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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1997
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 INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
2 PARK CENTER COURT, SUITE 200 21117
OWINGS MILLS, MARYLAND 21117 (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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(TITLE OF EACH CLASS) (NAME ON EACH EXCHANGE WHICH REGISTERED)
--------------------- ----------------------------------------
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
March 3, 1998 was $154,458,096.
The registrant had shares of common stock outstanding as of December 31,
1997 of 10,241,198.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information from the registrant's definitive Proxy Statement for the
year ended December 31, 1997 to be filed with the Securities and Exchange
Commission pursuant to Rule 14(a) no later than April 30, 1998 is incorporated
by reference into Parts II and III of this Form 10-K.
Certain information from the registrant's Registration Statement on Form SB-2
(registration number 33-71958) filed with the Securities and Exchange
Commission on November 19, 1993, as amended is incorporated by reference into
Part IV of this Form 10-K.
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YOUTH SERVICES INTERNATIONAL, INC.
INDEX -- FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
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PART I
ITEM 1. Business 3
ITEM 2. Properties 10
ITEM 3. Legal Proceedings 10
ITEM 4. Submission of Matters to a Vote of Security Holders 10
PART II
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters 11
ITEM 6. Selected Consolidated Financial Data 11
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
ITEM 8. Financial Statements and Supplementary Data 22
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 22
PART III
ITEM 10. Directors and Executive Officers of the Company 22
ITEM 11. Executive Compensation 22
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 22
ITEM 13. Certain Relationships and Related Transactions 23
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 24
SIGNATURES
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PART I
ITEM 1. BUSINESS
Youth Services International, Inc. (the "Company" or "YSI") is a leading
national provider of private educational, developmental and rehabilitative
programs which encompass a holistic approach to education, training and
socialization of youth in order to prepare them to reenter society as positive,
contributing, tax-paying members of their community. YSI's programs are
designed to equip youth with the skills, educational base and behavioral norms
to enable the youth to be successful in the work place, in school and in the
community. YSI provides its programs in the following settings: academy,
sexual offender, high impact, boot camp and detention. (See "-YSI Programs --
Program Settings" for a further description.) As of December 31, 1997, the
Company operated 18 residential juvenile justice programs in nine states
serving approximately 1,800 youth and conducted non-residential programs
serving approximately 175 additional youth. To date, the youth served by the
Company have been drawn from more than 21 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 developing new
programs in response to privatization opportunities, increasing student
capacity at existing facilities, expanding program offerings and acquiring
complementary programs and businesses.
The Company was established to capitalize on emerging opportunities in the
privatization of juvenile justice programs by state and local governments.
Management believes that opportunities in this market continue to increase as
the juvenile population rises, public facilities continue to be more
overcrowded and government agencies turn to privatization as an effective
alternative because of lower costs and demonstrated results in lowering
recidivism rates. 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.
During the period August 1994 through September 1996, the Company acquired
several companies which operate in the juvenile behavioral health business. In
an effort to focus on the Company's core juvenile justice business, in April
1997 the Company announced that it had committed to a plan to dispose of its
behavioral health business. On October 31, 1997, the Company sold all of its
behavioral health business other than its programs in the State of Texas which
are currently being held for sale. (See "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Recent
Developments" for a further description of this transaction.)
MARKET
The Company believes that the juvenile segment of the corrections market
continues to grow. Trends reflecting increases in both the number of juveniles
and the severity of the crimes committed by juveniles 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 services for troubled
youth will continue to increase. The Company also believes that certain
demographic trends, such as annual increases in both the number of teenagers and
youth from single parent families, will further contribute to the overall growth
in the population of troubled youth in the United States.
Many of these trends also exist in the international markets and YSI will
explore opportunities that exist internationally. YSI believes that
privatization opportunities may occur in the near future in markets such as
Australia, Canada, South Africa and the United Kingdom.
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 juvenile corrections industry, "de novo"
programs were in demand because of the lack of effective programs and capacity.
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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.
Successful proposals by the Company under an RFP have resulted in contracts
between the Company and the government agency under which youth are placed in
the Company's program by the government agency up to the licensed capacity.
Generally, the Company has little flexibility in admitting youth 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. Recently, the trend has been
developing whereby 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 adjudicated youth in a
residential facility. Placement authorities for adjudicated youth include state
juvenile services agencies, judges of juvenile and other courts and parole
officers. 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 with each facility.
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 and
international 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 existing 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
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
believes it can continue to facilitate and assist states and state agencies in
the process of determining to shift certain of its services for troubled youth
to private industry. In some instances, involvement in the privatization
process may result in the opening or expansion of a "de novo" program by
the Company to service youth referred by placement authorities. In most cases,
where the result is the issuance of an RFP, the Company's involvement exposes
the Company's abilities and experience which the Company believes are key
factors in RFP award decisions. 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 successful 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 Services. 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 will continuously
evaluate the effectiveness of its programs in preparing troubled youth to
become responsible, self-sufficient taxpayers. As
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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. In connection with its expansion of services, the Company
may choose to enter the alternative education market for non-adjudicated youth.
Providing education to troubled youth is a core competency that YSI has
developed by providing educational services in its juvenile justice facilities.
Since the majority of youth needing an alternative educational experience are
at-risk, this business is very compatible with YSI's strengths.
Pursue Mergers and Acquisitions. The Company will continue to evaluate and
selectively pursue merger and acquisition opportunities. 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 the
Company's core business, in areas that complement existing programs and in new
markets.
OPERATING STRATEGY
Leverage Operating Efficiencies. The Company continues the process of
consolidating and rationalizing its new organizational structure. 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. 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.
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 DESCRIPTION
YSI's programs encompass a holistic approach to education, training and
socialization of youth in order to prepare them to reenter society as positive,
contributing, tax-paying members of their community. YSI's programs are
designed to equip youth with the skills, educational base and behavioral norms
to enable the youth to be successful in the work place, in school and in the
community.
YSI's programs are comprised of four major components: education; vocational
training; group living (i.e., socialization); and recreation. Applied
consistently throughout these components are behavioral management principles
that are intended to change dramatically the thinking and behavior of
delinquent youth, teach basic life skills and reinforce the principle that
success begins with appropriate, acceptable behavior. Consequently, the
program components interlock and blend together to form a cohesive consistent
program designed to develop a youth that is fully-equipped to meet the
challenges of life in a responsible acceptable manner. In addition, YSI's
principle priority is to provide its programs in a safe and secure environment
for the community, the youth and the staff.
This program design is implemented through the application of its components
based on the underlying environment as follows:
I. Program Environment
A. Security - YSI believes that its first priority and responsibility
is to conduct its programs in an environment that is safe and
secure for the community, its staff and the youth in its programs.
YSI provides that security primarily through hardware and staff
supervision. Security is also derived from an intense schedule of
activities that occupy the youth at all times during the day and
involve them in activities that require, and reinforce the need
for and benefits of, positive thinking and behavior.
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B. Behavior Management - These principles are intended to change
dramatically the thinking and behavior of delinquent youth. The
behavior management approach requires a focus not just on
behavior, but also on positive thinking patterns, healthy belief
systems, and the development of a value system that provides
guidance in understanding that which is important in life. The
behavior management principles coupled with the intense schedule
of activities serve to create a safe environment for the community
and the staff and students at each YSI project.
II. Program Components
A. Education - YSI provides accredited educational courses at the
appropriate grade levels for the youth in its facilities. YSI's
educational programs are accredited with the state and local
school districts in which its facilities are located. The
education component follows School-to-Work principles to
complement the vocational component and prepare the youth for the
job market. Also, training in basic behavior and socialization
skills are applied in the education curriculum. Special education
needs are provided as appropriate to address learning differences
and disabilities.
B. Vocational Training - YSI's vocational training includes
instruction in skills in vocations that are most likely to provide
employment opportunities for the youth. YSI researches the jobs
market in the areas in which its facilities are located and from
which the youth are derived to provide training in appropriate
areas. YSI also provides basic work skills and socialization
skills to better enable youth to survive and be successful in the
work place.
C. Group Living - YSI's group living component includes individual
and group counseling, case management, community service, family
support and other group level activities. Through these sessions,
youth constantly assess their own behavior, the progress of their
individual development and the achievement of the goals each
youth, together with staff, establishes for himself or herself.
In addition, Group Living includes those portions of a youth's day
that he is not in school, vocational training or recreation.
Socialization and life skills are applied and behavior management
implemented at all times during a youth's day.
D. Recreation - YSI's programs include athletics and other
recreational activities as an integral element of the holistic,
balanced approach. These activities include intramurals,
interscholastic athletics, physical education and recreational
activities. These experiences provide a physical outlet for the
youth but, more importantly, provide instruction and experience in
teamwork, preparation, mentoring and other life and socialization
skills.
The goal of the YSI program is to provide, through the application of its
components, for the transition of the youth back into the community with the
skills required to live as a successful member of society.
PROGRAM SETTINGS
YSI currently provides its program in the following settings: academy,
sexual offender, high impact, boot camp and detention. The distinguishing
characteristics of these program settings follow:
Academy Programs. The Company's academy programs serve the needs of
adjudicated youth who generally are repeat offenders and/or violent crime
offenders. Academy programs are located in facilities which range from
staff-secure to hardware-secure. Academies provide the full YSI program
over an average length of stay ranging from nine to 15 months.
At certain projects, YSI offers various specialized programs in addition to the
academy program. These specialized programs are generally shorter term in
nature but are designed to achieve the same goal as the academy program.
Accordingly, at these projects, YSI's educational, developmental and
rehabilitative programs are modified to account for the shorter length-of-stay,
the purpose of the program and/or the particular issues facing the residents of
the program. These programs include the following in a highly secure
environment:
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.
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High Impact Programs. The Company's high impact programs generally serve
first-time offenders or "lower-level" offenders who have failed or
performed below expectations in non-residential settings. The lengths of
stay generally range from 30 to 90 days
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 one to 90 days as they await disposition of
court cases or determinations of placement.
YSI also provides non-residential aftercare programs for youth who have been
discharged from YSI or other residential juvenile facilities to assist them in
transitioning back into the community.
