations and in fiscal year
1995, the Company recognized $600,000 in contribution from operations which
represented 100% of the consulting revenue from the management of Introspect.
The change from recognizing management fees to consolidating the operations of
Introspect, which reported a significantly lower operating margin as compared to
the other programs operated by the Company, had the affect of reducing
contribution from operations as a percentage of revenues for fiscal year 1996.
In addition, amortization of goodwill increased $456,000 from $583,000 to
$1,039,000 as a result of the full year of amortization of goodwill recorded in
connection with three acquisitions completed during fiscal year 1995 and
additional goodwill recorded in connection with two acquisitions completed
during fiscal year 1996. Because the purchase accounting with respect to the
Introspect acquisition will not be recorded until the first quarter of fiscal
year 1997, no amortization of goodwill was recorded in fiscal year 1996 for such
transaction. See "-- Recent Developments."
Selling, General and Administrative Expenses. For fiscal year 1996,
selling, general and administrative expenses increased $1,663,000, or 40.6%, to
$5,760,000 from $4,097,000 for fiscal year 1995. As a percentage of revenues,
selling, general and administrative expenses decreased to 5.7% of revenues from
7.7% of revenues for fiscal year 1995. The most significant components of these
costs relate to the compensation expense and consulting fees associated with
business professionals necessary for the development and oversight of the
Company's operations. The decrease as a percentage of revenues from fiscal year
1995 is primarily attributable to revenues recorded as a result of the
consolidation of Introspect's operations of $16,131,000 with a minimal
corresponding increase in selling, general and administrative expenses in fiscal
year 1996.
Costs of Attempted Acquisitions. For fiscal year 1996, $569,000 of costs
were incurred in the pursuit of acquisitions that the Company elected not to
consummate, of which the most significant component was the costs associated
with the Three Springs, Inc. transaction.
Interest Expense. Interest expense increased $2,892,000 to $3,160,000 in
fiscal year 1996 from $268,000 in fiscal year 1995. Of the increase in interest
expense, $1,055,000 was attributable to the 7% Convertible Subordinated
Debentures Due 2006 that were issued on January 29, 1996, $1,146,000 was
recorded in connection with the consolidation of Introspect, and the remaining
increase of $691,000 resulted from
15
<PAGE> 18
increases in borrowings on the Company's revolving line of credit and other
miscellaneous debt assumed in connection with acquisitions made by the Company.
The Company retired substantially all of Introspect's debt upon the Company's
acquisition of Introspect in September 1996 utilizing funds drawn against YSI's
existing credit facilities.
Interest Income. For fiscal year 1996, interest income increased $595,000
to $645,000 from $50,000 in fiscal year 1995. The increase is primarily
attributable to $288,000 of dividend income earned on temporary investments and
$248,000 of interest income earned on the Company's excess cash balance.
Income Taxes. The provision for income taxes was $1,856,000, representing
an effective tax rate of 45.0% for fiscal year 1996 as compared to $1,332,000,
representing an effective tax rate of 37.9% for fiscal year 1995. The increase
in the effective tax rate was the result of the loss on Introspect operations
which was not consolidated for tax purposes, the increase in non-deductible
goodwill and other non-deductible expenses.
Net Income. Net income was $2,271,000, or $.25 per share for fiscal year
1996 compared to $2,179,000, or $.26 per share for fiscal year 1995.
FISCAL YEAR ENDED JUNE 30, 1995 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1994
Revenues. Revenues increased $18,195,000, or 52.2%, to $53,087,000 for
fiscal year 1995 from $34,892,000 for fiscal year 1994 primarily as a result of
the addition of new programs operated by the Company during each period. Of the
total increase in revenues, $3,171,000 is attributable to the full year of
operations of two programs that were acquired during fiscal year 1994;
$3,092,000 relates to the operations of three programs that were acquired during
fiscal year 1995; and $4,463,000 relates to the operations of two programs which
the Company opened or began managing during fiscal year 1995. Consulting and
other revenue increased $759,000 to $925,000 in fiscal year 1995 from $166,000
in fiscal year 1994. An increase in revenues of $6,710,000 was attributable to
programs that the Company operated for both the full fiscal years 1994 and 1995.
The average daily enrollment for all of the Company's programs increased 48.1%
to 1,257 youth in fiscal year 1995 from 849 youth in fiscal year 1994, including
a 26.7% increase in average daily enrollment in programs that the Company
operated for both the full fiscal years 1995 and 1994 to 991 youth from 782
youth. The Company reported an occupancy rate of 92.2% in fiscal year 1995
compared to 89.3% in fiscal year 1994 based on an average daily licensed
capacity of 1,364 beds for fiscal year 1995 and 951 beds in fiscal year 1994.
Program Direct Operating Expenses. Program direct operating expenses
increased $14,841,000, or 50.3%, to $44,374,000 for fiscal year 1995 from
$29,533,000 for fiscal year 1994 primarily as a result of the addition of new
programs operated by the Company during each period. Of the total increase in
expenses, $2,613,000 is attributable to the full year of operations of two
programs that were acquired during fiscal year 1994; $2,555,000 relates to the
operations of three programs that were acquired during fiscal year 1995; and
$5,085,000 relates to the operations of two programs which the Company opened or
began managing during fiscal year 1995. Salaries and related employee benefits
increased to approximately 70.6% of program direct operating expenses for fiscal
year 1995 compared to 67.1% of program direct operating expenses for fiscal year
1994.
Program Start-up Costs. Program start-up costs in fiscal year 1995 of
$280,000 consisted of costs related to the opening of two programs. Program
start-up costs in fiscal year 1994 of $40,000 consisted of costs incurred in
connection with the opening of one program.
Contribution from Operations. Contribution from operations for fiscal year
1995 increased $2,817,000, or 56.0%, to $7,850,000 from $5,033,000 for fiscal
year 1994. Contribution from operations increased as a percentage of revenues to
14.8% in fiscal year 1995 from 14.4% in fiscal year 1994 primarily as a result
of fewer programs under development in fiscal year 1995 compared to fiscal year
1994, which initially earn lower contribution margins than mature programs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1,366,000, or 50.0%, to $4,097,000 for fiscal
year 1995 from $2,731,000 for fiscal year 1994. The increase in selling, general
and administrative expenses is primarily attributable to the addition of
management personnel needed to oversee an increased number of programs. As a
percentage of revenues, selling, general and
16
<PAGE> 19
administrative expenses decreased slightly to 7.7% of revenues for fiscal year
1995 from 7.8% of revenues for fiscal year 1994.
Income Taxes. The provision for income taxes was $1,332,000, representing
an effective tax rate of 37.9%, for fiscal year 1995 as compared to an income
tax benefit of $140,000 for fiscal year 1994. The income tax benefit in fiscal
year 1994 resulted from the realization of net operating loss carryforwards and
other tax benefits.
Net Income. Net income was $2,179,000, or $.26 per share for fiscal year
1995 as compared to $2,092,000, or $.29 per share for fiscal year 1994. On a
fully-taxed basis, net income for fiscal year 1994 would have been approximately
$1,230,000, or $.17 per share.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had $3,037,000 in cash and $12,795,000
of working capital, which included $5,204,000 of investments available-for-sale.
Net cash provided by operating activities was $1,882,000 for the six months
ended December 31, 1996. Net accounts receivable increased $2,123,000 to
$22,050,000 at December 31, 1996 from $17,467,000 at June 30, 1996 primarily
as a result of the acquisition of Introspect effective September 1, 1996.
Net cash used in investing activities was $7,228,000 for the six months
ended December 31, 1996, of which $4,000,000 was used to fund the acquisition
of Introspect; $4,197,000 was invested in leasehold improvements, vehicles,
computer equipment and other capital expenditures in support of existing
programs, as well as the start-up of Keweenaw Academy in Michigan; $5,191,000
represents the net principal and dividend income related to the sale of a
temporary investment; $7,797,000 represents goodwill, and $221,000 represents
investments in deferred software costs, a prepaid consulting agreement and other
long-term asset investments.
Net cash provided by financing activities was $1,337,000 for the six
months ended December 31, 1996 comprised of $8,240,000 of borrowings under the
Company's lines of credit, and $1,136,000 of net proceeds from the Employee
Stock Option and Employee Stock Purchase Plans, offset by the repayment of
$7,987,000 of borrowings under the lines of credit and other long-term
borrowings. As of December 31, 1996, the Company had approximately $3,800,000
available on its existing bank revolving line of credit.
The Company believes that its current funds and funds available under
its amended line of credit, together with existing capital resources and cash
flow from its existing operations, will be sufficient to meet all indebtedness
payments, to make all planned capital additions and improvements and meet other
working capital needs for the next twelve months. However, if the Company
should identify one or more acquisition targets or begins substantial "de novo"
programs, it may need to access additional capital.
17
<PAGE> 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL STATEMENTS
The consolidated financial statements of the Company are included on pages
F-1 through F-31 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required by this Item 9 is not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
BOARD OF DIRECTORS
As of December 31, 1996, the Board of Directors was comprised of the
following persons:
<TABLE>
<S> <C>
W. James Hindman Chairman of the Board
Timothy P. Cole Vice Chairman of the Board
and Chief Executive Officer
Henry D. Felton Director
J. Donald Black Director
Mayer Kanter, Esq. Director
Cynthia K. Hindman, M.D. Director
Martin V. Marshall Director
Jacques T. Schlenger, Esq. Director
</TABLE>
Subsequent to December 31, 1996, Messrs. Hindman and Felton, and Dr.
Hindman resigned from the Board and Alan J. Andrieni and Bobbie L. Huskie were
appointed to the Board.
TIMOTHY P. COLE. Mr. Cole, who is 52 years old, serves as the Chairman
of the Board, Chief Executive Officer and President of the Company. Prior to
joining the Company in August 1996, Mr. Cole 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
Corporation. Prior to joining Wackenhut in 1988, 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 Advanced
Management Program.
J. DONALD BLACK. Mr. Black, who is 61 years old, 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. 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.
MAYER KANTER, ESQ. Mr. Kanter, who is 60 years old, has served as a
director of the Company since May 1993. He has practiced law for 30 years in
Sioux City, Iowa. 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.
MARTIN V. MARSHALL. Mr. Marshall, who is 74 years old, 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. Also, he has
consulted or been a board member with a large number of domestic and
international companies in a variety of fields and has written extensively on
marketing and long-term business planning.
JACQUES T. SCHLENGER, ESQ. Mr. Schlenger, who is 68 years old, 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.
ALAN J. ANDRIENI. Mr. Andrieni, who is 50 years old, was appointed a
director of the Company in January 1997. Since April 1997, Mr. Andrieni has
served as President and Chief Executive Officer of InterWorld Corporation, a
provider of software that enables corporations to do business on the internet.
Until April 1997, Mr. Andrieni served as the executive vice president and
director of Comdisco, Inc., a leading technology services company since 1994
and previously served as senior vice president since 1986. He was elected to
Comdisco's Board of Directors in 1992 and is a member of Comdisco's Office of
the President. Andrieni also serves on the Board of Directors for Hugoton
Energy Corporation, InterWorld Technology Ventures, Inc. and Astor Corporation.
Prior to joining Comdisco, Andrieni served as a vice president of Salomon
Brothers in New York and London from 1973 to 1978, working in general corporate
finance, mergers and acquisitions and lease financing. Mr. Andrieni graduated
from Princeton University and received his Juris Doctor from Rutgers University
Law School.
BOBBIE L. HUSKEY. Ms. Huskey, who is 49 years old, was appointed a
director of the Company in June 1997. Since 1984, Ms. Huskey has served as the
President of Huskey & Associates, a consulting firm founded by Ms. Huskey that
provides juvenile justice facility planning and programming services to state
and local governments. She is the immediate past president of the American
Correctional Association (ACA) after serving as its president for two years and
has been an active member of the ACA Executive Committee for 10 years. Ms.
Huskey has authored numerous articles and appeared on national news programs
regarding corrections and juvenile justice issues. She has led more than 50
planning studies across the country and has served as a consultant to the
National Institute of Corrections.
18
<PAGE> 21
EXECUTIVE OFFICERS
Mr. Cole, is Chairman of the Board, Chief Executive Officer and
President of the Company, as discussed above (see "Board of Directors"). In
addition, the following individuals serve as executive officers of the
Company:
MARK S. DEMILIO. Mr. Demilio, who is 41 years old, serves as Senior Vice
President - Corporate Development, General Counsel and Secretary. Prior to
joining the Company in March 1997, Mr. Demilio was a partner with Miles &
Stockbridge, a Baltimore law firm, since 1994, and had served as an associate
with that firm since 1989. Mr. Demilio received his Juris Doctor in 1986 from
the University of Maryland School of Law. Prior thereto, Mr. Demilio, a 1977
graduate of Villanova University with Bachelor of Science degree in Accounting,
served as a certified public accountant with Arthur Anderson LLP and a
financial analyst with Blue Cross and Blue Shield of Maryland.
DAVID B. DOLCH. Dr. Dolch, who is 41 years old, serves as Executive Vice
President-Operations. He joined the Company in April 1994 as Executive Director
of the Victor Cullen Academy program. In May 1994, Dr. Dolch received his
doctorate in Education from La Salle University. Prior to joining the Company,
Dr. 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.