PROGRAM OFFERINGS
The residential juvenile justice programs operated by the Company as of
December 31, 1997 are as follows:
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AT DECEMBER 31, 1997
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INITIAL % INCREASE NUMBER
TYPE OF START LICENSED LICENSED IN OF
RESIDENTIAL PROJECT(1) PROGRAM DATE SOURCE CAPACITY CAPACITY CAPACITY STUDENTS
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Clarinda Academy, IA Academy 2/92 De Novo 60 247 312% 201
Victor Cullen Academy, MD Academy 9/92 RFP 60 184 207 200
Reflections Treatment Sexual Offender 9/92 RFP 26 42 62 52
Agency, TN
Forest Ridge Youth Services, Academy 2/93 Acquisition 105 140 33 131
IA
Charles H. Hickey, Jr. Academy/Detention/ 7/93 RFP 312 323 4 303
School, MD High Impact/Sexual
Offender
Chamberlain Academy, SD Academy 11/93 Acquisition 60 78 30 76
Springfield Academy, SD Academy 11/93 Acquisition 70 108 54 102
Tarkio Academy, MO Academy/Sexual 9/94 De Novo 103 308 199 261
Offender
Woodward Academy, IA Academy/Sexual 7/95 RFP 25 98 292 67
Offender
Camp Washington, VA Boot Camp 1/96 RFP 45 95 111 50
Everglades Academy, FL Academy 12/96 RFP 102 102 -- 102
Keweenaw Academy, MI Academy 1/97 De Novo 80 80 -- 56
Genesis Treatment Agency, VA Sexual Offender 5/97 RFP 20 20 -- 12
Cypress Creek Academy, FL Academy 3/97 RFP 60 60 -- 60
Hillsborough Academy, FL Academy 7/97 RFP 25 25 -- 25
Pompano Academy, FL Academy 11/97 RFP 40 40 -- 11
Timberline Academy, FL Academy 11/97 RFP 30 30 -- 30
Snowden Cottage Academy, DE Academy 11/97 RFP 18 18 -- 18
-- -- -- --
Total/Percentage 1,241 1,998 61% 1,757
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(1) The Desert Hills - College Station and Los Hermanos Ranch facilities,
both primarily behavioral health programs in the State of Texas, are
being held for sale as of December 31, 1997. (See "ITEM 7. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS-Recent Developments.")
YSI's aftercare programs for youth who have been discharged from YSI or other
residential juvenile facilities are the Reflections Aftercare Program,
Knoxville, Tennessee; Virginia Aftercare Program & Services, Richmond,
Virginia; and YSI Community-Based Services, Des Moines, Iowa, Cedar Rapids,
Iowa, Estherville, Iowa, and St. Paul, Minnesota.
CONSULTING AND DEVELOPMENT SERVICES
CONSULTING SERVICES
Opportunities to provide consulting services have been presented to the
Company from time to time on projects to assist in the evaluation of problems
of youth, the improvement of services for troubled youth, the implementation of
programs in a community, privatization and other 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
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provider of choice, assists in community acceptance of potential youth care
programs or is beneficial to the Company based on other similar factors.
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 facilities for troubled youth. 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, construction contractors,
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 to 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.
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 and state welfare and child protective agencies. 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. 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 admissions personnel to
manage the admissions and graduation of youth in order to maintain high
occupancy levels. The admissions personnel of each program must continually
market to placement authorities in order to obtain a steady flow of referrals.
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
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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 1,800 personnel as of December 31, 1997: 60% in
direct care workers; 32% in professional, teacher and manager positions; and 6%
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 certain aspects of 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 holistic approach to
the education, training and socialization of troubled youth. 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 projects 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 project. 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
projects 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
contracts or as part of the initial licensing or license renewal process.
COMPETITION
YSI competes with a wide variety of organizations, including other for-profit
companies, not-for-profit companies and governmental agencies that provide
services to troubled youth. The Company distinguishes itself from its
competitors by providing a program that encompasses a holistic approach to the
education, training and socialization of troubled youth as opposed to strictly
punitive incarceration and institutionalization. The Company competes primarily
on the basis of the quality 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 services to troubled youth are
small and operate on a local or regional
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basis. YSI believes that there are few competitors that can offer services to
troubled youth 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.
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 $10.6 million as of December
31, 1997. 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. The
Company is generally responsible for the utilities, maintenance and repair of
the facilities.
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 21117. The lease for this facility expires in May 2002.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings other than routine
litigation which the Company does not believe is significant to its future
financial position or results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The information required by this Item 4 is not applicable.
10
<PAGE> 11
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
YSI's common stock trades on The Nasdaq Stock Market under the symbol "YSII".
On May 24, 1996, the Company effected 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 Stock Market after giving effect to the stock split.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
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 1, 1996 to December 31, 1996 . . . . 17 3/4 10 7/8
YEAR ENDED DECEMBER 31, 1997:
1st Quarter . . . . . . . . . . . . . . . . 18 1/4 12 1/2
2nd Quarter . . . . . . . . . . . . . . . . 15 3/8 9
3rd Quarter . . . . . . . . . . . . . . . . 18 5/8 12 1/8
4th Quarter . . . . . . . . . . . . . . . . 20 1/8 12 1/4
</TABLE>
As of March 3, 1998 the approximate number of holders of record of common
stock of the Company was 348.
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.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company as of and
for year ended December 31, 1997, the six months ended December 31, 1996 and
each of the years in the four year period ended June 30, 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 "Item 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and
Consolidated Financial Statements".)
11
<PAGE> 12
<TABLE>
<CAPTION>
YEAR SIX MONTHS
YEAR ENDED JUNE 30, ENDED ENDED DECEMBER 31,
------------------------------------ DECEMBER 31, -------------------
1993 1994 1995 1996 1997 1995 1996
------- ------- ------- --------- ---------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues . . . . . . . . . . . . . . . . . . . . . $8,895 $34,892 $53,087 $100,353 $108,129 $46,992 $57,043
Program expenses
Direct operating . . . . . . . . . . . . . . . 8,397 29,819 44,957 86,861 94,124 40,490 49,010
Start-up costs . . . . . . . . . . . . . . . . 392 40 280 58 207 30 142
--- -- --- -- --- -- ---
Contribution from operations . . . . . . . . . . . 106 5,033 7,850 13,434 13,798 6,472 7,891
Other operating expenses
Development costs . . . . . . . . . . . . . . 302 518 777 741 1,131 426 536
General and administrative . . . . . . . . . . 1,293 2,213 3,320 5,019 7,955 2,375 3,225
Loss on sale of behavioral health business . . -- -- -- -- 20,898 -- --
Costs of attempted acquisitions . . . . . . . -- -- -- 569 -- -- --
-- -- -- --- -- -- --
(Loss) income from operations . . . . . . . . . . . (1,489) 2,302 3,753 7,105 (16,186) 3,671 4,130
------ ----- ----- ----- -------- ----- -----
Other income (expense)
Interest expense . . . . . . . . . . . . . . . (173) (403) (268) (3,160) (3,022) (1,234) (1,908)
Interest income . . . . . . . . . . . . . . . 8 51 50 645 462 44 500
Loss on sale of investments . . . . . . . . . -- -- -- -- (203) -- (45)
Other income (expense), net . . . . . . . . . (17) 2 (24) (463) (107) (233) (197)
--- - --- ---- ---- ---- ----
(182) (350) (242) (2,978) (2,870) 1,423 (1,650)
---- ---- ---- ------ ------ ----- ------
(Loss)income before income taxes . . . . . . . . . (1,671) 1,952 3,511 4,127 (19,056) 2,248 2,480
Income tax (expense) benefit . . . . . . . . . . . -- 140 (1,332) (1,856) 3,085 (978) (946)
-- --- ------ ------ ----- ---- ----
Net (loss)income . . . . . . . . . . . . . . . . . $(1,671) $2,092 $2,179 $2,271 $(15,971) $1,270 $1,534
======= ====== ====== ====== ========= ====== ======
(Loss) earnings per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . $(.27) $.32 $.29 $.27 $ (1.59) $.16 $.17
===== ==== ==== ==== ========= ==== ====
Diluted . . . . . . . . . . . . . . . . . . . . . . $(.27) $.29 $.26 $.25 $ (1.59) $.14 $.15
===== ==== ==== ==== ======== ==== ====
Weighted average common shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . 6,271 6,532 7,640 8,271 10,044 8,120 9,114
===== ===== ===== ===== ====== ====== =====
Diluted . . . . . . . . . . . . . . . . . . . . . 6,271 7,094 8,264 9,267 10,044 8,898 10,027
===== ===== ===== ===== ====== ===== ======
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
------------------------------------------ ---------------------
1993 1994 1995 1996 1996 1997
--------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash . . . . . . . . . . . . . . . $ 663 $ 3,816 $ 784 $ 7,046 $ 3,037 $7,802
Working capital . . . . . . . . . . 178 6,078 9,624 29,923 12,795 22,972
Total assets . . . . . . . . . . . 4,704 18,130 29,050 74,639 93,089 64,884
Long-term obligations, net of current portion 3,141 1,291 6,955 43,145 36,940 33,062
Total liabilities . . . . . . . . . 5,452 4,315 11,382 51,188 60,499 42,077
Shareholders' (deficit) equity . . (748) 13,815 17,668 23,451 32,590 22,807
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
YSI operates programs designed to provide educational and rehabilative
services to adjudicated youth. As of December 31, 1997, YSI operated 18
residential juvenile justice programs in nine states. As of December 31, 1997,
the Company also operated two behavorial health programs which are being held
for sale. (See "RECENT DEVELOPMENTS" for further discussion of the Company's
writedown and disposition of seven behavioral health programs on October 31,
1997) .
Revenues are derived from the Company's operation of its juvenile justice
programs pursuant to contracts with governmental entities and management
agreements with private operators which are generally not-for-profit entities
that contract with governmental entities. Generally, the Company's contracts
provide for per diem payments based upon program occupancy. The Company
recognizes revenues from its fixed per diem and management contracts when the
Company performs the services pursuant to such contracts. One of the Company's
significant programs operates under a contract whereby revenues are recognized
as reimbursable costs are incurred through a gross maximum price cost
reimbursement arrangement. Under this contract, contract revenues are recorded
at amounts that are expected to be realized. This contract has certain costs
subject to audit and adjustment as determined through negotiations with
government representatives. Subsequent adjustments, if any, resulting from the
audit process are recorded when known.
12
<PAGE> 13
Program direct operating expenses are principally comprised of salaries and
related benefits of personnel, insurance, security expenses, transportation
costs, depreciation, meal costs and rent, utilities and other occupancy
expenses associated with the operation of the Company's programs at its
facilities.
Start-up costs are principally comprised of expenses associated with the
hiring and training of staff required to obtain licensing prior to admitting
students into a new program.
Contribution from operations consists of revenues minus program direct
operating expenses and start-up costs. Contribution from operations, in
general, is lower in the initial stages of a program's development primarily
because of start-up costs and other costs incurred during the period prior to
the achievement of stable occupancy. Contribution from operations as a
percentage of revenue is greater under some of the Company's contracts with
unaffiliated, not-for-profit entities because the not-for-profit entities are
responsible for certain elements of operating the programs and incur some of
the costs. Therefore, in these instances, the Company earns its margin on a
lower base of revenues and expenses.
Development costs are principally comprised of payroll and travel costs for
personnel associated with the Company's efforts to grow by expansion into new
markets.
General and administrative costs are principally comprised of salaries and
related benefits of personnel, insurance and rent, utilities and other
occupancy expenses associated with the operation of the Company's executive
offices and the management of the Company and its subsidiaries.
RECENT DEVELOPMENTS
In October 1997, the Company was awarded two contracts by the State of
Florida, Department of Juvenile Justice, to operate existing 40-bed male and
30-bed female juvenile corrections facilities in Pompano and Daytona Beaches,
respectively. The Company commenced operations in November 1997 at both
facilities.
In October 1997, the Company was selected by the State of Delaware,
Department of Service for Children, Youth and Their Families to operate a
17-bed residential program. The Company commenced operations of this program in
November 1997.
The Company has renovated several buildings in Rantoul, Illinois and intends
to operate a juvenile transition program for adjudicated youth. The Company
expects initially to serve approximately 50 youth and to be open for placements
in March 1998.
The Company also has renovated several buildings in Elmore, Minnesota and
plans to establish an academy program serving approximately 150 youth. The
Company anticipates the facility will be open for placements for adjudicated
youth in March 1998.
In March 1997, the Board of Directors of the Company approved, and management
committed to, a plan to sell the programs that comprised the Company's
behavioral health business. On October 31, 1997, the Company consummated the
sale of the behavioral health business, other than the two behavioral health
programs in Texas, for $20,400,000 resulting in a loss on sale of $20,898,000.
The Company's Texas Programs continue to be operated by the Company while being
held for sale.
13
<PAGE> 14
RESULTS OF OPERATIONS AND JUVENILE JUSTICE INFORMATION
The following table sets forth selected items from the Company's consolidated
financial statements expressed as a percentage of total revenues:
<TABLE>
<CAPTION>
FOR THE FOR THE SIX FOR THE
YEARS ENDED MONTHS ENDED YEARS ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
------------ ------------ --------
1997 1996 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Program expense:
Direct operating 87.0 86.4 85.9 86.2 86.6 84.7
Start-up 0.2 0.2 0.2 0.1 0.1 0.5
--- --- --- --- --- ---
Contribution from operations 12.8 13.4 13.9 13.7 13.3 14.8
Development costs (1.0) (0.9) (0.9) (0.9) (0.7) (1.5)
General and administrative (7.4) (5.2) (5.7) (5.1) (5.0) (6.3)
Loss on sale of behavioral health (19.3) -- -- -- -- --
Costs of attempted acquisitions -- (0.5) -- -- 0.6 --
-- ----- -- -- --- --
(Loss) income from operations (14.9) 6.8 7.3 7.7 7.0 7.0
(Loss) income before income taxes (17.6) 3.9 4.3 4.8 4.1 6.6
Net (loss) income (14.8)% 2.3% 2.7% 2.7% 2.3% 4.1%
</TABLE>
Given the Company's sale of the behavioral health business during the year
ended December 31, 1997, other than the two programs in Texas held for sale
(see "-Recent Developments"), certain portions of MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS address only the
historical results and trends of the continuing juvenile justice business.
The following table sets forth selected items from the Company's consolidated
financial statements with respect to only the juvenile justice business,
expressed as a percentage of revenues from the juvenile justice business:
<TABLE>
<CAPTION>
FOR THE FOR THE SIX FOR THE
YEARS ENDED MONTHS ENDED YEARS ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
------------ ------------ --------
1997 1996 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Program expense:
Direct operating 80.9 83.2 83.6 81.5 83.6 84.6
Start-up costs 0.3 0.3 0.5 0.1 0.1 0.7
--- --- --- --- --- ---
Contribution from operations 18.8% 16.5% 15.9% 18.4% 16.3% 14.7%
</TABLE>
14
<PAGE> 15
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES
JUVENILE JUSTICE
Revenues. Revenues derived from juvenile justice programs increased
$11,383,000, or 18.7%, to $72,368,000 for the year ended December 31, 1997 from
$60,985,000 for the year ended December 31, 1996. The increase resulted
primarily from the addition of seven new juvenile justice programs subsequent
to December 31, 1996 which provided additional revenues of $6,527,000 and the
expansion of juvenile justice programs existing at December 31, 1996 which
generated an increase of $4,856,000. The average daily enrollment for all of
the Company's residential juvenile justice programs increased 18.7% to 1,724
youth for the year ended December 31, 1997 from 1,452 for the year ended
December 31, 1996, including a 9.2% increase in average daily enrollment in the
11 programs that the Company operated during both the year ended December 31,
1997 and 1996 to 1,586 from 1,452. The Company reported an average occupancy
rate of 91.0% for the year ended December 31, 1997 compared to 93.4% for the
year ended December 31, 1996 based on an average daily licensed capacity of
1,895 beds for the year ended December 31, 1997 and 1,555 for the year ended
December 31, 1996. The decrease in occupancy percentage is due primarily to
the fact that several of the seven new juvenile justice programs were in
various stages of development where maximum occupancy had not yet been reached.
JUVENILE JUSTICE AND BEHAVIORAL HEALTH
Revenues. Revenues decreased $2,275,000, or 2.1%, to $108,129,000 for the
year ended December 31, 1997 from $110,404,000 for the year ended December 31,
1996. This decrease resulted primarily from a decrease of $11,418,000 in the
revenues generated from the behavioral health business between periods due to
the fact that only ten months of behavioral health revenues were included in
the year ended December 31, 1997 (see "-Recent Developments") in addition to
declines between years in the reimbursement from certain third-party payors in
the behavioral health business. The decrease between years further resulted
from non-recurring consulting revenues of $2,240,000 in the 1996 period. This
decrease was partially offset by the addition of seven new juvenile justice
programs subsequent to December 31, 1996 which provided additional revenues of
$6,527,000 and the expansion of juvenile justice programs existing at December
31, 1996 which generated an increase of $4,856,000.
PROGRAM DIRECT OPERATING EXPENSES
JUVENILE JUSTICE
Program Direct Operating Expenses. Program direct operating expenses incurred
from juvenile justice programs increased $7,797,000, or 15.4%, to $58,513,000
for the year ended December 31, 1997 from $50,716,000 for the year ended
December 31, 1996. As a percentage of revenue, program direct operating
expenses were 80.9% and 83.2%, thereby generating program contribution margin
percentage of 19.1% and 16.8% for the year ended December 31, 1997 and 1996,
respectively. This improvement between periods is due to certain operating
efficiencies and consolidations implemented throughout the Company's juvenile
justice programs. Salaries and related benefits constituted approximately 73.0%
of program direct operating expenses for the year ended December 31, 1997
compared to 72.1% of program direct operating expenses for the year ended
December 31, 1996.
JUVENILE JUSTICE AND BEHAVIORAL HEALTH
Program Direct Operating Expenses. Program direct operating expenses
decreased $1,257,000, or 1.3%, to $94,124,000 for the year ended December 31,
1997 from $95,381,000 for the year ended December 31, 1996. As a percentage of
revenue, program direct operating expenses were 87.0% and 86.4%, thereby
generating program contribution margin percentage of 13.0% and 13.6% for the
year ended December 31, 1997 and 1996, respectively. This slight decrease
between periods is due to revenue reductions from the factors described above
between periods in the behavioral health business without the ability to
eliminate the corresponding amount of direct expenses, as well as the effects
of non-recurring consulting revenues in the 1996 period. The effects of the
decrease in revenues from the behavioral health business were partially offset
by the operating efficiencies and consolidations implemented throughout the
Company's juvenile justice programs. Salaries and related employee benefits
constituted approximately 71.5% of program direct operating expenses for the
year ended December 31, 1997 compared to 82.7% of program direct operating
expenses for the year ended December 31, 1996.
15
<PAGE> 16
<PAGE> 17
START-UP COSTS
Start-up Costs. Start-up costs increased $37,000 for the year ended December
31, 1997 to $207,000 from $170,000 for the year ended December 31, 1996. The
start-up costs in the 1997 period relate to the opening of the Elmore,
Minnesota and Rantoul, Illinois juvenile justice projects. The start-up costs
in the 1996 period relate to the opening of the Keweenaw, Michigan and Camp
Washington juvenile justice projects.
CONTRIBUTION FROM OPERATIONS
JUVENILE JUSTICE
Contribution from Operations. Contribution from operations derived from
juvenile justice programs, which includes the effects of start-up costs in each
period, increased $3,549,000, or 35.1%, for the year ended December 31, 1997 to
$13,648,000 from $10,099,000 for the year ended December 31, 1996. Contribution
from operations increased as a percentage of juvenile justice revenues to 18.8%
for the year ended December 31, 1997 compared to 16.5% for the year ended
December 31, 1996.
JUVENILE JUSTICE AND BEHAVIORAL HEALTH
Contribution from Operations. Contribution from operations, which includes
the effects of start-up costs in each period, decreased $1,055,000, or 7.1%,
for the year ended December 31,1997 to $13,798,000 from $14,853,000 for the
year ended December 31, 1996. Contribution from operations decreased as a
percentage of revenues to 12.8% for the year ended December 31, 1997 compared
to 13.4% for the year ended December 31, 1996.
DEVELOPMENT COSTS
Development Costs. For the year ended December 31, 1997, development costs
increased $134,000, or 13.4%, to $1,131,000 from $997,000 for the year ended
December 31, 1996. This increase was primarily due to the Company's focus on
growth and the hiring of experienced, professional staff to focus exclusively
on development activities.