WILLIAM P. MOONEY. Mr. Mooney, who is 41 years old, serves as Chief
Financial Officer 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 and administrative 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.
KIMBERLY E. NICHOLS. Ms. Nichols, who is 28 years old, serves as Vice
President Finance and Investor Relations. Prior to joining the Company in
February 1994, Ms. Nichols served as a certified public accountant with Arthur
Andersen LLP since 1990. Ms. Nichols who is a graduate of James Madison
University, with a Bachelor of Business Administraion in Accounting, is
currently attending Loyola College in Maryland and is a candidate for a Master
of Business Administration in Finance.
19
<PAGE> 22
Section 16(a) of the Exchange Act requires the Company's executive
officers and directors, and any persons who own more than ten percent of a
registered class of the Company's equity securities, to file with the
Securities and Exchange Commission (SEC) reports of ownership and changes in
ownership of the Company's Common Stock and other equity securities of the
Company. Officers, directors and greater than ten-percent shareholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons, the Company believes
that there was compliance for the period from June 30, 1996 to December 31,
1996 with all Section 16 filing requirements applicable to its officers,
directors and greater than ten-percent beneficial owners.
ITEM 11. EXECUTIVE COMPENSATION
The following tables and related text summarize, in accordance with the
regulations of the Securities and Exchange Commission, the Company's
compensation of certain of its executive officers.
SUMMARY COMPENSATION
The following table summarizes certain information regarding the
compensation for the six month period ended December 31, 1996 and for each of
the fiscal years ended June 30, 1996, 1995 and 1994 of the Company's chief
executive officer and its most highly compensated executive officers during the
fiscal year ended June 30, 1996. No other executive officer of the Company had
salary and bonus which exceeded $100,000 during the fiscal year ended June 30,
1996.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
NAME AND PRINCIPAL POSITION ----------------------------- OPTIONS ALL OTHER
ON DECEMBER 31, 1996 YEAR SALARY BONUS OTHER GRANTED COMPENSATION
- ---------------------------------- ---- ----------- ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
W. James Hindman 1996*(a) $ 0 -- -- -- $ --
Chairman of the Board 1996 (a) $212,375 -- --(b) -- $ 3,412(c)
1995 (a) 150,000 -- --(b) 150,000 2,409(c)
1994 (a) 143,750 -- --(b) -- 20,362(d)
Timothy P. Cole 1996*(e) $123,635 -- -- 125,000 --
Chief Executive Officer
and President
Henry D. Felton, IV 1996*(f) $ 0 -- -- -- --
1996 $138,167 -- -- -- $ 1,356(c)
1995 125,000 -- -- 37,500 273(c)
1994 118,750 -- -- -- 5,645(g)
Fletcher J. McCusker 1996*(h) $ 58,723 -- -- -- --
1996 (h) $117,000 -- -- 97,500 --
</TABLE>
- ------------------------------
* Subseqent to June 30, 1996, the Company changed its fiscal year-end to
December 31. Information is for the six months ended December 31, 1996.
(a) Mr. Hindman received this compensation for fiscal years 1994 through 1996 as
Chief Executive Officer of the Company, and resigned as Chief Executive
Officer effective July 1, 1996.
(b) 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 fiscal years 1996, 1995 or 1994.
(c) Represents amounts contributed by the Company pursuant to the Company's
401(k) Retirement Plan.
(d) 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 is based, in the aggregate, on 5% of the
average annual outstanding principal balance due on such loan.
(e) Mr. Cole joined the Company on August 5, 1996, as Chief Executive Officer
and President.
(f) Mr. Felton resigned as Chief Operating Officer of the Company effective July
1, 1996.
(g) 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.
(h) Mr. McCusker joined the Company in July 1995 as Executive Vice President
Corporate Development and subsequently resigned effective December 31, 1996.
20
<PAGE> 23
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, 1996 and the six month period ended December 31,
1996.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZED
------------------------------------------------------ VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS/SARS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS/SARS EMPLOYEES IN OR BASE EXPIRATION ------------------------
NAME GRANTED FISCAL YEAR PRICE DATE 5% 10%
- ---------------------------- ------------ ------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Timothy P. Cole 125,000(a) 100.0%(b) $17.00 8/04/06 $1,336,250 $3,386,703
Fletcher J. McCusker 60,000(c) 26.2% $ 8.83 12/08/05 $ 333,188 $ 844,365
37,500(d) 16.4% $11.17 2/05/06 $ 263,428 $ 667,579
</TABLE>
- ------------------------------
(a) Of these options, 80,000 became exercisable on February 5, 1997, 50,000
become exercisable on February 5, 1998 and the remaining 25,000 become
exercisable on July 5, 1998.
(b) This percentage calculated based on options granted to employees during the
period of July 1, 1996 through December 31, 1996.
(c) Of these options, 20,000 were immediately exercisable as of July 1995, the
date of grant, 20,000 became exercisable in July 1996 and the remaining
20,000, which become exercisable in July 1997, were forfeited upon his
resignation of employment as of December 31, 1996.
(d) These options were exercisable upon grant.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES
The following table sets forth the value of unexercised options held by the
Named Officers as of December 31, 1996. None of the Named Officers exercised
options during the fiscal year ended June 30, 1996 or the fiscal period ended
December 31, 1996.
<TABLE>
<CAPTION>
NO. OF SECURITIES UNDERLYING
SHARES UNEXERCISED OPTIONS AT VALUE OF UNEXERCISED IN THE
ACQUIRED 12/31/96 MONEY OPTIONS AT 12/31/96
ON VALUE ---------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------- --------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
W. James Hindman -- -- 480,000 0 $ 6,320,000 --
Henry D. Felton -- -- 162,499 0 $ 2,153,000 --
Fletcher J. McCusker 30,000 -- 47,500 0 $ 202,000 --
</TABLE>
21
<PAGE> 24
SEVERANCE BENEFITS AND OTHER AGREEMENTS
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.
Employment Agreement. On July 17, 1996, the Company entered into an
employment agreement with Timothy P. Cole. Pursuant to that agreement, Mr. Cole
was elected the Chief Executive Officer and Vice Chairman of the Company
effective August 5, 1996. The initial term of the employment agreement is three
years. Beginning with the first anniversary of the agreement, the period of Mr.
Cole's employment is to be extended by successive additional one-year terms
beyond the two years then remaining on the agreement unless the Company or Mr.
Cole provides notice prior to any anniversary that the agreement will not extend
but will terminate at the end of the two year period following such anniversary.
Under the agreement, Mr. Cole is entitled to a base salary of at least
$300,000 per year and annual bonuses of up to 60% of his base salary. Mr. Cole
will receive a bonus of not less than $100,000 for the fiscal year ended June
30, 1997. In addition, Mr. Cole was granted options to purchase 125,000 shares
of the Company's common stock at $17.00 per share (the fair market value of YSI
common stock on August 5, 1996) of which 50,000 become exercisable on February
5, 1997, 50,000 become exercisable on February 5, 1998 and the remaining 25,000
become exercisable on July 5, 1998. The options are exercisable until the close
of business on August 5, 2001.
Pursuant to the agreement, the Company agreed to reimburse Mr.Cole up to
$100,000 of any losses realized on the sale of his former residence. The former
residence has been sold and the Company reimbursed Mr. Cole approximately
$55,000 for losses realized.
The agreement further provides that Mr. Cole will not compete with the
Company for two years following the termination of his employment and, in
connection with entering into the agreement, Mr. Cole was provided a
Change-In-Control Agreement. The Change in Control Agreement provides for the
payment by the Company of certain specified benefits in the event the
employment of Mr. Cole terminates under certain circumstances following any
change in control of the Company. For purposes of this agreement, 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 Mr. Cole
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. 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table presents certain information, as of June 30, 1997
regarding the beneficial ownership of shares of Common Stock by (i) each of the
directors and named executive officers of the Company, (ii) all current
directors and executive officers of the Company as a group and (iii) each person
or entity known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock (assuming the exercise of options and
warrants exercisable on or within 60 days of such date).
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
--------------------------
NAME NUMBER PERCENT
- ------------------------------------------------------------------- ------------- -------
<S> <C> <C>
Timothy P. Cole 50,000(1) *
William P. Mooney 31,125(2) *
Kimberly E. Nichols 3,750(3) *
Alan J. Andrieni 25,250 *
J. Donald Black 74,905(4) *
Mayer Kanter 154,407(5) 1.52%
Martin V. Marshall 18,044(6) *
Jacques Schlenger 19,407(7) *
All current directors and executive officers as a group (10
persons) 376,888(8) 3.67%
OTHER 5% STOCKHOLDERS
W. James Hindman 905,678(9) 8.99%
BAMCO, Inc. 840,500(10) 8.34%
Essex Investment Management Company 920,100(11) 9.13%
HBK 1,000,469(12) 9.03%
Wellington Management Company 688,900(13) 6.83%
</TABLE>
- ------------------------------
* Represents beneficial ownership of less than 1% of outstanding Common
Stock.
(1) Represents 50,000 shares issuable pursuant to options granted to Mr. Cole
that are exercisable within 60 days.
(2) Includes 30,125 shares issuable pursuant to options granted to Mr. Mooney
that are exercisable within 60 days.
(3) Includes 2,250 shares issuable pursuant to options granted to Ms. Nichols
that are exercisable within 60 days.
(4) Includes 38,250 shares issuable pursuant to options granted to Mr. Black
that are exercisable within 60 days and 2,319 shares issuable upon
exercise of a warrant issued to Mr. Black.
(5) Includes 48,000 shares issuable pursuant to options granted to Mr. Kanter
that are exercisable within 60 days.
(6) Includes 15,000 shares issuable pursuant to options granted to Mr.
Marshall that are exercisable within 60 days.
(7) Includes 15,000 shares issuable pursuant to options granted to Mr.
Schlenger that are exercisable within 60 days.
(8) Includes 198,625 shares issuable pursuant to options granted to directors
and executive officers that are exercisable within 60 days and 2,319
shares issuable upon the exercise of warrants issued to a director.
(9) Excludes 105,000 shares that are beneficially owned by Mr. Hindman's wife,
and 34,785 shares issuable upon exercise of a warrant issued to Mrs.
Hindman.
(10) Based upon an Amendment No. 1 to Schedule 13G, dated July 14, 1997, filed
by Baron Capital Group, Inc. ("BCG"); Baron Capital, Inc. ("BCI");
BAMCO, Inc. ("BAMCO"); Baron Capital Management, Inc. ("BCM"); Baron
Asset Fund ("BAF"); and Ronald Baron as a group in accordance with Rule
13d-1(b)(1)(ii)(F), BCG, BCI and Ronald Baron are parent holding
companies of BAMCO and BCM, investment advisors registered under the
Investment Advisors Act of 1940, and Baron Asset Fund, an investment
company registered under the Investment Company Act of 1940. According
to the Amendment No. 1 to Schedule 13G, BAMCO and BCM have been granted
the discretion to dispose of 695,000 shares (6.76% of the outstanding
Common Stock) and 145,500 shares (1.42% of the outstanding Common Stock),
respectively, held in the accounts of their advisory clients, one if whom
is Baron Asset Fund, which beneficially owns 695,000 shares (6.76%) of
Common Stock. BCI, as parent holding company of BCM, is deemed to
beneficially own the 145,500 shares beneficially owned by BCM. BCG and
Ronald Baron, as parent holding companies of BCI and BAMCO, are deemed
to beneficially own the 840,500 shares beneficially owned by BCI and
BAMCO in the aggregate.
(11) Based upon a Schedule 13G filed with the SEC on December 10, 1996 by Essex
Investment Company ("Essex"), Essex is an investment advisor registered
under the Investment Advisors Act of 1940 which has sole voting power
over 687,935 shares and sole dispositive power over 920,100 shares.
(12) Based upon a Schedule 13D filed with the SEC on May 29, 1997 filed by HBK
Investments, L.P., HBK Finance, L.P. and HBK Main Street Investments,
L.P. as a group in accordance with Rule 13d-1(b)(1)(ii)(F), these shares
are issuable upon conversion of the Company's 7% Convertible Subordinated
Debentures Due 2006 ("Conversioin Shares") held by HBK Investments, L.P.
(666,979 Conversion Shares), HBK Finance, L.P. (322,661 Conversion
Shares) and HBK Main Street Investments, L.P. (10,829 Conversion
Sharese). According to the Schedule 13D, these Conversion Shares
represent 6.3%, 3.1% and 0.1%, respectively, of the total outstanding
shares of Common Stock including the respective Conversion Shares in
accordance with Rule 13d-3(d)(1)(i).
(13) Based upon a Schedule 13G filed with the SEC on January 24, 1997 by
Wellington Management Company, LLP ("WMC"), WMC is an investment
advisor registered under the Investment Advisors Act of 1940 which has
sole voting power over 296,900 shares and sole dispositive power over
688,900 shares.
22
<PAGE> 25
(10) 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, representing
6.1% and 1.2% 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
Advisers 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 (5.4%) of the shares beneficially owned by BAMCO, Inc.
(11) Based upon an Amendment No. 2 to Schedule 13G filed with the SEC on
September 13, 1996 by Essex Investment Company ("Essex"), Essex is an
investment adviser registered under the Investment Advisers Act of 1940
which has sole voting power over 672,200 shares and sole dispositive power
over 844,562 shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN RELATED PARTY TRANSACTIONS
Conference Center. In August 1995, the Company entered into a Lease with
W. James 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 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 value of the improvements to
the Hindmans property is approximately $200,000.
Evergreen. During the fiscal year ended June 30, 1996, V. Joel Nicholson
and Joel F. Smith resigned as executive officers of the Company. In connection
with that resignation, the Company entered into an agreement with Evergreen
National Development, Inc. ("Evergreen"), a corporation that was formed and
organized by Messrs. Smith, Nicholson and certain other former employees of the
Company. Under the terms of the agreement, the Company agreed to compensate
Evergreen for services Evergreen provided to the Company relating to property
and facility development, mergers and acquisitions, business development and
general consulting matters on a basis set forth in the agreement.
23
<PAGE> 26
The agreement was approved by the Company's board of directors in a manner
consistent with the Company's related-party transaction policy. In connection
with considering and approving the terms of the agreement, the board of
directors obtained an opinion from an independent investment banking firm to the
effect that the agreement between the Company and Evergreen was fair to the
Company from a financial point of view and its terms were generally as favorable
to the Company as the terms that would have been available to the Company from
unaffiliated third parties. During fiscal year 1996, the Company paid $275,000
to Evergreen for services it provided to the Company under the agreement. In
September 1996, the Company terminated the agreement with Evergreen.
Hindman Enterprises. The Company has recently reached an agreement with W.
James Hindman Enterprises, Inc. ("Hindman Enterprises"), a corporation owned by
W. James Hindman, the Chairman of the Company concerning the Company's use of a
Hawker business jet aircraft owned by Hindman Enterprises. Under the terms of an
oral lease arrangement between the Company and Hindman Enterprises effective
July 1, 1996, Hindman Enterprises has agreed to charge the Company $1,400 per
hour for the Company's use of the aircraft. The Company also is responsible for
the fuel and other direct costs it incurs in connection with use of the
aircraft. Hindman Enterprises has agreed that the Company shall have first
priority with respect to the scheduling and use of the aircraft.
The Company entered into this arrangement after it investigated and
solicited other proposals for the use of similar business aircraft and believes
that the terms on which it is utilizing the aircraft are more favorable to the
Company than terms available in the commercial marketplace. The Company has paid
Hindman Enterprises approximately $126,000 since July 1, 1996, pursuant to this
arrangement.
International Youth Institute. The Company recently entered into an
agreement with International Youth Institute, Inc. ("IYI"). Pursuant to the
terms of this agreement, IYI has agreed to furnish the Company with training and
related services from July 1, 1996 through June 30, 1999 unless either party
sooner terminates the agreement by giving 90 days prior written notice to the
other party. Timothy Hindman, who is the son of W. James Hindman, owns
approximately 20% of the equity securities of IYI. Marc Michaelis, an executive
officer of the Company, owns approximately 1% of the equity securities of IYI.
The services IYI is to provide include program facility training needs
assessments which will involve onsite assessment at both the individual employee
and program levels, as well as quality assurance training, employee performance
analysis and monthly reporting functions. In addition, IYI has agreed to provide
YSI with basic training courses which will include orientation training for all
new YSI employees and annual training required to continue applicable
accreditations. The basic training orientation curriculum is to include training
with respect to YSI's "formula for success" and "world of work"; juvenile
justice and behavioral health matters; general health, safety and security
matters; and crisis intervention methodologies. IYI has also agreed to make
independent study, video and correspondence courses and elective training
courses available to YSI and these offerings will be based on program training
needs assessments and applicable youth development professional certification
levels. In connection with entering into this arrangement, a number of YSI
employees who had been employed by YSI to train other YSI employees were hired
by IYI.
Under the terms of the agreement, IYI is to receive approximately $860,000
per year, subject to certain adjustments, for the basic training assessment and
program training it provides. IYI is to be compensated for providing the
elective training courses on an incremental hourly basis at a fixed rate of $10
per student training hour and the costs of independent study, video and
correspondence courses remain subject to negotiation. In addition to the basic
training program fee and any fees pertaining to elective training, an annual
administrative fee of $25,000 is payable to IYI by YSI at the beginning at each
contract year.
In connection with the resignation of W. James Hindman, founder of the
Company, from the Board of Directors effective July 1, 1997, the Company
appointed Mr. Hindman Chairman Emeritus and entered into a four-year
Representation Agreement with Mr. Hindman. Under the Representation Agreement,
Mr. Hindman agrees to represent the Company's interests with current and
potential customers, governmental bodies and the public as and to the extent
requested by the Company and in exchange, the Company will pay Mr. Hindman
$20,000 per quarter during the four-year term.
24
<PAGE> 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements:
The consolidated financial statements of the Company are included on pages
F-1 through F-26 of this Form 10-K.
(2) Financial Statement Schedules
The financial statement schedules prescribed by this Item 14 are not
required.
(3) Exhibits (All references herein to "SEC" shall mean the U.S.
Securities and Exchange Commission)
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------------------------------------------------------
<C> <S>
3.1 Articles of Incorporation of the Company, as amended.(1)
3.2 Bylaws of the Company, as amended and restated.
4.1 The rights of security holders are defined in the Articles of Incorporation, as
amended, and the Bylaws, as amended and restated, of the Company filed as Exhibits
3.1 and 3.2 hereto, respectively.
4.2 The Company's 12% Subordinated Debenture Due December 31, 2002.(1)
4.3 Specimen of Common Stock Certificate.(1)
4.4 Form of Company's 7% Convertible Subordinated Debentures Due February 1, 2006.
(Included as exhibit to Exhibit 4.5 of this Form 10-K.)
4.5 Fiscal and Paying Agency Agreement dated January 29, 1996 by and among the Company,
The Chase Manhattan Bank, N.A., New York, The Chase Manhattan Bank, N.A., London and
Chase Manhattan Bank Luxembourg S.A. (Incorporated by reference to Exhibit 10.4 to
the Company's Quarterly Report on Form 10-Q for the quarter ended December 31,
1995.)
10.1 Contract among Youth Services International of Baltimore, Inc., the Company and the
Maryland Department of Juvenile Services for the operation and management of the
Charles H. Hickey, Jr. School.(1)
10.2 Contract between Youth Services International of Maryland, Inc. and the Maryland
Department of Juvenile Services for the operation of the Victor Cullen Center.(1)
10.13 Contract between the State of Tennessee and Youth Services International of
Tennessee, Inc., d/b/a Reflections Treatment Agency.(1)
10.31 The Company's Stock Option Plan.(1)
10.33 The Company's Board of Directors Compensation Plan. (Incorporated by reference to
Exhibit 4 to the Company's Registration Statement on Form S-8 (registration number
33-99500) filed with the SEC on November 16, 1995.)
10.34 Warrant to Purchase Common Stock of The Company.(1)
10.35 The Company's 1995 Employee Stock Option Plan. (Incorporated by reference to Exhibit
4 to the Company's Registration Statement on Form S-8 (registration number 33-84934)
filed with the SEC on October 11, 1994.)
10.36 The Company's 1996 Employee Stock Option Plan. (Incorporated by reference to Exhibit
4 to the Company's Registration Statement on Form S-8 (registration number 33-99498)
filed with the SEC on November 16, 1995.)
10.37 The Company's Fiscal Year 1997 Employee Stock Purchase Plan. (Incorporated by
reference to Exhibit 4 to the Company's Registration Statement on Form S-8
(registration number 333-07157) filed with the SEC on June 28, 1996.)
10.38 The Company's 1995 Director Stock Option Plan. (Incorporated by reference to Exhibit
4 to the Company's Registration Statement on Form S-8 (registration number 33-84938)
filed with the SEC on October 11, 1994.)
10.39 Asset Purchase Agreement between Parc Place Limited Partnership and Southwestern
Children's Health Services, Inc., a wholly-owned subsidiary of the Company
(Incorporated by reference to Exhibit to the Company's Current Report on Form 8-K
filed with the SEC on August 26, 1994.)
10.40 Asset Purchase Agreement, dated as of August 11, 1994, by and among Parc Place
Limited Partnership, Business Financial Services Corporation, Parc Place, Inc., PLC
Management, Inc., Patricia L. Carey, Bertram J. Trobman and Southwestern Children's
Health Services, Inc. (Incorporated by reference to Exhibit 1 to the Company's
Current Report on Form 8-K, filed with the SEC on August 24, 1994.)
10.41 Stock Purchase Agreement, dated as of September 1, 1994, by and among Nicholas J.
Mavrolas and Suzan N. Mavrolas and Southwestern Children's Health Services,
Inc.(Incorporated by reference to Exhibit 10.2 to the Company's Form 10-QSB, filed
with the SEC on November 14, 1994.)
10.42 Stock Purchase Agreement, dated as of June 1, 1995, by and among Kurt Mahoney, Ph.D.
and Southwestern Children's Health Services, Inc.(2)
10.43 Loan and Security Agreement, dated as of June 20, 1995, by and among the Company,
each of its subsidiaries and Signet Bank/Maryland.(2)
10.44 Master Revolving Promissory Note, dated as of June 20, 1995, by and among the
Company, each of its subsidiaries and Signet Bank/Maryland.(2)
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------------------------------------------------------
<C> <S>
10.45 Asset Purchase Agreement, dated as of June 30, 1995, by and among the Company, Youth
Services International of New Mexico, Inc., Desert Hills Center for Youth and
Families of New Mexico, Inc., Diversification Association, Inc., Introspect
HealthCare Corporation, Anna Ash, William Ash, Manuel G. Bracomonte, Tamatha
Bracamonte, Donald V. Campbell, Mary K. Campbell, Donna Heidinger, Guy W. Heidinger,
Daniel R. Lopez, Nancy Lopez, Elizabeth McCusker, Fletcher J. McCusker, Judy McKee,
and Michael McKee. (Incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K, filed with the SEC on August 3, 1995.)
10.46 Option Agreement, dated as of June 30, 1995, by and among the Company,
Diversification Association, Inc., Introspect HealthCare Corporation, Desert Hills
Center for Youth and Families, Inc., Desert Hills Center for Youth and Families of
Hawaii, Inc., Anna Ash, William Ash, Manuel G. Bracomonte, Tamatha Bracamonte,
Donald V. Campbell, Mary K. Campbell, Donna Heidinger, Guy W. Heidinger, Daniel R.
Lopez, Nancy Lopez, Elizabeth McCusker, Fletcher J. McCusker, Judy McKee, and
Michael McKee. (Incorporated by reference to Exhibit 2.2 to the Company's Current
Report on Form 8-K, filed with the SEC on August 3, 1995.)
10.47 Management Agreement, dated as of June 30, 1995, by and among the Company,
Southwestern Children's Health Services, Inc., Introspect HealthCare Corporation,
Desert Hills Center for Youth and Families of Nevada, Inc., Ocotillo Pediatric
Services, Inc., Desert Hills Center for Youth and Families, Inc., Desert Hills
Center for Youth and Families of Hawaii, Inc., Anna Ash, William Ash, Manuel G.
Bracomonte, Tamatha Bracamonte, Donald V. Campbell, Mary K. Campbell, Donna
Heidinger, Guy W. Heidinger, Daniel R. Lopez, Nancy Lopez, Elizabeth McCusker,
Fletcher J. McCusker, Judy McKee, and Michael McKee. (Incorporated by reference to
Exhibit 2.3 to the Company's Current Report on Form 8-K, filed with the SEC on
August 3, 1995.)
10.48 Loan Agreement, dated as of June 30, 1995, by and between Introspect HealthCare
Corporation and the Company. (Incorporated by reference to Exhibit 2.4 to the
Company's Current Report on Form 8-K, filed with the SEC on August 3, 1995.)
10.49 Asset Purchase Agreement dated March 27, 1996 by and among the Company, Youth
Services International of Florida, Inc., a Florida corporation and a wholly-owned
subsidiary of YSI, the Tampa Bay Academy, Ltd., a Florida limited partnership,
American Residential Centers, Inc., a Florida corporation and the general partner of
Tampa Bay and Malcolm B. Harriman, Edward C. Hoefle, Ronald L. Knaus and Wayne
Shive, being all of the stockholders of American Residential Centers, Inc.
(Incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form
8-K, filed with the SEC on April 11, 1996.)
10.50 Agreement dated March 27, 1996 by and among the Company, American Residential
Centers, Inc., a Florida corporation and Malcolm B. Harriman, Edward C. Hoefle,
Ronald L. Knaus and Wayne Shive, being all of the stockholders of American
Residential Centers, Inc. (Incorporated by reference to Exhibit 2.2 to the Company's
Current Report on Form 8-K, filed with the SEC on April 11, 1996.)
10.51 Lease dated March 27, 1996 but effective as of March 1, 1996 by and between The
Tampa Bay Academy, Ltd., a Florida limited partnership and Youth Services
International of Florida, Inc., a Florida corporation. (Incorporated by reference to
Exhibit 2.3 to the Company's Current Report on Form 8-K, filed with the SEC on April
11, 1996.)