GENERAL AND ADMINISTRATIVE EXPENSES
General and Administrative Expenses. For the year ended December 31, 1997,
general and administrative expenses increased $2,232,000, or 39.0%, to
$7,955,000 from $5,723,000 for the year ended December 31, 1996. As a
percentage of revenues, general and administrative expenses increased to 7.4%
for the year ended December 31, 1997 from 5.2% for the year ended December 31,
1996. The most significant components of these costs relate to the
compensation expense associated with business professionals necessary for the
oversight of the Company's operations. The increase as a percentage of revenue
for the year ended December 31, 1997 as compared to the year ended December 31,
1996 is primarily attributable to the Company's efforts to develop the
infrastructure necessary to enhance its current operations and required
training expenses for staff.
NET INTEREST AND OTHER EXPENSE
Net Interest and Other Expense. Net interest and other expense decreased
$335,000, or 10.5%, to $2,870,000 for the year ended December 31, 1997 as
compared to $3,205,000 for the year ended December 31, 1996. The decrease was
primarily attributable to a decrease in the average outstanding line of credit
balance and the repayment of debt secured by certain personal property which
were paid down from the cash flow of the juvenile justice business.
INCOME TAXES
Income Taxes. The benefit for income taxes was $3,085,000, representing an
effective tax benefit rate of 16.2% for the year ended December 31, 1997 as
compared to an income tax provision of $1,824,000, representing an effective
tax rate of 41.8% for the year ended December 31, 1996. The decrease in the
effective tax rate was primarily attributable to the Company's inability to
recognize fully the tax benefits associated with the $27,000,000 restructuring
charge due to the non-deductibility of a large component of assets (goodwill)
which were written down and included in the restructuring charge.
16
<PAGE> 18
NET (LOSS) INCOME
Net (Loss) Income. Net loss, including the $17,113,000 after-tax effect of
the $20,898,000 loss on sale of the behavioral health business in the 1997
period, was $15,971,000, or $1.59 per share on a diluted basis, for the year
ended December 31, 1997 compared to net income $2,535,000, or $0.26 per share
on a diluted basis, for the year ended December 31,1996.
SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1995
REVENUES
JUVENILE JUSTICE
Revenues. Revenues derived from juvenile justice programs increased
$4,081,000, or 15.2%, to $30,864,000 for the six months ended December 31, 1996
from $26,783,000 for the six months ended December 31, 1995. The increase
resulted primarily from the expansion of juvenile justice programs existing at
December 31, 1995 which generated an increase of $2,991,000 and the addition of
two new juvenile justice programs subsequent to December 31, 1995 which
provided additional revenues of $1,090,000. The average daily enrollment for
all of the Company's residential juvenile justice programs increased 18.9% to
1,495 youth for the six months ended December 31, 1996 from 1,257 youth for the
six months ended December 31, 1995, including a 13.9% increase in average daily
enrollment in the nine programs that the Company operated during both six month
periods ended December 31, 1996 and 1995 to 1,432 from 1,257, respectively.
The Company reported an average occupancy rate of 93.4% for the six months
ended December 31, 1996 compared to 94.9% for the six months ended December 31,
1995 based on an average daily licensed capacity of 1,600 beds for 1996 and
1,324 beds for 1995. The decrease in occupancy percentage is due primarily to
the fact that the two new juvenile justice facilities were in various stages of
development where maximum occupancy had not yet been reached.
JUVENILE JUSTICE AND BEHAVIORAL HEALTH
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. The increase resulted from the expansion of programs
existing at December 31, 1995 which generated an increase of $5,661,000 and the
addition of three new programs subsequent to December 31, 1995 which provided
additional revenues of $4,342,000. In addition, the increase further resulted
from $1,310,000 of non-recurring consulting revenues during the six months
ended December 31, 1996. These increases in revenues were partially offset by a
decrease in revenues of $1,262,000 resulting from the cancellation of a
management contract in 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 16 programs that
the Company operated during both the six months ended December 31, 1996 and
1995 to 2,059 youth from 1,779 youth, respectively. 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
JUVENILE JUSTICE
Program Direct Operating Expenses. Program direct operating expenses
incurred from juvenile justice programs increased $3,978,000, or 18.2%, to
$25,800,000 for the six months ended December 31, 1996 from $21,822,000 for the
six months ended December 31, 1995. As a percentage of revenue, program direct
operating expenses were 83.6% and 81.5%, thereby generating program
contribution margin percentage of 16.4% and 18.5% for the six months ended
December 31, 1996 and 1995 respectively. This decrease between periods is due
primarily to the opening of two new juvenile justice programs during the six
month period ended December 31, 1996. Salaries and related benefits constituted
approximately 74.4% of program direct operating expenses for the six months
ended December 31, 1996 compared to 75.4% of program direct operating expenses
for the six months ended December 31, 1995.
17
<PAGE> 19
JUVENILE JUSTICE AND BEHAVIORAL HEALTH
Program Direct Operating Expenses. Program direct operating expenses
increased $8,520,000, or 21.0%, to $49,010,000 for the six months ended
December 31, 1996 from $40,490,000 for the six months ended December 31, 1995.
As a percentage of revenue, program direct operating expenses were 85.9% and
86.2%, thereby generating program contribution margin percentage of 14.1% and
13.8% for the six months ended December 31, 1996 and 1995, respectively. The
slight increase between periods is due primarily to the improved performance
of certain behavioral health programs as well as the effects of the
non-recurring consulting revenues in 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.
START-UP COSTS
Start-up costs. Start-up costs increased $112,000 for the six months ended
December 31, 1996 to $142,000 from $30,000 for the six months ended December
31, 1995. The start-up costs in the 1996 period relate to the opening of the
Keweenaw, Michigan juvenile justice project. The start-up costs in the 1995
period relate to the opening of the Camp Washington juvenile justice project.
CONTRIBUTION FROM OPERATIONS
JUVENILE JUSTICE
Contribution from Operations. Contribution from operations which includes
the effects of start-up costs in each period decreased $9,000, or 0.2%, for the
six months ended December 31, 1996 to $4,922,000 from $4,931,000 for the six
months ended December 31, 1995. Contribution from operations decreased as a
percentage of juvenile justice revenues to 15.9% for the six months ended
December 31, 1996 compared to 18.4% for the six months ended December 31, 1995.
JUVENILE JUSTICE AND BEHAVIORAL HEALTH
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 13.7% for the six months ended December 31,
1995.
DEVELOPMENT COSTS
Development Costs. For the six months ended December 31, 1996, development
costs increased $110,000, or 25.8%, to $536,000 from $426,000 for the six
months ended December 31, 1995. This increase was primarily due to the
Company's focus on growth and the hiring of individuals specifically targeting
development activities.
GENERAL AND ADMINISTRATIVE EXPENSES
General and Administrative Expenses. For the six months ended December 31,
1996, general and administrative expenses increased $850,000, or 35.8%, to
$3,225,000 from $2,375,000 for the six months ended December 31, 1995. As a
percentage of revenues, general and administrative expenses increased to 5.7%
for the six months ended December 31, 1996 from 5.1% 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 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.
NET INTEREST AND OTHER EXPENSE
Net Interest and Other Expense. Net interest and other expense increased
$227,000, or 16.0%, to $1,650,000 for the six months ended December 31, 1996
from $1,423,000 for the six months ended December 31, 1995. The increase was
due primarily to the interest expense attributable to the issuance of 7%
Convertible Subordinated Debentures in 1996
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partially offset by the decrease in interest expense resulting from the payoff
of debt incurred in connection with the acquisitions of Desert Hills of New
Mexico and Introspect.
INCOME TAXES
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. Net income was $1,534,000, or $.15 per share on a diluted basis
for the six months ended December 31, 1996 compared to $1,270,000, or $.14 per
share on a diluted basis for the six months ended December 31, 1995.
YEAR ENDED JUNE 30, 1996 COMPARED TO YEAR ENDED JUNE 30, 1995
REVENUES
JUVENILE JUSTICE
Revenues. Revenues derived from juvenile justice programs increased
$12,128,000, or 28.2%, to $55,124,000 for the year ended June 30, 1996 from
$42,996,000 for the year ended June 30, 1995. The increase resulted primarily
from the addition of two new juvenile justice programs subsequent to June 30,
1995 which provided additional revenues of $1,451,000 and the expansion of
juvenile justice programs existing at June 30, 1995 which generated an increase
of $10,677,000. The average daily enrollment for all of the Company's
residential juvenile justice programs increased 28.7% to 1,342 youth for the
year ended June 30, 1996 from 1,043 for the year ended June 30, 1995, including
a 24.9% increase in average daily enrollment in the eight programs that the
Company operated during both the year ended June 30, 1996 and 1995 to 1,303
youth from 1,043 youth. The Company reported an average occupancy rate of
94.7% for the year ended June 30, 1996 compared to 92.5% for the year ended
June 30, 1995 based on an average daily licensed capacity of 1,417 beds for the
year ended June 30, 1996 and 1,128 for the year ended June 30, 1995. The
increase in occupancy percentage is due primarily to the increase in census
levels in several of the juvenile justice programs that commenced operations in
the 1995 period.
JUVENILE JUSTICE AND BEHAVIORAL HEALTH
Revenues. Revenues increased $47,266,000, or 89.0%, to $100,353,000 for the
year ended June 30, 1996 from $53,087,000 for the year ended June 30, 1995. The
increase resulted primarily from the addition of six new programs subsequent to
June 30, 1995 which provided additional revenues of $33,058,000 and the
expansion of programs existing at June 30, 1995 which generated an increase of
$15,428,000. The increase in revenues was partially offset by a decrease in
revenues of $885,000 resulting from the cancellation of a management contract
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 during the year ended June
30, 1996 from 1,257 youth during the year ended June 30, 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
JUVENILE JUSTICE
Program Direct Operating Expenses. Program direct operating expenses incurred
from juvenile justice programs increased $9,733,000, or 26.8%, to $46,095,000
for the year ended June 30, 1996 from $36,362,000 for the year ended June 30,
1995. As a percentage of revenue, program direct operating expenses were 83.6%
and 84.6%, thereby generating
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program contribution margin percentage of 16.4% and 15.4% for the year ended
June 30, 1996 and 1995, respectively. This improvement between periods is due
to the increased census levels and the inherent profitability thereof in
several of the juvenile justice programs that commenced operations in the 1995
period. Salaries and related benefits constituted approximately 72.3% of
program direct operating expenses for the year ended June 30, 1996 compared to
75.2% of program direct operating expenses for the year ended June 30, 1995.