10.52 Promissory Note dated April 13, 1989 made by The Tampa Bay Academy, Ltd., a Florida
limited partnership, in favor of National Home Life Assurance Company, a Missouri
corporation, in the original principal amount of $3,800,000. (Incorporated by
reference to Exhibit 2.4 to the Company's Current Report on Form 8-K, filed with the
SEC on April 11, 1996.)
10.53 Guaranty dated April 13, 1989 executed by Wayne M. Shive, Ann W. Shive, Malcolm B.
Harriman, Alysa G. Harriman, Edward C. Hoefle, Ronald L. Knaus and Yvonne Knaus.
(Incorporated by reference to Exhibit 2.5 to the Company's Current Report on Form
8-K, filed with the SEC on April 11, 1996.)
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ------------------------------------------------------------------------------------
<C> <S>
10.54 Mortgage, Assignment of Rents and Security Agreement dated April 13, 1989 by and
between The Tampa Bay Academy, Ltd., a Florida limited partnership, and National
Home Life Assurance Company, a Missouri corporation. (Incorporated by reference to
Exhibit 2.6 to the Company's Current Report on Form 8-K, filed with the SEC on April
11, 1996.)
10.55 Assignment dated March 27, 1996 by National Home Life Assurance Company, n/k/a
Providian Life and Health Insurance Company, a Missouri corporation in favor of the
Company. (Incorporated by reference to Exhibit 2.7 to the Company's Current Report
on Form 8-K, filed with the SEC on April 11, 1996.)
10.56 Promissory Note Modification Agreement dated March 27, 1996 by and among the
Company, a Maryland corporation, The Tampa Bay Academy, Ltd., a Florida limited
partnership, Wayne M. Shive, Ann W. Shive, Malcolm B. Harriman, Alysa G. Harriman,
Edward C. Hoefle, Ronald L. Knaus and Yvonne Knaus. (Incorporated by reference to
Exhibit 2.8 to the Company's Current Report on Form 8-K, filed with the SEC on April
11, 1996.)
10.57 Option Exercise Agreement, dated as of September 11, 1996, by and among the Company,
Diversification Association, Inc., Introspect HealthCare Corporation, Desert Hills
Center for Youth and Families of Nevada, Inc., Ocotillo Pediatric Services, Inc.,
Desert Hills Center for Youth and Families, Inc., Desert Hills Center for Youth and
Families of Hawaii, Inc., Anna Ash, William Ash, Manuel G. Bracamonte, Tamatha
Bracamonte, Donald V. Campbell, Mary K. Campbell, Donna Heidinger, Guy W. Heidinger,
Daniel R. Lopez, Nancy Lopez, Elizabeth McCusker, Fletcher J. McCusker, Judy McKee,
and Michael McKee. (Incorporated by reference to the Company's Current Report on
Form 8-K filed with the SEC on September 25, 1996. The Exhibits to the Option
Exercise Agreement have been omitted from such Form 8-K and this filing. The Company
hereby undertakes to furnish these materials to the SEC upon request.)
11 Computation of Per Share Earnings.
21 Subsidiaries of the Company
23 Consent of Arthur Andersen LLP, independent public accountants.
27 Financial Data Schedule
</TABLE>
- ---------------
(1) Incorporated by reference from the identically numbered exhibit to the
Company's Registration Statement (registration number 33-71958) filed with
the SEC on November 19, 1993, as amended.
(2) Incorporated by reference from the identically numbered exhibit to the
Company's Annual Report on Form 10-KSB for the year ended June 30, 1995.
(b) The Company filed a Current Report on Form 8-K on April 10, 1996 in
connection with its acquisition of the Tampa Bay Academy. The Form 8-K included
audited financial statements of The Tampa Bay Academy, Ltd. and of American
Residential Centers, Inc. for the years ended December 31, 1994 and 1995, and
pro forma financial statements of the Company for the fiscal year ended June 30,
1995 and the nine months ended March 31, 1996.
(c) Exhibits:
Exhibits required to be filed in response to this paragraph (c) are
listed above in subparagraph (a)(3.)
(d) Financial Statement Schedules:
Financial Statement Schedules prescribed to be filed in response to
this paragraph (d) of Item 14 are not required.
27
<PAGE> 30
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF
1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
YOUTH SERVICES INTERNATIONAL, INC.
By: /s/ TIMOTHY P. COLE
--------------------------------------
TIMOTHY P. COLE
CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE
OFFICER AND PRESIDENT
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF
1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- --------------------------- -------------------
<S> <C> <C>
/s/ TIMOTHY P. COLE Chairman of the Board, July 24, 1997
- --------------------------------------------- Chief Executive Officer
TIMOTHY P. COLE and President
(Principal Executive
Officer)
/s/ WILLIAM P. MOONEY Chief Financial Officer July 24, 1997
- --------------------------------------------- and Treasurer
WILLIAM P. MOONEY (Principal Financial
Officer and Principal
Accounting Officer)
/s/ J. DONALD BLACK Director July 24, 1997
- ---------------------------------------------
J. DONALD BLACK
/s/ MAYER KANTER Director July 24, 1997
- ---------------------------------------------
MAYER KANTER
Director July 24, 1997
- ---------------------------------------------
MARTIN V. MARSHALL
/s/ JACQUES T. SCHLENGER Director July 24, 1997
- ---------------------------------------------
JACQUES T. SCHLENGER
/s/ ALAN J. ANDRIENI Director July 24, 1997
- ---------------------------------------------
ALAN J. ANDRIENI
/s/ BOBBIE L. HUSKEY Director July 24, 1997
- ---------------------------------------------
BOBBIE L. HUSKEY
</TABLE>
28
<PAGE> 31
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF YOUTH SERVICES INTERNATIONAL, INC. AND
SUBSIDIARIES
Report of Independent Public Accountants.............................................. F-1
Consolidated Financial Statements:
Balance Sheets................................................................... F-2
Statements of Income............................................................. F-4
Statements of Shareholders' Equity............................................... F-5
Statements of Cash Flows......................................................... F-6
Notes to Consolidated Financial Statements....................................... F-7
</TABLE>
<PAGE> 32
YOUTH SERVICES INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1995 AND 1996 AND
FOR THE YEARS ENDED JUNE 30, 1994, 1995 AND 1996
TOGETHER WITH REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS
F-1
<PAGE> 33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Youth Services International, Inc.:
We have audited the accompanying consolidated balance sheets of Youth Services
International, Inc. (a Maryland corporation) and subsidiaries as of June 30,
1995 and 1996, and December 31, 1996, and the related consolidated statements
of income, shareholders' equity and cash flows for the years ended June 30,
1994, 1995 and 1996, and for the six months ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Youth Services
International, Inc. and subsidiaries as of June 30, 1995 and 1996, and December
31, 1996, and the results of their operations and their cash flows for the
years ended June 30, 1994, 1995 and 1996, and the six months ended December 31,
1996, in conformity with generally accepted accounting principles.
Baltimore, Maryland,
July 23, 1997
F-2
<PAGE> 34
Page 2 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1994, 1995 AND 1996
AND FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Unrealized
Loss on Total
Additional Accumulated Investments Shareholders'
Common Paid-in (Deficit) Available- (Deficit)
Stock Capital Earnings for-Sale Equity
----------- ------------- -------------- -------------- --------------
(in thousands except share data)
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1995 $ 81 $ 16,337 $ 1,250 $ - $ 17,668
Tax benefit realized due to exercise
of employee stock options - 1,029 - - 1,029
Issuance of 490,946 shares of common
stock under the Stock Option and
Employee Stock Purchase Plan 5 2,733 - - 2,738
Unrealized loss on investments
available-for-sale, net of tax effect - - - (255) (255)
Net income - - 2,271 - 2,271
--------- ----------- ----------- ----------- -----------
BALANCE, June 30, 1996 86 20,099 3,521 (255) 23,451
Tax benefit realized due to exercise
of employee stock options - 522 - - 522
Issuance of 201,069 shares of common
stock under the Stock Option,
Employee Stock Purchase Plan and the
Directors' Stock Option Plan 2 1,157 - - 1,159
Unrealized gain on investments
available-for-sale, net of tax effect - - - 197 197
Conversion of subordinated debentures
to common stock 5 5,745 - - 5,750
Stock issuance costs - (23) - - (23)
Net income - - 1,534 - 1,534
--------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1996 $ 93 $ 27,500 $ 5,055 $ (58) $ 32,590
========= =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE> 35
Page 1 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1995 AND 1996, AND DECEMBER 31, 1996
ASSETS
<TABLE>
<CAPTION>
June 30, June 30, December 31,
1995 1996 1996
------------- ------------- --------------
(in thousands)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 784 $ 7,046 $ 3,037
Cash held in escrow 2,543 - -
Restricted cash 656 500 371
Investments available-for-sale - 9,798 5,204
Accounts receivable, net of allowance for doubtful
accounts of $175, $748 and $1,027, respectively 8,804 17,467 22,050
Receivables from related parties - - 1,125
Refundable income taxes 40 1,046 1,046
Current portion of notes receivable - 113 51
Prepaid expenses, supplies and other 1,224 1,918 3,360
Deferred tax asset - 78 110
------------- ------------- -------------
Total current assets 14,051 37,966 36,354
------------- ------------- -------------
PROPERTY, EQUIPMENT AND IMPROVEMENTS:
Land 307 621 1,086
Leasehold improvements 2,280 7,134 9,794
Program equipment 1,135 2,289 4,004
Buildings 2,164 5,162 11,698
Office furniture and equipment 1,738 3,874 4,181
Vehicles 1,354 1,320 1,543
------------- ------------- -------------
8,978 20,400 32,306
Less- Accumulated depreciation (1,726) (3,265) (4,881)
------------- ------------- -------------
7,252 17,135 27,425
------------- ------------- -------------
OTHER ASSETS:
Deposits 204 160 273
Deferred debt issue costs, net 121 2,613 2,511
Goodwill, net 5,874 9,613 20,675
Notes receivable, net of current portion - 4,133 3,133
Non-compete agreements, net 116 277 225
Deferred tax asset 392 750 591
Management fee receivable 510 154 -
Other assets, net 530 1,838 1,902
------------- ------------- -------------
7,747 19,538 29,310
------------- ------------- -------------
Total assets $ 29,050 $ 74,639 $ 93,089
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE> 36
Page 2 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1995 AND 1996, AND DECEMBER 31, 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30, June 30, December 31,
1995 1996 1996
------------- ------------- --------------
(in thousands except share data)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,927 $ 1,465 $ 2,025
Accrued payroll 538 1,641 1,859
Accrued interest payable - 1,093 965
Other accrued expenses 1,121 3,018 5,326
Deferred revenue 102 38 1,469
Short-term borrowings 568 - -
Current portion of long-term debt and capital lease
obligations 133 788 11,915
Deferred tax liability 38 - -
------------- ------------- -------------
Total current liabilities 4,427 8,043 23,559
CAPITAL LEASE OBLIGATIONS, less current portion 3 2,266 2,207
7% CONVERTIBLE SUBORDINATED DEBENTURES - 37,950 32,200
12% SUBORDINATED DEBENTURES, net of unamortized
original issue discount of $26, $17 and $12, respectively,
including debentures in the principal amount of $580,
held by shareholders or their close relatives 974 983 988
OTHER LONG-TERM DEBT, less current portion 5,978 1,946 1,545
------------- ------------- -------------
Total liabilities 11,382 51,188 60,499
------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value:
authorized shares 70,000,000, issued and outstanding
8,056,141, 8,597,712 and 9,314,765, respectively 81 86 93
Additional paid-in capital 16,337 20,099 27,500
Unrealized loss on investments available-for-sale - (255) (58)
Accumulated earnings 1,250 3,521 5,055
------------- ------------- -------------
Total shareholders' equity 17,668 23,451 32,590
------------- ------------- -------------
Total liabilities and shareholders' equity $ 29,050 $ 74,639 $ 93,089
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-5
<PAGE> 37
Page 1 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1994, 1995 AND 1996
AND FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Unrealized
Loss on Total
Additional Accumulated Investments Shareholders'
Common Paid-in (Deficit) Available- (Deficit)
Stock Capital Earnings for-Sale Equity
----------- ------------- -------------- -------------- --------------
(in thousands except share data)
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1993 $ 50 $ 2,223 $ (3,021) - $ (748)
Repurchase of 5,294 shares of common
stock, at $2.00 - (11) - - (11)
Tax benefit realized due to exercise of
employee stock options - 108 - - 108
Issuance of 1,950,000 shares in
connection with initial public
offering 20 11,284 - - 11,304
Issuance of 612,695 shares of common
stock under the Stock Option and
Employee Stock Purchase Plan 6 1,064 - - 1,070
Net income - - 2,092 - 2,092
--------- ----------- ----------- ---------- -----------
BALANCE, June 30, 1994 76 14,668 (929) - 13,815
Tax benefit realized due to exercise
of employee stock options - 554 - - 554
Issuance of 479,067 shares of common
stock under the Stock Option and
Employee Stock Purchase Plan 5 1,115 - - 1,120
Net income - - 2,179 - 2,179
--------- ----------- ----------- ----------- -----------
BALANCE, June 30, 1995 81 16,337 1,250 - 17,668
--------- ----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 38
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED JUNE 30, 1994, 1995 AND 1996
AND FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
June 30, June 30, June 30, December 31,
1994 1995 1996 1996
------------- ------------- ------------ --------------
(in thousands except per share data)
<S> <C> <C> <C> <C>
REVENUES $ 34,892 $ 53,087 $ 100,353 $ 57,043
PROGRAM EXPENSES:
Direct operating 29,533 44,374 85,822 48,000
Amortization of goodwill 286 583 1,039 1,010
Start-up costs 40 280 58 142
------------ ------------ ----------- -------------
Contribution from operations 5,033 7,850 13,434 7,891
OTHER OPERATING EXPENSES:
Selling, general and administrative 2,731 4,097 5,760 3,761
Costs of attempted acquisitions - - 569 -
------------ ------------ ----------- -------------
Income from operations 2,302 3,753 7,105 4,130
------------ ------------ ----------- -------------
OTHER INCOME (EXPENSE):
Interest expense (403) (268) (3,160) (1,908)
Interest income 51 50 645 500
Other income (expense), net 2 (24) (463) (242)
------------ ------------ ----------- -------------
(350) (242) (2,978) (1,650)
------------ ------------ ----------- -------------
Income before income tax benefit (expense) 1,952 3,511 4,127 2,480
Income tax benefit (expense) 140 (1,332) (1,856) (946)
------------ ------------ ----------- -------------
Net income $ 2,092 $ 2,179 $ 2,271 $ 1,534
============ ============ =========== =============
Earnings per common and common
equivalent share $ 0.29 $ 0.26 $ 0.25 $ 0.15
============ ============ =========== =============
Weighted average common and common
equivalent shares outstanding 7,094 8,264 9,267 10,027
============ ============ =========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE> 39
Page 1 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1994, 1995 AND 1996
AND FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
June 30, June 30, June 30, December 31,
1994 1995 1996 1996
------------ ------------ ----------- ---------------
(in thousands)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,092 $ 2,179 $ 2,271 $ 1,534
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Loss (income) on Introspect operations - - 296 (371)
Depreciation and amortization 799 1,841 3,428 2,971
(Gain) loss on disposal of property, equipment
and improvements (13) - 105 -
Loss on sale of investments - - - 45
Deferred income taxes (381) 27 (304) (2)
Tax benefit realized due to exercise of employee
stock options 108 554 1,029 522
Net change in operating assets and liabilities (2,214) (8,077) (4,869) (2,817)
------------ ------------ ----------- -------------
Net cash provided by (used in) operating activities 391 (3,476) 1,956 1,882
------------ ------------ ----------- -------------
INVESTING ACTIVITIES:
Purchases of property, equipment and improvements (2,522) (3,521) (9,675) (4,197)
Proceeds from sale of property, equipment and
improvements 25 - 674 -
Goodwill (245) (1,827) (2,203) (7,747)
Disbursements for notes receivable - - (4,271) -
Collection of notes receivable - - 25 62
Purchases of investments - - (10,223) (316)
Proceeds from sale of investments - - - 5,191
Other long-term assets (4) (511) (1,887) (221)
Non-compete agreements - (40) (250) -
------------ ------------ ----------- -------------
Net cash used in investing activities (2,746) (5,899) (27,810) (7,228)
------------ ------------ ----------- -------------
FINANCING ACTIVITIES:
Proceeds from short-term borrowings 710 202 440 8,240
Proceeds from borrowings on other long-term debt - 5,350 7,566 -
Issuance of 7% convertible subordinated
debentures - - 37,950 -
Repayments of short-term borrowings, other
long-term debt and capital lease obligations (7,565) (238) (13,914) (7,987)
Proceeds from Initial Public Offering, net 11,304 - - -
Proceeds from issuance of common stock under the
Employee Stock Option and Purchase Plans, net 1,070 1,120 2,738 1,136
Repurchase of common stock (11) - - -
Deferred debt issue costs - (91) (2,664) (52)
------------ ------------ ----------- -------------
Net cash provided by financing activities 5,508 6,343 32,116 1,337
------------ ------------ ----------- -------------
NET INCREASE (DECREASE) IN CASH 3,153 (3,032) 6,262 (4,009)
CASH, beginning of period 663 3,816 784 7,046
------------ ------------ ----------- -------------
CASH, end of period $ 3,816 $ 784 $ 7,046 $ 3,037
============ ============ =========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE> 40
Page 2 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1994, 1995 AND 1996
AND FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
June 30, June 30, June 30, December 31,
1994 1995 1996 1996
------------ ------------- ------------ --------------
(in thousands)
<S> <C> <C> <C> <C>
CHANGES IN OPERATING ASSETS AND
LIABILITIES:
Cash held in escrow $ - $ (2,543) $ 2,543 $ -
Restricted cash (170) (435) 156 129
Accounts receivable (2,730) (4,187) (8,700) (2,123)
Receivables from related parties - - - (1,125)
Refundable income taxes (177) 137 (1,006) -
Prepaid expenses, supplies and other (70) (948) (684) (1,367)
Deposits (76) (65) 44 (3)
Deferred debt issue costs and other (25) - - -
Management fee receivable - (510) 60 154
Accounts payable 6 1,122 (1,173) 40
Accrued payroll 636 (790) 928 (59)
Accrued interest payable - - 1,093 (342)
Other accrued expenses 392 142 1,897 448
Deferred revenue - - (27) 1,431
----------- ------------ ----------- -------------
Net change in operating assets and liabilities $ (2,214) $ (8,077) $ (4,869) $ (2,817)
=========== ============ =========== =============-
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest $ 403 $ 268 $ 921 $ 2,050
=========== ============ =========== =============
Cash paid for taxes $ 310 $ 655 $ 2,292 $ 723
=========== ============ =========== =============
Noncash net asset acquisition through
assumption of liabilities, notes payable,
bank loan and mortgage assumption $ 4,260 $ 1,440 $ 4,880 $ 13,104
=========== ============ =========== =============
Noncash conversion of 7% convertible
subordinated debentures $ - $ - $ - $ 5,750
=========== ============ =========== =============
Noncash reduction of accounts receivable
through application of advance payments
for services $ 37 $ 38 $ 37 $ 19
=========== ============ =========== =============
Noncash acquisition of leasehold improvements
through a note payable $ - $ 79 $ - $ -
=========== ============ =========== =============
Capital lease obligation $ - $ - $ 230 $ -
=========== ============ =========== =============
Unrealized loss (gain) on investments available-
for-sale $ - $ - $ 425 $ (326)
=========== ============ =========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-9
<PAGE> 41
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995 AND 1996, AND DECEMBER 31, 1996
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Organization and Nature of Operations
Youth Services International, Inc. (YSI, Inc.) and its subsidiaries
(collectively, "the Company") are organized to privately manage and operate a
broad range of educational, developmental and rehabilitative programs for
troubled youth who have either been adjudicated as delinquents or suffer from
behavioral problems. The Company commenced the operation of its first program
in February 1992. As of December 31, 1996, the Company manages and operates
programs in 12 states. The Company's programs are provided in residential,
boot camp and non-residential settings.
On February 3, 1994, the Company sold 1,950,000 shares of common stock at $6.67
per share pursuant to its Registration Statement filed on Form SB-2 with the
Securities and Exchange Commission. The net proceeds to the Company from this
offering of $11,304,000, net of $1,696,000 of stock issuance costs, were used
to reduce long-term indebtedness, borrowings under the lines of credit and
other short-term borrowings, to fund certain acquisitions and capital
expenditures and to 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.
Change in Year-end
On April 25, 1997, the Board of Directors approved a resolution to change the
Company's year-end from June 30 to December 31. The accompanying financial
statements include the financial position and results of operations as of and
for the six months ended December 31, 1996.
Principles of Consolidation
The consolidated financial statements include the accounts of Youth Services
International, Inc. and the following wholly-owned subsidiaries:
- Youth Services International of Iowa, Inc. (YSII)
- Youth Services International of Tennessee, Inc. (YSIT)
- YSI of Utah, Inc. (YSIU)
- Youth Services International of Baltimore, Inc. (YSIB)
- Youth Services International of Maryland, Inc. (YSIM)
- Youth Services International of Northern Iowa, Inc. (YSINI)
- Youth Services International of South Dakota, Inc. (YSISD)
- Youth Services International of Missouri, Inc. (YSIMO)
- YSI of Central Iowa, Inc. (YSICI)
- Youth Services International of New Mexico, Inc. (YSINM)
- Youth Services International of Texas, Inc. (YSITX)
- Youth Services International of Florida, Inc. (YSIF)
F-10
<PAGE> 42
- 2 -
- Youth Services International of Virginia, Inc. (YSIV)
- Youth Services International of Tucson, Inc. (YSITU)
- Youth Services International of Michigan, Inc. (YSIMI)
- Southwestern Children's Health Services, Inc. (SWCHS)
and its wholly-owned subsidiaries -
- Promise House, Inc.
- Developmental Behavioral Consultants, Inc. (DBC)
- Parc Place, Inc.
Significant intercompany accounts and transactions have been eliminated in
consolidation.
The Company manages and operates certain of its programs pursuant to
subcontracts or similar relationships with not-for-profit entities. These
not-for-profit entities hold contracts directly with state and local
governments to provide rehabilitative services to troubled youth and choose to
subcontract this management responsibility to the Company. These
not-for-profit entities are each controlled by independent Boards of Directors
which have the right to terminate their contract with the Company under certain
circumstances. The accompanying consolidated balance sheets include net
accounts receivable pursuant to these contracts of $3,753,000, $6,028,000 and
$7,407,000 as of June 30, 1995 and 1996, and December 31, 1996, respectively.
Revenue Recognition and Contract Provisions
The Company's programs are typically provided pursuant to contracts directly
with governmental entities and third-party payors, or subcontracts with
not-for-profit entities. These contracts generally provide for fixed per diem
payments based upon program occupancy. Revenues on fixed per diem and
management contracts are recognized as the services are performed.
One of the Company's significant programs operates under a contract with three
distinct revenue components as follows:
- Gross maximum price cost reimbursement under which revenues are
recognized as reimbursable costs are incurred.
- Fixed per diem under which revenues are recognized as the services
are performed.
- Management fee under which revenues are recognized as the services
are performed.
Contract terms with government and not-for-profit entities generally range from
one to five years in duration and expire at various dates through December
2000. Some of these contracts are subject to termination for the convenience
of a particular governmental entity. Management of the Company is not aware of
any circumstances that would cause any governmental entity to terminate any
existing agreement.
Certain contract costs, including indirect costs, are subject to audit and
adjustment by negotiations with government or third party payor
representatives. Contract revenues have been recorded at amounts which are
expected to be realized; subsequent adjustments, if any, resulting from the
audit process are recorded when known.
Concentration of Credit Risk
Accounts receivable are uncollateralized and are due primarily from state and
local governments and not-for-profit entities under contracts.
F-11
<PAGE> 43
- 3 -
Property, Equipment and Improvements
Property and equipment is recorded at cost and is depreciated using the
straight-line method over estimated useful lives ranging from 3 to 39 years.
Leasehold improvements are amortized over the term of the related lease or the
useful life, if shorter.
Intangible Assets
Intangible assets are amortized using the straight-line method and consist of
the following:
<TABLE>
<CAPTION>
Intangible Asset Useful Life
---------------------------- -----------
<S> <C>
Organization costs 5 years
Deferred debt issue costs 2-10 years
Goodwill 10 years
Non-compete agreements 3-5 years
</TABLE>
Amortization expense for the years ended June 30, 1994, 1995 and 1996, and the
six months ended December 31, 1996, was $341,000, $676,000, $1,452,000 and
$1,347,000, respectively. Accumulated amortization at June 30, 1995 and 1996,
and December 31, 1996, was $1,042,000, $2,494,000 and $3,841,000, respectively.
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". This statement
requires that long-lived assets and certain identifiable intangibles including
goodwill to be held and used or disposed of by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company uses an
estimate of the undiscounted cash flows over the remaining life of the goodwill
in measuring whether the goodwill will be realizable. The Company adopted this
statement during the six months ended December 31, 1996, and determined that no
impairment loss need be recognized for applicable assets during that period.
See Note 21 for discussion of impairment loss recognized subsequent to
year-end.
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 SFAS No. 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
F-12
<PAGE> 44
- 4 -
believes, based on available evidence, that it is more likely than not they
will be realized (see Note 14).
Stock Split
A three-for-two stock split in the form of a stock dividend was effected May
24, 1996, with the issuance of 2,823,544 shares of common stock. All share and
per share amounts in the accompanying consolidated financial statements and
notes thereto have been retroactively restated to reflect this split.
Earnings Per Common and Common Equivalent Share
Earnings per common and common equivalent share have been computed by dividing
net income by the weighted average number of shares of common stock and common
stock equivalents outstanding after giving retroactive effect to the fiscal
1996 three-for-two stock split. Common stock equivalents include all stock
options after applying the treasury stock method (see Note 21).