JUVENILE JUSTICE AND BEHAVIORAL HEALTH
Program Direct Operating Expenses. Program direct operating expenses
increased $41,904,000, or 93.2%, to $86,861,000 for the year ended June 30,
1996 from $44,957,000 for the year ended June 30, 1995. As a percentage of
revenue, program direct operating expenses were 86.6% and 84.7%, thereby
generating program contribution margin percentage of 13.4% and 15.3% for the
year ended June 30, 1996 and 1995, respectively. This decrease between periods
is due primarily to the fact that the acquisitions and growth in the 1996
period were in the behavioral health business where margins are typically lower
than in the juvenile justice business. 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.
START-UP COSTS
Start-up Costs. Start-up costs decreased $222,000 for the year ended June 30,
1996 to $58,000 from $280,000 for the year ended June 30, 1995. The start-up
costs in the 1996 period relate to the opening of the Camp Washington juvenile
justice project. The start-up costs in the 1995 period relate to the opening of
the Tarkio, Missouri and Woodward, Iowa juvenile justice projects.
CONTRIBUTION FROM OPERATIONS
JUVENILE JUSTICE
Contribution from Operations. Contribution from operations derived from
juvenile justice programs, which includes the effects of start-up costs in each
period, increased $2,617,000, or 41.2%, for the year ended June 30, 1996 to
$8,971,000 from $6,354,000 for the year ended June 30, 1995. Contribution from
operations increased as a percentage of juvenile justice revenues to 16.3% for
the year ended June 30, 1996 compared to 14.7% for the year ended June 30,
1995.
JUVENILE JUSTICE AND BEHAVIORAL HEALTH
Contribution from Operations. Contribution from operations, which includes
the effects of start-up costs in each period, increased $5,584,000, or 71.1%,
for the year ended June 30, 1996 to $13,434,000 from $7,850,000 for the year
ended June 30, 1995. Contribution from operations decreased as a percentage of
revenues to 13.3% for the year ended June 30, 1996 compared to 14.8% for the
year ended June 30, 1995.
DEVELOPMENT COSTS
Development Costs. For the year ended June 30, 1996, development costs
decreased $36,000, or 4.6%, to $741,000 from $777,000 for the year ended June
30, 1995. This decrease was primarily due to the fact that during the 1996
period a larger portion of the development effort related to acquisitions
whereby the related expenses are capitalized as goodwill in connection with the
purchase accounting.
GENERAL AND ADMINISTRATIVE EXPENSES
General and Administrative Expenses. For the year ended June 30, 1996,
general and administrative expenses increased $1,699,000, or 51.2%, to
$5,019,000 from $3,320,000 for the year ended June 30, 1995. As a percentage
of revenues, general and administrative expenses decreased to 5.0% for the year
ended June 30, 1996 from 6.3% for the year ended June 30, 1995. The most
significant components of these costs relate to the compensation expense
associated with business professionals necessary for the oversight of the
Company's operations. The decrease as a percentage of revenue for the year
ended June 30, 1996 as compared to the year ended June 30, 1995 is primarily
attributable to certain efficiencies and economies of scale being gained
through growth.
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NET INTEREST AND OTHER EXPENSE
Net Interest and Other Expense. Net interest and other expense increased
$2,736,000, or 1,130.6%, to $2,978,000 for the year ended June 30, 1996 as
compared to $242,000 for the year ended June 30, 1995. The increase was
primarily attributable to the Company's 7% Convertible Subordinated Debentures
issued during the 1996 period, as well as increases in the outstanding balance
on the Company's line of credit.
INCOME TAXES
Income Taxes. The income tax provision was $1,856,000, representing an
effective tax rate of 45.0% for the year ended June 30, 1996 as compared to an
income tax provision of $1,332,000 representing an effective tax rate of 37.9%
for the year ended June 30, 1995. The increase in the effective tax rate was
the result of the loss from Introspect operations in the 1996 period which was
not consolidated for tax purposes, the increase in non-deductible goodwill and
other non-deductible expenses.
NET INCOME
Net Income. Net income was $2,271,000, or $.25 per share on a diluted basis,
for the year ended June 30, 1996 compared to net income of $2,179,000, or $.26
per share on a diluted basis, for the year ended June 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had $7,802,000 in cash and $22,972,000 of
working capital. Net cash provided by operating activities was $4,396,000 for
the year ended December 31, 1997 compared to net cash used in operating
activities of $7,985,000 for the year ended December 31, 1996. This increase
resulted primarily from the Company's favorable working capital experience in
the accounts receivable and accounts payable areas as well, as the improvement
in juvenile justice program margins.
Net cash provided by investing activities was $10,590,000 for the year ended
December 31, 1997, comprised primarily of $14,154,000 of net proceeds from the
sale of the behavioral health business, $6,084,000 of proceeds from sales of
investments and fixed assets and $3,184,000 of proceeds from the collection of
an outstanding promissory note offset by $12,204,000 used to fund capital
expenditures and other assets and $628,000 used to fund an acquisition.
Net cash used in financing activities was $10,221,000 for the year ended
December 31, 1997 comprised of repayments of short-term borrowings and
long-term debt of $13,439,000 offset by $3,218,000 of proceeds from stock
option exercises and employee stock purchases.
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 LIBOR plus 150 basis points and are payable on demand. As of
December 31, 1997, YSI had no outstanding borrowings under this line of credit.
In January 1998, the Company redeemed the 12% Subordinated Debentures in the
principal amount of $1,000,000.
On October 31, 1997, the Company received approximately $15,900,000 in cash
and on February 20, 1998, the Company received an additional $4,500,000 in cash
in connection with the closing of the behavioral health sale (see "-Recent
Developments"). 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
begin substantial "de novo" programs, it may need to access additional capital
through traditional bank financing or the public equity markets.
YEAR 2000
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The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Specifically, software
computational errors are a potential risk with respect to dates after December
31, 1999. The Company has made a preliminary assessment of its Year 2000
compliance issues, and is developing plans to address any deficiencies.
Although the Company has not yet estimated the total costs needed for Year 2000
compliance, the Company currently believes it will be able to upgrade and
enhance its computer software systems to recognize years beginning with 2000
and that the cost to do so will not be material to its financial position,
liquidity, or results of operations.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this report contains forward-looking
statements. The forward-looking statements contained herein are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected in the forward-looking statements. Important
factors that might cause such a difference include, but are not limited to,
those discussed in this section. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
analysis only as of the date hereof. The Company undertakes no obligation to
publicly revise or update these forward-looking statements to reflect events or
circumstances that arise from the date hereof. Readers should carefully review
the risk factors described in the documents filed by the Company with the
Securities and Exchange Commission.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company are included on pages
F-1 through F-23 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
The information required by this Item 10 is included under the captions
"Election of Directors", "Board of Directors" and "Executive Officers" in the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A no
later than April 30, 1998 (the "1998 Proxy Statement") and that information is
incorporated by reference in this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is included under the caption
"Executive Compensation" in the 1998 Proxy Statement and that information is
incorporated by reference in this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is included under the caption
"Security Ownership of Principal Stockholders , Directors and Officers" in the
1998 Proxy Statement and that information is incorporated by reference in this
Form 10-K.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is included under the caption
"Certain Relationships and Related Party Transactions" in the 1998 Proxy
Statement and that information is incorporated by reference in this Form 10-K.
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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-23 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
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<S> <C>
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.
(Incorporated by reference to Exhibit 3.2 of the Company's Annual Report on Form
10-K for the Fiscal Year Ended June 30, 1996.)
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.)
4.6 Indenture, dated October 15, 1996, by and between the Company and the Chase Manhattan
Bank, as trustee. (Incorporated by reference to Exhibit 4(d) to the Company's Registration
Statement on Form S-3 (Registration No. 333-09089).)
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.)
</TABLE>
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<S> <C>
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.)
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
</TABLE>
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<TABLE>
<S> <C>
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.)
10.58 Consulting Services Agreement, dated August 30, 1995, between ATSG, Inc. and Youth
Services International, Inc. (Incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q, filed with the SEC on November 14, 1995.)
10.59 Management Agreement, dated as of September 1, 1995, by and between Brazos
Valley Youth Corporation and Youth Services International of Texas, Inc.
(Incorporated by reference to Exhibit 10.5 to the Company's Form 10-Q,
filed with the SEC on November 14, 1995.)
10.60 Employment Agreement, dated as of July 16, 1996, by and between Timothy
P. Cole and Youth Services International, Inc. (Incorporated by reference
to Exhibit 10 to the Company's Form 10-Q, filed with the SEC on
November 14, 1996.)
10.61 First Amendment to Loan and Security Agreement dated December 12, 1996
by Signet Bank and the Company and certain of its subsidiaries. (Incorporated
by reference to Exhibit 10(a) to the Company's Form 10-Q, filed with SEC on
February 11, 1997.
10.62 Amended and Restated Master Revolving Promissory Note from the Company and
certain of its subsidiaries to Signet Bank dated December 12, 1996.
(Incorporated by reference to Exhibit 10(a) to the Company's Form 10-Q,
filed with the SEC on February 11, 1997.)
10.63 Memorandum of understanding, between Youth Services International,
Inc. and International Youth Insititute. (Incorporated by reference to Exhibit
10.2 to the Company's Form 10-Q, filed with the SEC on February 11, 1997.)
10.64 Stock Purchase Agreement By and Among Youth and Family Centered Services, Inc.,
Youth Services International Holdings, Inc. and Youth Services International, Inc.
dated as of July 22, 1997. (Incorporated by reference to Exhibit 2 to the Company's
Current Report on Form 8-K, filed with the SEC on August 6, 1997.)
10.65 Amendment No. 1 to Stock Purchase Agreement By and Among Youth and Family Centered
Services, Inc., Youth Services International Holdings, Inc. and Youth Services
International, Inc. dated as of October 31, 1997. (Incorporated by reference to Exhibit
2 to the Company's Form 10-Q, filed with the SEC on November 13, 1997)
10.66 The Company's 1997 Employee Stock Option Plan. (Incorporated by reference to Exhibit to
the Company's Registration Statement on Form S-8 (registration number 333-47305) filed with
the SEC on March 4, 1998.)
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.
(b) The Company did not file any Current Reports on Form 8-K during the
quarter ended December 31, 1997.
(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.