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. UNAUDITED FINANCIAL INFORMATION:
The unaudited summary results of operations for the six month period ended
December 31, 1995 was as follows (in thousands):
<TABLE>
<S> <C>
Revenues $ 46,992
Program expenses 40,520
Selling, general and administrative expenses 2,801
------------
Income from operations 3,671
------------
Income before income tax expense 2,248
Income tax expense 978
------------
Net income $ 1,270
============
Earnings per common and common equivalent share $ 0.14
============
</TABLE>
3. INVESTMENTS:
Under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", securities are required to be reported as held-to-maturity,
trading or available-for-sale securities. Securities classified as
available-for-sale are reported at fair value with unrealized gains and losses
reported as a separate component of shareholders' equity.
F-13
<PAGE> 45
- 5 -
Amortized cost and approximate fair value of investment securities
available-for-sale as of June 30, 1996 and December 31, 1996, are as follows
(in thousands):
<TABLE>
<CAPTION>
As of June 30, 1996
------------------------------------------------------------
Gross Approximate
Amortized Cost Unrealized Loss Fair Value
-------------- --------------- ---------------
<S> <C> <C> <C>
U.S. Government Bond Fund, Class A $ 5,103 $ 182 $ 4,921
Corporate Bond Fund, Class A 5,120 243 4,877
----------- ------------ ------------
$ 10,223 $ 425 $ 9,798
=========== ============ ============
<CAPTION>
As of December 31, 1996
------------------------------------------------------------
Gross Approximate
Amortized Cost Unrealized Loss Fair Value
-------------- --------------- ---------------
<S> <C> <C> <C>
Corporate Bond Fund, Class A $ 5,303 $ 99 $ 5,204
=========== ============ ============
</TABLE>
4. NOTES RECEIVABLE:
During the year ended June 30, 1996, the Company entered into a $1,000,000
discretionary line of credit agreement with Introspect under which the Company,
at its sole discretion, was able to extend credit to Introspect Healthcare
Corporation (Introspect) for a term that corresponds to the Option Agreement
(see Note 20). Credit extended under this line of credit bore interest at
prime plus 2% and was payable on demand. The amount was reclassified to
goodwill in connection with the Introspect acquisition effective September 1,
1996 (see Note 16).
In connection with its 1996 asset purchase of Tampa Bay Academy, Ltd. (TBA)
(see Note 16), the Company repaid a mortgage obligation of TBA of approximately
$3,271,000 thereby creating a note receivable from the former owners of TBA.
The note receivable bears interest at an annually adjustable rate equal to the
10 year Treasury Bond rate plus 285 basis points (9.28% at December 31, 1996).
Monthly principal and interest payments are due through April 1, 1999, with a
balloon payment of $2,892,000 due on May 1, 1999. The note is secured by real
property and the assignment of rental income. The uncollected principal
balance of this note was $3,184,000 as of December 31, 1996.
5. SHORT-TERM BORROWINGS:
Lines of Credit
During the year ended June 30, 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 the year ended June 30, 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
F-14
<PAGE> 46
- 6 -
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. During the year ended June 30, 1995,
the Company entered into an operating line of credit arrangement with a bank,
under which it could borrow the lesser of $5,000,000 or 85% of eligible
accounts receivable. Amounts drawn under this line of credit bore interest at
prime plus one-half percent and were payable on demand. The line was secured
by accounts receivable of the Company. The preceding lines of credit were
canceled during the year ended June 30, 1996, and replaced with the line of
credit facility described in Note 7.
Lines of credit information for the years ended June 30, 1995 and 1996, prior
to the line of credit facility describe din Note 7, is as follows (in
thousands):
<TABLE>
<CAPTION>
June 30, June 30,
1995 1996
------------- -------------
<S> <C> <C>
Maximum amount outstanding during
the year $ 3,070 $ 70
Average outstanding month-end balance
during the year 820 70
Weighted average interest rate during
the year 9.4% 10.0%
</TABLE>
Promissory Notes
During the year ended June 30, 1995, the Company entered into a promissory note
arrangement with a lessor, under which it financed the cost of $79,000 in
leasehold improvements. The note bore interest at 8.678% and provided for six
monthly payments of principal plus accrued interest. The unpaid principal
balance was $58,000 as of June 30, 1995, and was paid in full during the year
ended June 30, 1996.
During the year ended June 30, 1995, the Company issued a short-term promissory
note in connection with its purchase of DBC (see Note 16). The note was
non-interest bearing with a face value of $450,000. The note was discounted to
$440,000 using an imputed interest rate of 8%. The note was paid in full
during the year ended June 30, 1996.
6. SUBORDINATED DEBENTURES:
12% Subordinated Debentures
During the year ended June 30, 1993, the Company issued 12% Subordinated
Debentures in the principal amount of $1,000,000 due in 10 equal semi-annual
installments beginning June 30, 1998. Debentures in the principal amount of
$580,000 are held by shareholders or their close relatives.
In connection with the issuance of the debentures, warrants to purchase 231,900
shares of common stock at an exercise price of $3.23 per share were issued.
These warrants were exercisable beginning in April 1993 and expire at various
dates through November 1999. The warrants have been assigned a value of
$50,000.
The debentures were issued with an original issue discount of $50,000. The
discount is being amortized over the life of the debentures using the effective
interest method.
F-15
<PAGE> 47
- 7 -
During the six months ended December 31, 1996, 60,167 warrants were exercised
and the Company received approximately 7000 shares of common stock as exercise
proceeds.
7% Convertible Subordinated Debentures
During the year ended June 30, 1996, the Company issued 7% Convertible
Subordinated Debentures due February 1, 2006, in the principal amount of
$37,950,000. Interest is payable semi-annually in arrears. The debentures
are convertible into common stock at the rate of one share for each $12.47 of
principal. The 7% Convertible Subordinated Debentures may be redeemed at the
option of the Company, in whole or in part at any time after February 1, 1999,
at a redemption price equal to that percentage of their principal amount set
forth below:
<TABLE>
<CAPTION>
On or after February 1, Premium
----------------------- -------
<S> <C>
1999 103%
2000 102%
2001 101%
2002 100%
</TABLE>
The Company incurred approximately $2,500,000 of direct costs in connection
with the issuance of the 7% Convertible Subordinated Debentures. These costs
have been included within deferred debt issue costs in the accompanying
consolidated balance sheets.
In July 1996, holders of an aggregate principal amount of $5,750,000 of 7%
Convertible Subordinated Debentures surrendered such debentures for conversion
and received 461,106 shares of common stock. A conversion premium of $297,000
was paid by the Company. The conversion premium has been included in other
expense in the accompanying consolidated statement of income for the year ended
June 30, 1996.
F-16
<PAGE> 48
- 8 -
7. OTHER LONG-TERM DEBT:
Other long-term debt consists of the following at June 30, 1995 and 1996, and
December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
June 30, June 30, December 31,
1995 1996 1996
------------- ------------ --------------
<S> <C> <C> <C>
Bank Loans:
Revolving line of credit payable to a bank, permitted
borrowings equal to the lesser of $20,000,000 or 85% of
eligible accounts receivable plus 95% of cash balances
on deposit, secured by accounts receivable and cash
balances on deposit, bearing interest at the prime rate
or LIBOR plus 2.25%, (7.36% as of December 31, 1996) due
November 1997. $ 5,300 $ - $ 11,124
Note Payable to a bank, secured by vehicle, bearing
interest at 11%, payable in monthly installments through
August 1995 with a $6,500 balloon payment due August
1995. 7 - -
DBC Purchase Note (Note 15):
Note payable to a non-affiliated individual, in the face
amount of $450,000 discounted to $393,000, at an imputed
interest rate of 8%, $225,000 is payable August 1996 and
$225,000 is payable August 1997. 393 393 189
Mortgage Payable:
Mortgage payable to the City of Springfield, South
Dakota secured by property in the City of Springfield,
South Dakota, bearing interest at 3.5%, principal and
interest due in annual installments through June 2002. 105 90 90
Economic Development Loans:
Note payable to the City of Clarinda, Iowa secured by a
second position lien on certain accounts receivable and
property and equipment, bearing interest at 4%, paid in
full during the year ending 1996. 148 - -
Forest Ridge Purchase Note :
Note payable to a non-affiliated individual, in the face
amount of $150,000 discounted to $117,000, at an imputed
interest rate of 10%, payable in monthly installments
beginning March 1993. 70 46 33
</TABLE>
F-17
<PAGE> 49
- 9 -
<TABLE>
<CAPTION>
June 30, June 30, December 31,
1995 1996 1996
------------- ------------ --------------
<S> <C> <C> <C>
Other:
Note payable to Finova Capital Corporation, secured by
certain personal property, bearing interest at 11%,
payable in monthly installments through January 2001. $ - $ 1,669 $ 1,523
Note payable to Finova Capital Corporation, secured by
certain fixed assets, bearing interest at 11%, payable
in monthly installments through November 2000. - 363 330
Note payable to Tarkio Development Group, bearing
interest at 3% per annum, principal and interest due
August 1997. 50 50 -
------------ ----------- -------------
6,073 2,611 13,289
Less: Current portion 95 665 11,744
------------ ----------- -------------
Total $ 5,978 $ 1,946 $ 1,545
============ =========== =============
</TABLE>
Borrowings information with respect to the revolving line of credit for the
fiscal years ended June 30, 1995 and 1996, and for the six months ended
December 31, 1996, is as follows (in thousands):
<TABLE>
<CAPTION>
June 30, June 30, December 31,
1995 1996 1996
------------- ------------- -------------
<S> <C> <C> <C>
Maximum amount outstanding during the year $ 5,300 $ 7,295 $ 11,124
Average outstanding month-end balance during
the year 5,300 5,295 5,042
Weighted average interest rate during the year 8.3% 8.3% 7.8%
</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 December 31, 1996, the Company was in compliance with these
covenants.
F-18
<PAGE> 50
- 10 -
The aggregate maturities of other long-term debt at December 31, 1996, are as
follows (in thousands):
<TABLE>
<CAPTION>
For the Year
Ending December 31,
-------------------
<S> <C>
1997 $ 11,744
1998 454
1999 500
2000 545
2001 29
2002 and thereafter 15
-------------
Total $ 13,289
=============
</TABLE>
8. LEASES:
The Company leases certain operating facilities and computer and office
equipment under capital and operating leases expiring through fiscal 2010.
Included in property, equipment and improvements at December 31, 1996, is
$2,240,000 related to the capital leases, net of accumulated amortization of
$230,000.
Future minimum lease payments, by year and in the aggregate are as follows (in
thousands):
<TABLE>
<CAPTION>
For the Year Capital Operating
Ending December 31, Leases Leases
------------------- -------------- --------------
<S> <C> <C>
1997 $ 399 $ 3,498
1998 357 2,967
1999 281 2,478
2000 281 1,848
2001 287 1,330
2002 and thereafter 2,683 5,599
------------- -------------
4,288 $ 17,720
=============
Less- Amounts representing interest 1,910
-------------
2,378
Less- Current portion 171
-------------
$ 2,207
=============
</TABLE>
Rent expense for the fiscal years ended June 30, 1994, 1995 and 1996 and for
the six months ended December 31, 1996 was $353,000, $940,000, $2,482,000 and
$1,832,000, respectively.
9. 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
F-19
<PAGE> 51
- 11 -
make additional contributions to the Plan at its discretion. During fiscal
years ended June 30, 1994, 1995 and 1996, and during the six months ended
December 31, 1996, the Company expensed $72,000, $115,000, $191,000 and
$120,000, respectively, in matching contributions and administrative fees
related to the Plan.
10. CONTINGENCIES:
The Company has been named as defendant in various legal proceedings arising
from the performance of its normal activities. It is the opinion of
management, after consultation with legal counsel, that the amount, if any, of
the Company's ultimate liability under all current legal proceedings will not
have a material adverse effect on the financial position of the Company.
11. SELF-INSURANCE:
Effective November 1, 1993, the Company implemented a program of providing
group health insurance benefits for employees on a self-insured basis. The
plan covers all full-time employees of the Company who have satisfied
eligibility requirements. Administrative services related to the benefits
program are provided by a third-party contract administrator. The Company also
entered into a re-insurance agreement which provides specific and aggregate
stop loss coverage. Amounts payable for claims incurred on or before June 30,
1995 and 1996 and December 31, 1996, were $275,000, $436,000 and $450,000,
respectively, and are included in other accrued expenses in the accompanying
consolidated balance sheets. Self-insurance activity for the fiscal years
ended June 30, 1994, 1995 and 1996 and for the six months ended December 31,
1996, is summarized below (in thousands):
<TABLE>
<CAPTION>
June 30, June 30, June 30, December 31,
1994 1995 1996 1996
------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Balance, beginning of period $ - $ 209 $ 275 $ 436
Claims expense 804 2,368 3,334 1,717
Claims payments (595) (2,302) (3,173) (1,703)
----------- ------------ ----------- -------------
Balance, end of period $ 209 $ 275 $ 436 $ 450
=========== ============ =========== =============
</TABLE>
12. EQUITY PARTICIPATION PLANS:
Stock Option Plans
During the year ended June 30, 1992, the Board of Directors approved the
establishment of the Youth Services International, Inc. 1992 Stock Option Plan
(the 1992 Stock Option Plan), under which the Company may grant to eligible
employees nonqualified stock options to purchase up to 1,125,000 shares of
common stock. Options granted under the 1992 Stock Option Plan allow for the
purchase of common stock at prices not less than the fair market value of the
common stock at the date of grant, for a term of no more than ten years. At
the discretion of the Board of Directors, the granted options may also be
subject to certain vesting provisions. The majority of the options granted to
date contain a three-year vesting period.