26
<PAGE> 28
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, March 31, 1998
--------------------------- Chief Executive Officer
TIMOTHY P. COLE and President
(Principal Executive
Officer)
/s/ WILLIAM P. MOONEY Chief Financial Officer March 31, 1998
--------------------------- and Treasurer
WILLIAM P. MOONEY (Principal Financial
Officer and Principal
Accounting Officer)
/s/ ALAN J. ANDREINI Director March 31, 1998
---------------------------
ALAN J. ANDREINI
/s/ JAMES A. FLICK, JR. Director March 31, 1998
---------------------------
JAMES A. FLICK, JR.
/s/ LENNEAL J. HENDERSON Director March 31, 1998
---------------------------
LENNEAL J. HENDERSON
/s/ BOBBIE L. HUSKEY Director March 31, 1998
---------------------------
BOBBIE L. HUSKEY
/s/ JANET LANGHART Director March 31, 1998
---------------------------
JANET LANGHART
/s/ JACQUES T. SCHLENGER Director March 31, 1998
---------------------------
JACQUES T. SCHLENGER
</TABLE>
27
<PAGE> 29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Youth Services International, Inc.:
We have audited the accompanying consolidated balance sheets of Youth
Services International, Inc. (a Maryland corporation) and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for the year ended December
31, 1997, the six months ended December 31, 1996, and the years ended June
30, 1996 and 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Youth
Services International, Inc. and subsidiaries as of December 31, 1997 and
1996, and the results of their operations and their cash flows for the year
ended December 31, 1997, the six months ended December 31, 1996, and the
years ended June 30, 1996 and 1995, in conformity with generally accepted
accounting principles.
Baltimore, Maryland,
February 20, 1998
F-1
<PAGE> 30
Page 1 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------- -------
(in thousands)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 7,802 $ 3,037
Restricted cash 264 371
Investments available-for-sale - 5,204
Accounts receivable, net of allowance for doubtful
accounts of $413 and $1,027, respectively 15,756 22,050
Proceeds receivable from sale of behavioral health
business 4,500 -
Receivables from related parties 95 1,125
Refundable income taxes - 1,046
Current portion of notes receivable - 51
Prepaid expenses, supplies and other 2,801 3,360
Deferred tax asset 769 110
------- -------
Total current assets 31,987 36,354
------- -------
PROPERTY, EQUIPMENT AND IMPROVEMENTS:
Land 1,976 1,086
Leasehold improvements 9,364 9,794
Program equipment 1,913 4,004
Buildings 8,637 11,698
Office furniture and equipment 3,201 4,181
Vehicles 1,481 1,543
------- -------
26,572 32,306
Less- Accumulated depreciation (5,871) (4,881)
------- -------
Property, equipment and improvements, net 20,701 27,425
------- -------
OTHER ASSETS:
Deferred debt issue costs, net 1,819 2,511
Goodwill, net 2,165 20,675
Notes receivable, net of current portion - 3,133
Deferred tax asset 6,512 591
Other assets, net 1,700 2,400
------- -------
12,196 29,310
------- -------
Total assets $64,884 $93,089
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-2
<PAGE> 31
Page 2 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
----------- ---------
(in thousands)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 1,193 $ 2,025
Accrued expenses 6,351 8,150
Deferred revenue 1,243 1,469
Current portion of long-term obligations 228 11,915
-------- -------
Total current liabilities 9,015 23,559
CAPITAL LEASE OBLIGATIONS, less current portion 5 2,207
7% CONVERTIBLE SUBORDINATED DEBENTURES 32,200 32,200
12% SUBORDINATED DEBENTURES, net of
unamortized original issue discount of $3 and $12,
respectively 797 988
LONG-TERM DEBT, less current portion 60 1,545
-------- -------
Total liabilities 42,077 60,499
-------- -------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value:
70,000,000 shares authorized, 10,241,198 and
9,314,765 issued and outstanding, respectively 102 93
Additional paid-in capital 33,621 27,500
Accumulated (deficit) earnings (10,916) 5,055
Unrealized loss on investments available-for-sale - (58)
-------- -------
Total shareholders' equity 22,807 32,590
-------- -------
Total liabilities and shareholders' equity $ 64,884 $93,089
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 32
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Six Months Year Year
Ended Ended Ended Ended
December 31, December 31, June 30, June 30,
1997 1996 1996 1995
---- ---- ---- ----
(in thousands except per share data)
<S> <C> <C> <C> <C>
REVENUES $108,129 $57,043 $100,353 $53,087
PROGRAM EXPENSES:
Direct operating 94,124 49,010 86,861 44,957
Start-up costs 207 142 58 280
-------- ------- -------- -------
Contribution from operations 13,798 7,891 13,434 7,850
OTHER OPERATING EXPENSES:
Development costs 1,131 536 741 777
General and administrative 7,955 3,225 5,019 3,320
Loss on sale of behavioral health business 20,898 - - -
Costs of attempted acquisitions - - 569 -
-------- ------- -------- -------
(Loss) income from operations (16,186) 4,130 7,105 3,753
-------- ------- -------- -------
OTHER INCOME (EXPENSE):
Interest expense (3,022) (1,908) (3,160) (268)
Interest income 462 500 645 50
Loss on sale of investments (203) (45) - -
Other expense, net (107) (197) (463) (24)
-------- ------- -------- -------
(2,870) (1,650) (2,978) (242)
-------- ------- -------- -------
(Loss) income before income taxes (19,056) 2,480 4,127 3,511
Income tax benefit (expense) 3,085 (946) (1,856) (1,332)
-------- ------- -------- -------
Net (loss) income $(15,971) $ 1,534 $ 2,271 $ 2,179
======== ======= ======== =======
(Loss) earnings per common share:
Basic
$ (1.59) $ 0.17 $ 0.27 $ 0.29
======== ======= ======== =======
Diluted
$ (1.59) $ 0.15 $ 0.25 $ 0.26
======== ======= ======== =======
Weighted average common shares outstanding:
Basic 10,044 9,114 8,271 7,640
======== ======= ======== =======
Diluted 10,044 10,027 9,267 8,264
======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 33
Page 1 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Loss on
Additional Accumulated Investments Total
Common Paid-in (Deficit) Available- Shareholders'
Stock Capital Earnings for-Sale Equity
------- ------- -------- -------- ------------
(in thousands except share data)
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1994 $ 76 $14,668 $ (929) $- $13,815
Tax benefit realized due to exercise
of nonqualified stock options - 554 - - 554
Issuance of 479,067 shares of common
stock under stock option and stock
purchase plans 5 1,115 - - 1,120
Net income - - 2,179 - 2,179
------- ------- -------- ------- --------
BALANCE, June 30, 1995 81 16,337 1,250 - 17,668
Tax benefit realized due to exercise
of nonqualified stock options - 1,029 - - 1,029
Issuance of 490,946 shares of common
stock under stock option and stock
purchase plans 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 nonqualified stock options - 522 - - 522
Issuance of 193,641 shares of common
stock under stock option and stock
purchase plans 2 1,032 - - 1,034
Issuance of 7,428 shares of common
stock as compensation - 125 - - 125
Stock issuance costs - (23) - - (23)
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
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-5
<PAGE> 34
Page 2 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Loss on
Additional Accumulated Investments Total
Common Paid-in (Deficit) Available- Shareholders'
Stock Capital Earnings for-Sale Equity
------- ------- --------- ------ --------
(in thousands except share data)
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 $93 $27,500 $5,055 $(58) $32,590
Tax benefit realized due to exercise
of nonqualified stock options - 2,805 - - 2,805
Issuance of 863,471 shares of
common stock under stock option
and stock purchase plans 9 3,267 - - 3,276
Issuance of 8,205 shares of common
stock as compensation - 107 - - 107
Stock issuance costs - (58) - - (58)
Unrealized gain on investments
available-for-sale, net of tax effect - - - 58 58
Net loss - - (15,971) - (15,971)
---- ------- --------- ------ -------
BALANCE, December 31, 1997 $102 $33,621 $(10,916) $ - $22,807
==== ======= ========= ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 35
Page 1 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Six Months Year Year
Ended Ended Ended Ended
December 31, December June 30, June 30,
1997 31, 1996 1996 1995
---- -------- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $(15,971) $ 1,534 $ 2,271 $ 2,179
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
(Income) loss on Introspect operations - (371) 296 -
Stock granted as compensation 107 125 - -
Depreciation and amortization 5,126 3,035 3,428 1,841
Loss on sale of property, equipment and
improvements 23 12 105 -
Loss on sale of behavioral health business 20,898 - - -
Loss on sale of investments 203 45 - -
Deferred income taxes (6,621) (2) (304) 27
Tax benefit realized due to exercise of nonqualified
stock options 2,805 522 1,029 554
Net change in operating assets and liabilities (2,174) (6,427) (4,324) (8,077)
-------- -------- -------- -------
Net cash provided by (used in) operating activities 4,396 (1,527) 2,501 (3,476)
-------- -------- -------- -------
INVESTING ACTIVITIES:
Purchases of property, equipment and improvements (11,829) (4,224) (5,870) (3,521)
Proceeds from sale of property, equipment and
improvements 984 33 674 -
Cash paid for acquired businesses, net of cash
received (628) (4,023) (6,449) (1,827)
Net proceeds from sale of behavioral health business 14,154 - - -
Disbursements for notes receivable - - (4,271) -
Collection of notes receivable 3,184 62 25 -
Purchases of investments - - (10,223) -
Proceeds from sale of investments 5,100 4,875 - -
Other long-term assets (375) (471) (1,816) (551)
-------- -------- -------- -------
Net cash provided by (used in) investing activities 10,590 (3,748) (27,930) (5,899)
-------- -------- -------- -------
FINANCING ACTIVITIES:
Proceeds from short-term borrowings and long-term
debt - 14,109 4,331 5,552
Issuance of 7% convertible subordinated
debentures - - 37,950 -
Repayments of short-term borrowings,
long-term debt and capital lease obligations (13,439) (13,854) (10,664) (238)
Proceeds from issuance of common stock under
stock option and stock purchase plans, net 3,218 1,011 2,738 1,120
Deferred debt issue costs - - (2,664) (91)
-------- -------- -------- -------
Net cash (used in) provided by financing activities (10,221) 1,266 31,691 6,343
-------- -------- -------- -------
NET INCREASE (DECREASE) IN CASH 4,765 (4,009) 6,262 (3,032)
CASH, beginning of period 3,037 7,046 784 3,816
-------- -------- -------- -------
CASH, end of period $ 7,802 $ 3,037 $ 7,046 $ 784
======== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE> 36
Page 2 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Six Months Year Year
Ended Ended Ended Ended
December 31, December 31, June 30, June 30,
1997 1996 1996 1995
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
CHANGES IN OPERATING ASSETS AND
LIABILITIES, NET OF EFFECTS OF BUSINESS
ACQUISITIONS AND DISPOSITIONS:
Cash held in escrow $ - $ - $ 2,543 $(2,543)
Restricted cash 107 131 156 (435)
Accounts receivable (1,835) (3,218) (7,866) (4,187)
Receivables from related parties 1,029 (1,125) - -
Refundable income taxes 1,046 - (1,006) 137
Prepaid expenses, supplies and other 149 (1,369) (666) (948)
Deposits 154 (3) 79 (65)
Management fee receivable - - 60 -
Accounts payable (408) 54 (1,073) (510)
Accrued expenses (2,191) (2,328) 3,476 474
Deferred revenue (225) 1,431 (27) -
------- ------- ------- -------
Net change in operating assets and liabilities $(2,174) $(6,427) $(4,324) $(8,077)
======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest $ 3,013 $ 2,050 $ 921 $ 268
======= ======= ======= =======
Cash paid for taxes $ 279 $ 723 $ 2,292 $ 655
======= ======= ======= =======
Capital lease obligation $ - $ - $ 230 $ -
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE> 37
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Organization and Nature of Operations
Youth Services International, Inc. and its subsidiaries (collectively, "the
Company") are organized to privately manage and operate educational,
developmental and rehabilitative programs for troubled youth who have been
adjudicated. The Company's programs are provided in residential and
non-residential settings. The Company commenced the operation of its first
program in February 1992. On February 3, 1994, the Company sold 1,950,000 shares
in connection with its initial public offering of common stock at $6.67 per
share pursuant to its Registration Statement filed on Form SB-2 with the
Securities and Exchange Commission.