F-20
<PAGE> 52
- 12 -
During the year ended June 30, 1994, the Board of Directors approved the
establishment of the Youth Services International, Inc. 1995 Employee Stock
Option Plan and the Youth Services International, Inc. 1995 Director Stock
Option Plan (the 1995 Stock Option Plan and the 1995 Director Stock Option
Plan, respectively). Under the 1995 Stock Option Plan, the Company may grant
to eligible employees nonqualified stock options to purchase up to 750,000
shares of common stock beginning July 1, 1994. The 1995 Stock Option Plan
provides for the purchase of common stock at the fair market value of the
common stock at the date of grant. Under the 1995 Director Stock Option Plan,
the Company may grant options to purchase up to 200,000 shares of common stock
to nonemployee members of the Board of Directors. The 1995 Director Stock
Option Plan provides for the granting of 7,500 shares of the Company's common
stock each year coincident with the anniversary date of the appointment of a
nonemployee Board of Directors member through September 27, 2004. The 1995
Director Stock Option Plan provides for the purchase of common stock at the
fair market value of the common stock at the date of grant.
During the year ended June 30, 1995, the Board of Directors approved the
establishment of the Youth Services International, Inc. 1996 Employee Stock
Option Plan (the 1996 Stock Option Plan). Under the 1996 Stock Option Plan,
the Company may grant to eligible employees nonqualified stock options to
purchase up to 450,000 shares of common stock beginning July 1, 1995. The 1996
Stock Option Plan provides for the purchase of common stock at the fair market
value of the common stock at the date of grant.
During the six months ended December 31, 1996, the Board of Directors approved
the establishment of the Youth Services International, Inc. 1997 Employee Stock
Option Plan (the 1997 Stock Option Plan). Under the 1997 Stock Option Plan,
the Company may grant to eligible employees incentive stock options or
nonqualified stock options to purchase up to 500,000 shares of common stock
beginning July 1, 1996. The 1997 Stock Option Plan provides for the purchase
of common stock at the fair market value of the common stock at the date of
grant.
A summary of the status of the Company's stock option plans as of June 30, 1995
and 1996, and as of December 31, 1996 is as follows:
<TABLE>
<CAPTION>
June 30, 1995 June 30, 1996 December 31, 1996
------------------------ ------------------------ ------------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex.Price Shares Ex. Price Shares Ex. Price
---------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of
period 1,683,645 $ 2.77 1,358,191 $ 3.09 1,385,002 $ 3.01
Granted 60,000 5.26 373,050 11.06 147,500 16.46
Exercised (377,453) 2.04 (291,365) 4.78 (189,128) 5.07
Forfeited (8,001) 3.22 (54,874) 4.87 - -
Expires - - - - - -
--------- ------ --------- ------ --------- ------
Outstanding, end of period 1,358,191 $ 3.09 1,385,002 $ 3.01 1,343,374 $ 2.82
========= ====== ========= ====== ========= ======
Exercisable, end of period 997,904 $ 2.40 1,093,118 $ 3.12 860,569 $ 3.27
========= ====== ========= ====== ========= ======
</TABLE>
Stock Purchase Plan
During the year ended June 30, 1994, the Company established an Employee Stock
Purchase Plan (the Plan). Under the Plan, the Company was authorized to grant
to eligible employees
F-21
<PAGE> 53
- 13 -
opportunities to purchase 225,000, 300,000 and 450,000 shares of common stock
beginning July 1, 1994, 1995 and 1996, respectively. The 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. During the years ended June 30, 1994, 1995
and 1996 and the six months ended December 31, 1996, employees purchased
approximately 0, 102,000, 250,000 and 7,000 shares of common stock,
respectively, for proceeds to the Company of approximately $0, $427,000,
$1,917,000, and $91,000, respectively.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting For Stock Based Compensation." This statement defines a fair value
based method of accounting for an employee stock option or similar equity
instrument and encourages but does not require all entities to adopt that
method of accounting for all of their employee stock compensation plans.
Entities electing not to make the change in accounting methods must make pro
forma disclosures of net income and earnings per share as if the fair value
based method of accounting had been applied. The Company has elected to
account for these plans under APB Opinion No. 25, under which no compensation
cost has been recognized. Had compensation cost for these plans been
determined consistent with SFAS Statement No. 123, the Company's net income and
earnings per share would have been reduced to the following pro forma amounts
for the year ended June 30, 1996 and the six months ended December 31, 1996 (in
thousands, except per share data):
<TABLE>
<CAPTION>
June 30, December 31,
1996 1996
------------- --------------
<S> <C> <C> <C>
Net Income (loss): As reported $ 2,271 $ 1,534
=========== ===========
Pro Forma $ 1,447 $ (219)
=========== ===========
Fully Diluted EPS: As reported $ .25 $ .15
=========== ===========
Pro Forma $ .16 $ (.02)
=========== ===========
</TABLE>
The weighted average fair value per option granted during the year ended June
30, 1996, and the six months ended December 31, 1996, was as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1996
------------- --------------
<S> <C> <C>
Employee Stock Option Plan $ 3.84 $ 6.25
Directors' Stock Option Plan 9.73 7.67
Employee Stock Purchase Plan 2.46 4.89
</TABLE>
F-22
<PAGE> 54
- 14 -
The above information was calculated utilizing the Black-Scholes option-pricing
model and the following key assumptions:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1996
------------- --------------
<S> <C> <C>
Risk-free interest rate 5.9% 5.9%
Volatility 60% 60%
Expected life (months 24 24
</TABLE>
14. INCOME TAXES:
The income tax (expense) benefit for the fiscal years ended June 30, 1994, 1995
and 1996, and for the six months ended December 31, 1996, included the
following components (in thousands):
<TABLE>
<CAPTION>
June 30, June 30, June 30, December 31,
1994 1995 1996 1996
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Federal income tax benefit (expense) $ 125 $ (1,110) $ (1,616) $ (829)
State income tax benefit (expense) 15 (222) (240) (117)
------------ ------------ ------------ -------------
Total $ 140 $ (1,332) $ (1,856) $ (946)
============ ============ ============ =============
Current income tax expense $ (241) $ (1,305) $ (2,160) $ (948)
Deferred income tax benefit (expense) 381 (27) 304 2
------------ ------------ ------------ -------------
Total $ 140 $ (1,332) $ (1,856) $ (946)
============ ============ ============ =============
</TABLE>
A reconciliation between the actual income tax provision (benefit) and the
amount computed by applying the federal statutory tax rate of 34% to the income
before income tax expense is as follows:
<TABLE>
<CAPTION>
June 30, June 30, June 30, December 31,
1994 1995 1996 1996
------------ ----------- ------------ --------------
<S> <C> <C> <C> <C>
Income tax provision at federal statutory
rate 34.0% 34.0% 34.0% 34.0%
State income taxes, net of federal income
tax effect 5.0 4.6 5.0 5.0
Loss on Introspect operations - - 2.4 (5.1)
Non-deductible goodwill - - 1.6 3.6
Change in valuation allowance (44.8) - - -
Other (1.4) (.7) 2.0 .6
-------- ------- -------- ---------
Total (7.2) 37.9% 45.0% 38.1%
======== ======= ======== =========
</TABLE>
F-23
<PAGE> 55
- 15 -
Deferred tax assets (liabilities) are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
June 30, June 30, December 31,
1995 1996 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net operating loss carryforwards $ 242 $ 203 $ 239
Depreciation and amortization 147 490 321
Accruals and reserves 99 390 546
Start-up losses 89 96 130
Prepaid expenses and inventory (221) (482) (442)
Unrealized loss on investments available-
for-sale - 170 41
Developed software - (68) (62)
Other (2) 29 (72)
------------- ------------ -------------
Deferred tax asset $ 354 $ 828 $ 701
============= ============ =============
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $305,000 and $2,700,000 for federal and state income tax
purposes, respectively, that expire through 2011.
15. RELATED PARTY TRANSACTIONS:
During the year ended June 30, 1995, the Company provided drug and alcohol
services to troubled youth pursuant to an informal agreement with a
not-for-profit entity. An officer of the Company is a member of the Board of
Trustees of the not-for-profit entity. In connection with this informal
agreement, the Company made working capital advances and extended a $100,000
operating line of credit to the not-for-profit entity. The line of credit
bears interest at 10% and requires payment in full of all unpaid principal plus
accrued interest thereon on or before June 30, 1996. The Company is in the
process of extending the maturity date of this line of credit to June 30, 1997.
Revenues earned in connection with this informal agreement totaled $57,000 for
the year ended June 30, 1995. Unpaid working capital and line of credit
advances totaled $131,000 as of June 30, 1996 and December 31, 1996, and are
included in receivables from related parties in the accompanying consolidated
balance sheets.
During the year ended June 30, 1996, the Company entered into a lease with an
officer of the Company pursuant to which the Company leased certain real
property upon which it constructed a conference center and apartment facility.
The improvements on the real property were constructed at the sole expense of
the Company and totaled approximately $200,000. The real property and
improvements thereon are available for use by the Company for an initial period
of five years with an optional five year renewal. During the initial five year
term of the lease, the Company is not required to pay any rent; however, the
Company is responsible for the payment of all utilities used by the Company and
for the maintenance of certain specified liability insurance coverages. The
Company will surrender the leased premises, as improved, upon expiration of the
lease agreement.
During the six months ended December 31, 1996, the Company entered into an
agreement with International Youth Institute ("IYI"), a company in which an
officer and shareholder is a relative of an officer of YSI. Under this
agreement, the Company outsources the training of its child care staff workers
to IYI. In connection with this agreement, a number of YSI employees who were
trainers of other YSI employees were hired by IYI. In order to compensate YSI
for the knowledge, training
F-24
<PAGE> 56
- 16 -
materials and other intellectual property that had been transferred, IYI paid
YSI $700,000 and will not be compensated for training services IYI provided
prior to January 1, 1997. The sale amount of $700,000 has been included in
revenues in the accompanying statement of income for the six months ended
December 31, 1996. YSI and IYI also entered into a training services agreement
pursuant to which IYI will provide certain training services to YSI for a
period of five years at a rate of approximately $34 per month per full-time
employee of YSI.
16. ACQUISITIONS:
Prestige Developments, Inc.
Effective November 1, 1993, the Company purchased substantially all of the
assets of Prestige Developments Inc., (Prestige), a South Dakota company.
Prestige manages two juvenile rehabilitative residential treatment facilities
pursuant to a management contract with an unaffiliated not-for-profit entity.
The Company purchased the assets for $900,000 in cash, a note payable in the
amount of $3,825,000, payment of a corporate built-in gains tax of $70,000 and
a mortgage assumption in the amount of $135,000. Acquisition costs of
approximately $113,000 were incurred in connection with the purchase. The
purchase method of accounting was used to record the transaction.
The fair market values assigned to the purchased assets are as follows (in
thousands):
<TABLE>
<S> <C>
Land $ 189
Building 851
Equipment 200
Non-compete agreement 100
Goodwill 3,703
-------------
$ 5,043
=============
</TABLE>
In connection with this purchase, the sellers signed a covenant not to compete
in the state of South Dakota for a period of five years from the closing date
of the transaction (see Note 1 for amortization policy).
Western Youth, Inc.
Effective January 1, 1994, the Company purchased all of the issued and
outstanding stock of Western Youth, Inc. (Western Youth), a Utah company.
Western Youth operates foster care and group home treatment programs in the
Utah cities of Salt Lake City, Clearfield and Orem. The Company purchased the
stock for $50,000 in cash and $300,000 in notes payable to the former
stockholders. Western Youth was merged with YSIU during the year ended June 30,
1996.
Goodwill in the amount of $300,000 arose through this purchase transaction and
was based upon the excess of purchase price over the fair market value of
assets acquired (see Note 1 for amortization policy).
F-25
<PAGE> 57
- 17 -
Parc Place, Limited Partnership
Effective August 1, 1994, the Company purchased certain assets of Parc Place,
Limited Partnership (Parc Place), an Arizona limited partnership, for $843,000
in cash and the assumption of liabilities and notes payable in the amount of
$80,000. The Company also incurred acquisition related costs of approximately
$334,000. Parc Place is a provider of residential and day treatment services
for adolescents, with a focus on chemical dependency and dual diagnosis cases.
The fair market values assigned to the purchased assets are as follows (in
thousands):
<TABLE>
<S> <C>
Leasehold improvements $ 3
Office furniture and equipment 120
Vehicles 19
Prepaid expenses and supplies 30
Goodwill 1,085
-------------
$ 1,257
=============
</TABLE>
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 5 and 7) and the assumption of $464,000 in
liabilities. The Company also incurred acquisition related costs of
approximately $47,000.