On October 31, 1997, the Company consummated the sale of certain of its
subsidiaries which comprised its behavioral health business. As of December 31,
1997, the Company managed and operated 18 programs for adjudicated youth and two
behavioral health programs. The two behavioral health programs are currently
being held for sale by the Company (See Note 15 for further discussion of the
sale and the two businesses being held for sale.)
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 for the
Company's transition period comprised of the six months ended December 31, 1996.
Principles of Consolidation
As of December 31, 1997, the consolidated financial statements included the
accounts of Youth Services International, Inc. and the following wholly-owned
subsidiaries:
- Youth Services International of Iowa, Inc.
- Youth Services International of Tennessee, Inc.
- Youth Services International of Baltimore, Inc.
- Youth Services International of Maryland, Inc.
- Youth Services International of Northern Iowa, Inc.
- Youth Services International of South Dakota, Inc.
- Youth Services International of Missouri, Inc.
- Youth Services International of Central Iowa, Inc.
- Youth Services International of Texas, Inc.
- Youth Services International of Virginia, Inc.
- Youth Services International of Delaware, Inc.
- Youth Services International Southeastern Programs, Inc.
- Youth Services International of Minnesota, Inc.
- Youth Services International of Illinois, Inc.
- Youth Services International of Michigan, Inc.
Significant intercompany accounts and transactions have been eliminated in
consolidation.
F-9
<PAGE> 38
2
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 subcontract 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 $5,437,000 and $7,407,000 as of December 31, 1997 and 1996,
respectively.
Revenue Recognition and Contract Provisions
The Company's programs are typically provided pursuant to contracts directly
with governmental entities or subcontracts with not-for-profit entities that
contract directly with governmental 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 whereby
revenues are recognized as reimbursable costs are incurred through a gross
maximum price cost reimbursement arrangement. This contract has costs, including
indirect costs, subject to audit and adjustment by negotiations with government
representatives. Contract revenues subject to audit relating to this contract of
$13,519,000, $6,835,000, $13,583,000 and $13,561,000 have been recorded for the
year ended December 31, 1997, the six months ended December 31, 1996 and the
years ended June 30, 1996 and 1995, respectively, at amounts which are expected
to be realized. Subsequent adjustments, if any, resulting from the audit process
are recorded when known.
Contract terms with government and not-for-profit entities generally range from
one to five years in duration and expire at various dates through June 2002.
Most of these contracts are subject to termination for convenience by the
governmental entity. Management of the Company is not aware of any circumstances
that would cause any governmental entity to terminate any existing agreement.
Concentration of Credit Risk
Accounts receivable are uncollateralized and are due primarily from state and
local governments and not-for-profit entities under contracts.
Property, Equipment and Improvements
Property and equipment is recorded at cost and is depreciated using the
straight-line method over estimated useful lives ranging from 3 to 39 years.
Leasehold improvements are amortized over the term of the related lease or the
useful life, if shorter.
Goodwill
Goodwill representing the excess of the cost over the net tangible and
identifiable intangible assets of acquired businesses is stated at cost and is
amortized over 10 years using the straight-line method.
Amortization expense for the year ended December 31, 1997, the six months ended
December 31, 1996 and the years ended June 30, 1996 and 1995, was $894,000,
$1,011,000, $1,038,000 and $582,000, respectively. Accumulated amortization at
December 31, 1997 and 1996 was $1,656,000 and $2,927,000, respectively. (See
Note 15 for discussion of the loss related to the disposition of the behavioral
health business recognized during the year ended December 31, 1997.)
F-10
<PAGE> 39
3
Realizability of Long-Lived Assets and Goodwill
In March 1995, the Financial Accounting Standards Board ("FASB") 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 its
long-lived assets and goodwill in measuring whether the assets to be held and
used will be realizable.
Fair Value of Financial Instruments
The Company determines fair value of their financial instruments held based on
quoted market values where applicable or discounted cash flow analyses. As of
December 31, 1997 and 1996, the carrying value of its financial instruments
approximates fair value.
Deferred Revenue
Deferred revenue consists of advance payments for services which will be
recognized as revenue as the related services are performed.
Development Costs
Development costs consist primarily of payroll and travel costs of individuals
whose role is to grow the Company by entering new markets.
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 believes, based on available
evidence, that it is more likely than not they will be realized (see Note 13).
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.
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.
F-11
<PAGE> 40
4
Newly Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which is effective for fiscal years beginning after December 15, 1997. The
statement establishes standards for reporting and display of comprehensive
income and its components. The Company plans to adopt this new standard in the
fiscal year beginning January 1, 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. The statement establishes revised standards
under which an entity must report business segment information in its financial
statements. The Company plans to adopt this new standard, if applicable, in the
fiscal year ending December 31, 1998.
2. EARNINGS PER SHARE:
In March 1997, the Company adopted SFAS No. 128, "Earnings Per Share," effective
December 15, 1997. As a result, the Company is required to provide additional
disclosure of basic earnings per share. Despite certain new calculation
criteria, diluted earnings per share, as defined and reported under the new
SFAS, was equivalent to the historically reported fully diluted earnings per
share.
The following illustrates the calculation of basic and diluted (loss) earnings
per share for all years presented:
<TABLE>
<CAPTION>
Year Six Months Year Year
Ended Ended Ended Ended
December 31, December 31, June 30, June 30,
1997 1996 1996 1995
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Net (loss) income $(15,971) $1,534 $2,271 $2,179
-------- ----- ----- -----
Weighted average common
shares outstanding 10,044 9,114 8,271 7,640
Dilutive effects of options
and warrants - 913 996 624
- --- --- ---
Weighted average common
and common equivalent
shares outstanding 10,044 10,027 9,267 8,264
====== ====== ===== =====
Basic (loss) earnings per
common share $(1.59) $0.17 $0.27 $0.29
====== ===== ===== =====
Diluted (loss) earnings per
common share $(1.59) $0.15 $0.25 $0.26
====== ===== ===== =====
</TABLE>
Basic (loss) earnings per common share were computed by dividing net (loss)
income by the weighted average number of common shares outstanding during the
year. Diluted (loss) earnings per common share were computed by dividing net
(loss) income by the weighted average number of common and common equivalent
shares outstanding during the year. The Company's 7% Convertible Subordinated
Debentures (see Note 8) are excluded
F-12
<PAGE> 41
5
from the diluted (loss) earnings per common share calculation due to their
anti-dilutive effect. The dilutive effects of options and warrants were not
provided for the year ended December 31, 1997 as losses are not diluted for
earnings per share purposes.
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.
Amortized cost and approximate fair value of investment securities
available-for-sale as of December 31, 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
As of December 31, 1996
-------------------------------------------
Gross
Unrealized Approximate
Amortized Cost Loss Fair Value
-------------- ---- ----------
<S> <C> <C> <C>
Corporate Bond Fund, Class A $ 5,303 $ 99 $ 5,204
======== ======== ========
</TABLE>
There were no investment securities available-for-sale as of December 31, 1997.
4. NOTES RECEIVABLE:
In connection with its 1996 asset purchase of Tampa Bay Academy, Ltd. (TBA) (see
Note 15), the Company paid a mortgage obligation of TBA of approximately
$3,271,000 thereby creating a note receivable from the former owners of TBA. The
note receivable bore interest at an annually adjustable rate equal to the 10
year Treasury Bond rate plus 285 basis points. On October 31, 1997, the
outstanding principal balance of $3,067,000 was repaid by the former owners of
TBA. The proceeds from the repayment were utilized to partially fund the
Company's acquisition on October 31, 1997 of the land and buildings owned by the
former owners of TBA for $5,000,000.
During the year ended June 30, 1996, the Company entered into a $1,000,000
discretionary line of credit agreement with Introspect Healthcare Corporation
(Introspect). The line of credit balance of $1,000,000 was reclassified to
goodwill in connection with the Company's acquisition of Introspect effective
September 1, 1996 (see Note 15).
5. ACCRUED EXPENSES:
Accrued expenses consist of the following as of December 31, 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
---- ----
<S> <C> <C>
Accrued payroll $1,384 $1,859
Accrued interest 948 965
Other 4,019 5,326
------ ------
$6,351 $8,150
====== ======
</TABLE>
F-13
<PAGE> 42
6
6. SHORT-TERM BORROWINGS:
Lines of Credit
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. This line of
credit was canceled during the year ended June 30, 1996, and replaced with the
line of credit facility included in Note 8.