The fair market values assigned to the purchased assets are as follows (in
thousands):
<TABLE>
<S> <C>
Cash $ 232
Accounts receivable 389
Prepaid expenses and supplies 83
Fixed assets 121
Goodwill 619
-------------
$ 1,444
=============
</TABLE>
F-26
<PAGE> 58
- 18 -
Desert Hills Center for Youth and Families of New Mexico, Inc.
Effective July 1, 1995, the Company purchased certain of the assets of Desert
Hills Center for Youth and Families of New Mexico, Inc. (Desert Hills), a New
Mexico corporation and a wholly owned subsidiary of Introspect Healthcare
Corporation (Introspect), an Arizona corporation. Desert Hills is a provider
of services to behaviorally disturbed and at-risk adolescents at two adjacent
facilities in Albuquerque, New Mexico. The Company purchased the assets for
$2,618,000 in cash and the assumption of $4,545,000 in liabilities. Acquisition
costs of approximately $658,000 were incurred in connection with the purchase.
In connection with this acquisition and the Option Agreement discussed in Note
20, the Company transferred $2,543,000 into an escrow account as of June 30,
1995. These escrowed funds were utilized upon the transaction's closing in
July 1996. The purchase method of accounting was used to record the
transaction.
The fair market values assigned to the purchased assets are as follows (in
thousands):
<TABLE>
<S> <C>
Cash $ 1
Property, equipment and improvements 5,346
Prepaid expenses and supplies 10
Goodwill 2,464
-------------
$ 7,821
=============
</TABLE>
Tampa Bay Academy, Ltd.
Effective March 1, 1996, the Company purchased the business and certain assets
of Tampa Bay Academy, Ltd. (TBA), a Florida limited partnership, and a
management contract with a related entity. TBA is primarily a residential
treatment center licensed for 104 youth. The Company purchased the assets and
management contract for $4,250,000 in cash and the assumption of $337,000 in
liabilities. Acquisition costs of approximately $342,000 were incurred in
connection with the purchase. Additionally, the sellers signed a covenant not
to compete for a period of three years. The purchase method of accounting was
used to record the transaction.
The fair market values assigned to the purchased assets are as follows (in
thousands):
<TABLE>
<S> <C>
Cash $ 250
Accounts receivable, net 834
Fixed assets 1,187
Prepaid expenses and supplies 17
Deposits 36
Non-compete agreement 150
Goodwill 2,455
-------------
$ 4,929
=============
</TABLE>
In connection with this transaction, the Company entered into a lease of
certain real property owned by TBA.
F-27
<PAGE> 59
- 19 -
Youth Quest
Effective July 18, 1996, the Company purchased certain of the assets of Youth
Quest, Inc. (Youth Quest), a Utah corporation, for $815,000 in cash and the
assumption of liabilities in the amount of $128,000. The Company also incurred
acquisition related costs of approximately $147,000. Youth Quest is engaged in
the business of providing therapeutic foster care, specialized group home
services and related clinical counseling services.
<TABLE>
<S> <C>
Cash $ (11)
Accounts receivable, net 113
Fixed assets 17
Deposits 1
Goodwill 970
-------------
$ 1,090
=============
</TABLE>
Introspect Healthcare Corporation
Effective July 1, 1995, the Company entered into an Option Agreement whereby
the Company acquired the option to purchase all of the issued and outstanding
capital stock of Introspect, a wholly-owned subsidiary of Diversification
Association, Inc. (DAI), an Arizona corporation, for a period of five years.
The Option Agreement establishes a purchase price of $4,100,000 which is
subject to reduction or increase based on a number of factors as defined in the
Option Agreement. The Company paid $350,000 in cash as consideration for the
option. The Company incurred approximately $32,000 in additional costs related
to the Option Agreement.
Simultaneous with the Option Agreement, the Company entered into a Management
Agreement effective July 1, 1995, pursuant to which the Company would manage
the business of Introspect, Desert Hills - HI and Desert Hills - NV for a
period of five years. The Management Agreement provides that the Company
receive a management fee of $600,000 for management services provided during the
period January 1, 1995 through June 30, 1995. This amount is included in
revenues in the accompanying consolidated statements of income in the year
ended June 30, 1995. The Company would receive a management fee, as defined in
the Management Agreement, for services provided during the term of the
Management Agreement. The Option Agreement provides that in the event the
Management Agreement is terminated prior to its expiration and the option under
the Option Agreement is not exercised within 120 days of the termination of the
Management Agreement, the Company is required to pay a penalty which decreases
as time passes from $500,000 if the Management Agreement is terminated after
June 30, 1995, and prior to December 31, 1995, to $100,000 at the expiration of
the Management Agreement if the option is not exercised.
Effective July 1, 1995, the Company also entered into a consulting and
non-compete agreement with certain of DAI's shareholders. Under this
agreement, certain of DAI's shareholders agreed to provide consulting services
to the Company, as well as, to not compete with the Company in a defined
geographical area. This agreement extends over a five-year period and requires
payment of approximately $500,000 in the aggregate per year.
During the year ended June 30, 1996, the Company provided management services
to Introspect in accordance with the terms of the Management Agreement. In
addition to providing such management services, the Company extended various
forms of financial support to Introspect. Given the significant degree of
Introspect's financial dependence upon the Company, as well as the
F-28
<PAGE> 60
- 20 -
Company's exercise of the Option in the fourteenth month of a sixty month
option exercise period (see below), the revenues and expenses of Introspect
have been included in the Company's consolidated statements of income since
July 1, 1996, and all management fee income from that date has been eliminated.
In September 1996, the Company exercised its option to acquire all of the
issued and outstanding capital stock of Introspect. The Company purchased the
stock for $4,000,000 in cash and the assumption of $15,668,000 of liabilities.
Concurrent with this acquisition, the Company retired approximately $9,700,000
of Introspect's indebtedness. The purchase method of accounting was used to
record the transaction. Notes and other receivables totaling approximately
$2,698,000 and $306,000 of costs related to the option agreement, net of
accumulated amortization, which are described above and in Note 4 were
classified and assigned to goodwill or other Introspect assets in connection
with the purchase price allocation. Acquisition costs of approximately
$192,000 were incurred in connection with the purchase. The fair market values
assigned to purchased assets are as follows (in thousands):
<TABLE>
<S> <C>
Cash $ 1,432
Accounts receivable 2,474
Prepaid expenses and supplies 79
Fixed Assets 7,709
Other 188
Goodwill 10,982
-------------
$ 22,864
=============
</TABLE>
17. SIGNIFICANT CONTRACT:
In May 1993, the Company was awarded a five-year contract with the State of
Maryland to operate the Charles H. Hickey, Jr. School, a 312-bed residential
treatment facility located in Baltimore County, Maryland. The terms of the
contract, as amended, call for payments to the Company of $48,286,000
(excluding certain potential incentive and penalty fees) during the first three
years of the contract. Payments in the fourth and fifth years will be based
upon the previous year adjusted for inflation. The contract commenced July 1,
1993.
18. REVENUES AND EXPENSES:
Approximately 99%, 99%, 80% and 98% of the Company's revenues for the years
ended June 30, 1994, 1995 and 1996, and for the six months ended December 31,
1996, respectively, relate to amounts earned from state and local governmental
agency and local not-for-profit entity contracts the Company has entered into
to manage and operate programs that provide educational, developmental and
rehabilitative services to troubled youth.
The Company earned revenues of approximately 72%, 76%, 61 and 77% from state
and local governments and approximately 27%, 23% 19% and 21% from local
not-for-profit entities for the years ended June 30, 1994, 1995 and 1996 and
for the six months ended December 31, 1996, respectively.
F-29
<PAGE> 61
- 21 -
19. PRO FORMA INFORMATION (UNAUDITED):
Assuming the acquisition of TBA and Introspect had been consummated at the
beginning of fiscal 1995, the unaudited pro forma consolidated results of
operations would have been as follows (in thousands except for per share data)
for the years ended June 30, 1995 and 1996 (see Note 16). Such information
reflects adjustments, net of tax effects, to reflect changes in depreciation,
lease and interest expense and goodwill amortization. As previously mentioned
in Note 16, the results of operations of Introspect have been included in the
Company's consolidated statements of income since July 1, 1996.
<TABLE>
<CAPTION>
1995 1996
-------------- --------------
<S> <C> <C>
Revenues $ 80,926 $ 106,262
Net income 1,766 2,277
Net income per share .21 .25
Weighted average common and common
equivalent shares outstanding 8,264 9,267
</TABLE>
The pro forma information presented above may not be indicative of the results
of operations which actually would have occurred if the transactions had taken
place as of the beginning of fiscal 1995 and 1996, respectively.
20. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair value of cash and restricted cash is the carrying amount, which is a
reasonable estimate of fair value. For securities held as investments, fair
value is determined using the quoted market prices.
The fair value of the Company's subordinated debentures and other long-term
debt is estimated based on the quoted market prices for the same or similar
issues or on the current rates offered to the Company for debt of the same
remaining maturity.
The fair value of notes receivable is estimated based on the discounted value
of the future cash flows expected to be received from the notes. The discount
rates used are reflective of the effects of interest rate changes and the
effects of changes in credit risk.
F-30
<PAGE> 62
- 22 -
The estimated fair values of the Company's financial instruments at December
31, 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
Carrying Approximate
Amount Fair Value
-------------- -------------
<S> <C> <C>
Financial Assets:
Cash $ 3,037 $ 3,037
Restricted cash 373 373
Investments available-for-sale 5,204 5,204
Notes receivable 3,184 3,184
------------- -------------
$ 11,798 $ 11,798
============= =============
Financial Liabilities:
Subordinated debentures $ 33,188 $ 32,370
Other long-term debt 13,289 13,289
------------- -------------
$ 46,477 $ 45,659
============= =============
</TABLE>
21. NEW AUTHORITATIVE STANDARDS NOT YET IMPLEMENTED:
In March 1997, the Financial Accounting Standards Board released SFAS No. 128
"Earnings Per Share." The new statement is effective for financial statements
for periods ending after December 15, 1997, and early adoption is not
permitted. When adopted, SFAS 128 will require the restatement of prior
periods and disclosure of basic and diluted earnings per share and related
computations. The retroactive restatement process would require additional
disclosure of basic earnings per share of $.27 and $.17 for the year ended June
30, 1996, and for the six months ended December 31, 1996, respectively.
22. SUBSEQUENT EVENTS:
In March 1997, the board of directors approved, and management committed to a
plan to sell the nine programs that comprise the Company's behavioral health
business. The Company will continue to operate its behavioral health businesses
until a sale can be consummated, which the Company is attempting to accomplish
by September 30, 1997. As a result of this decision to dispose of the
behavioral health business, the Company has recorded a restructuring charge
of $27,000,000 to reduce the carrying amount of behavioral health assets to
their estimated fair value based upon an independent appraisal less selling
costs. In July 1997, the Company entered into a definitive agreement to sell
the behavioral health business for $21.7 million. The Company expects to
record a pre-tax gain of approximately $6.0 million from the sale. The Company
will continue to operate its behavioral health business until the closing of the
sale which is expected to occur on or before September 30, 1997.
F-31
<PAGE> 1
STATEMENT REGARDING COMPUTATION OF
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
Youth Services International, Inc.
<TABLE>
<CAPTION>
Six
Months
Ended
12/31/96
----------
<S> <C>
Weighted average shares
outstanding 9,113,860
Weighted average common stock
equivalents outstanding:
Common stock
Stock options 1,421,042
Warrants 179,828
-----------
Total 1,600,870
Assumed treasury stock repurchases:
Common stock
Stock options 646,555
Warrants 41,229
-----------
Total 687,784
Net weighted average common stock
equivalents 913,086
-----------
Total primary weighted average
common stock and common stock
equivalents outstanding 10,026,946
===========
Note: 20% buy back limit 1,822,920
===========
Net income $1,535,000
===========
Primary earnings per share $0.15
===========
</TABLE>
Note: The fully-diluted calculation has not been presented as the impact is
anti-dilutive.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-K, into Youth Services
International, Inc. and subsidiaries' previously filed Registration Statement
File Nos. 333-07517, 33-99500, 33-99498, 33-93880, 33-84934, 33-84938,
33-84672, 33-83726 and 33-83724.
ARTHUR ANDERSEN LLP
Baltimore, Maryland,
July 23, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,037
<SECURITIES> 5,204
<RECEIVABLES> 23,077
<ALLOWANCES> 1,027
<INVENTORY> 0
<CURRENT-ASSETS> 36,354
<PP&E> 32,306
<DEPRECIATION> 4,881
<TOTAL-ASSETS> 93,089
<CURRENT-LIABILITIES> 23,559
<BONDS> 0
0
0
<COMMON> 93
<OTHER-SE> 32,497
<TOTAL-LIABILITY-AND-EQUITY> 93,089
<SALES> 0
<TOTAL-REVENUES> 57,043
<CGS> 0
<TOTAL-COSTS> 52,913
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,908
<INCOME-PRETAX> 2,480
<INCOME-TAX> 946
<INCOME-CONTINUING> 1,534
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,534
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0
</TABLE>