Lines of credit information for the years ended June 30, 1996 and 1995, prior to
the line of credit facility included in Note 8, is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended Year Ended
June 30, June 30,
1996 1995
---------- ----------
<S> <C> <C>
Maximum amount outstanding during
the year $ 70 $ 3,070
Average outstanding month-end balance
during the year 70 820
Weighted average interest rate during
the year 10.0% 9.4%
</TABLE>
7. 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 were held by shareholders or their close relatives. The debentures were
issued with an original issue discount of $50,000 which was being amortized over
the life of the debentures using the effective interest method. The 12%
Subordinated Debentures were redeemed by the Company on January 1, 1998 and a
loss of $53,000 was incurred by the Company in connection with this early
extinguishment.
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.
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:
F-14
<PAGE> 43
7
<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 and are being amortized over the life of the related debentures.
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 operations for the year
ended June 30, 1996.
8. LONG-TERM DEBT:
Long-term debt consists of the following at December 31, 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
---- ----
<S> <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%, (7.4% as of December 31,
1997) due November 1998. $ - $11,124
DBC Purchase Note:
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 was payable August 1996 and
$225,000 was payable August 1997. - 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. 75 90
</TABLE>
F-15
<PAGE> 44
8
<TABLE>
<S> <C> <C>
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. 5 33
Other:
Note payable to Finova Capital
Corporation, secured by certain
fixed assets, bearing interest at
11%, payable in monthly installments
through January 2001. Outstanding
balance of $1,722,000 was repaid on
June 30, 1997. - 1,853
------- -------
80 13,289
Less: Current portion 20 11,744
------- -------
Total $ 60 $ 1,545
======= =======
</TABLE>
Borrowings information with respect to the revolving line of credit for the
years ended December 31, 1997, the six months ended December 31, 1996, and the
years ended June 30, 1996, and 1995, is as follows (in thousands):
<TABLE>
<CAPTION>
December December June June
31, 1997 31, 1996 30, 1996 30, 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Maximum amount outstanding during the year $5,310 $11,124 $7,295 $5,300
Average outstanding month-end balance during
the year 3,087 5,042 5,295 5,300
Weighted average interest rate during the year 6.7% 7.8% 8.3% 8.3%
</TABLE>
Certain of these agreements require that the Company maintain a minimum current
ratio and level of tangible net worth, as well as meet certain other financial
standards.
9. OPERATING LEASES:
The Company leases certain operating facilities and computer and office
equipment under operating leases expiring through 2010.
Future minimum lease payments, by year and in the aggregate are as follows (in
thousands):
<TABLE>
<CAPTION>
For the Year
Ending December 31,
-------------------
<S> <C>
1998 $ 1,412
1999 1,092
2000 675
2001 235
2002 113
2003 and thereafter 33
----------
$ 3,560
==========
</TABLE>
F-16
<PAGE> 45
9
Rent expense for the year ended December 31, 1997, the six months ended December
31, 1996, and the years ended June 30, 1996, and 1995 was $2,838,000,
$1,832,000, $2,482,000 and $940,000, respectively.
10. 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 its discretion. During
the year ended December 31, 1997, the six months ended December 31, 1996 and the
years ended June 30, 1996, and 1995, the Company expensed $42,000, $120,000,
$191,000 and $115,000, respectively, in matching contributions and
administrative fees related to the Plan.
11. 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.
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.
During the year ended June 30, 1994, the Board of Directors and shareholders
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 automatic granting of 7,500 shares of the Company's common
stock each year on the anniversary date of the appointment of a non-employee
director to the Board of Directors. 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.
F-17
<PAGE> 46
10
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 December 31,
1997 and 1996 and June 30, 1996 and 1995, is as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996 June 30, 1996 June 30, 1995
------------------ ------------------ ------------------ ------------------
Wtd.Avg. Wtd.Avg. Wtd.Avg. Wtd.Avg.
Shares Ex.Price Shares Ex.Price Shares Ex.Price Shares Ex.Price
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of period 1,414,628 $ 6.36 1,444,753 $ 5.17 1,520,646 $ 2.83 1,096,000 $1.13
Granted 305,184 11.05 147,500 16.46 373,050 11.06 757,538 5.09
Exercised (827,508) 3.27 (177,625) 5.05 (448,943) 2.15 (332,892) 2.37
Forfeited (164,006) 8.04 - - - - - -
--------- ------ --------- ------ --------- ------ --------- -----
Outstanding, end of period 728,298 $11.46 1,414,628 $ 6.36 1,444,753 $ 5.17 1,520,646 $2.83
========= ====== ========= ====== ========= ====== ========= =====
Exercisable, end of period 333,798 $10.94 1,109,078 $ 4.68 1,226,620 $ 4.59 1,265,480 $2.42
========= ====== ========= ====== ========= ====== ========= =====
</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 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 six months ended
December 31, 1996 and the years ended June 30, 1996 and 1995, employees
purchased approximately 7,000, 250,000, and 102,000 shares of common stock,
respectively, for proceeds to the Company of approximately $91,000, $1,917,000,
and $427,000, respectively. The Company has discontinued this plan and no shares
were issued during the year ended December 31, 1997.
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 (loss) income and (loss) earnings
per share would have been (increased) reduced to the following pro forma amounts
for the year ended December 31, 1997, the six months ended December 31, 1996 and
the years ended June 30, 1996 and (in thousands, except per share data):
F-18
<PAGE> 47
11
<TABLE>
<CAPTION>
Year Six Months Year
Ended Ended Ended
December 31, December 31, June 30,
1997 1996 1996
----------- ----------- ----------
<S> <C> <C> <C>
Net (loss) income: As reported $(15,971) $1,534 $2,271
-------- ====== ======
Pro Forma $(17,790) $ (219) $1,447
-------- ====== ======
Basic EPS: As reported $ (1.59) $ 0.17 $ 0.27
-------- ====== ======
Pro Forma $ (1.77) $(0.02) $ 0.17
-------- ====== ======
Diluted EPS: As reported $ (1.59) $ 0.15 $ 0.25
-------- ====== ======
Pro Forma $ (1.77) $(0.02) $ 0.16
-------- ====== ======
</TABLE>
Because the SFAS Statement 123 method accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The weighted average fair value per option granted during the year ended
December 31, 1997, the six months ended December 31, 1996 and the year ended
June 30, 1996 was $6.73, $10.09, $6.78, respectively.
The above information was calculated utilizing the Black-Scholes option-pricing
model and the following key assumptions:
<TABLE>
<CAPTION>
Year Six Months Year
Ended Ended Ended
December 31, December 31, June 30,
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 6.5% 5.9% 5.9%
Volatility 75% 60% 60%
Expected life (months) 48 24 24
</TABLE>
F-19
<PAGE> 48
12
13. INCOME TAXES:
The income tax benefit (expense) for the year ended December 31, 1997, the six
months ended December 31, 1996 and the years ended June 30, 1996 and 1995,
included the following components (in thousands):
<TABLE>
<CAPTION>
Year Six Months Year Year
Ended Ended Ended Ended
December 31, December 31, June 30, June 30,
1997 1996 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Federal income tax benefit (expense) $2,902 $(829) $(1,616) $(1,110)
State income tax benefit (expense) 183 (117) (240) (222)
------ ----- ------- -------
Total $3,085 $(946) $(1,856) $(1,332)
====== ===== ======= =======
Current income tax benefit (expense) $(731) $(948) $(2,160) $(1,305)
Deferred income tax benefit (expense) 3,816 2 304 (27)
------ ----- ------- -------
Total $3,085 $(946) $(1,856) $(1,332)
====== ===== ======= =======
</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>
Year Six Months Year Year
Ended Ended Ended Ended
December 31, December 31, June 30, June 30,
1997 1996 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income tax (benefit) provision at federal statutory
rate (34.0)% 34.0% 34.0% 34.0%
State income taxes, net of federal income
tax effect (5.0) 5.0 5.0 4.6
Loss on Introspect operations - (5.1) 2.4 -
Non-deductible goodwill 21.1 3.6 1.6 -
Other 1.7 .6 2.0 (.7)
---- ---- ---- ----
Total (16.2)% 38.1% 45.0% 37.9%
==== ==== ==== ====
</TABLE>
F-20
<PAGE> 49
13
Deferred tax assets (liabilities) are comprised of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------ ----
<S> <C> <C>
Loss carryforwards $5,740 $239
Depreciation and amortization 613 321
Accruals and reserves 1,200 546
Start-up losses 173 130
Prepaid expenses and inventory (431) (442)
Unrealized loss on investments
available-for-sale - 41
Other (14) (134)
------ ----
Deferred tax asset $7,281 $701
====== ====
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $10,299,000 and $12,276,000 for federal and state income tax
purposes, respectively, that expire through 2012. At December 31, 1997, the
Company also has a capital loss carryforward of approximately $10,600,000 that
expires in 2002.
14. RELATED PARTY TRANSACTIONS:
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 a former officer and director of YSI.
Under this agreement, the Company outsources the training of its 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 materials and other intellectual property that had
been transferred, IYI paid YSI $700,000 and was not 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 operations 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.
In connection with the resignation of the Founder of the Company from the Board
of Directors effective July 1, 1997, the Company appointed the Founder as
Chairman Emeritus and entered into a four-year Representation Agreement with
him. Under the Representation Agreement, the Chairman Emeritus agrees to
represent the Company's interest with current and potential customers,
governmental bodies and the public as and to the extent requested by the Company
and in exchange, the Company pays him $20,000 per quarter during the four-year
term.
15. DISPOSITION OF BEHAVIORAL HEALTH BUSINESS:
During the period January 1, 1994 through January 1, 1997, the Company acquired
the operating assets or stock of the following companies:
- Western Youth Inc.
- Parc Place, Limited Partnership
- Promise House, Inc.
- Developmental Behavioral Consultants, Inc.
- Desert Hills Center for Youth and Families of New Mexico, Inc.
- Desert Hills of Texas, Inc.
F-21
<PAGE> 50
14
- Tampa Bay Academy, Ltd.
- Youth Quest Inc.
- Introspect Healthcare, Corporation
- Texas Children's Health Services Inc. ("Los Hermanos")
Following their respective acquisitions, the Company operated each of the
companies listed above as distinct businesses. Due to their related nature,
however, these businesses comprised the Company's behavioral health business.
The total acquisition price for these companies, including assumed liabilities
and acquisition costs, was approximately $41.1 million with approximately $19.8
million of the total purchase price being allocated to goodwill in connection
with purchase accounting.
In March 1997, the Board of Directors of the Company approved, and management
committed to, a plan to sell the programs that comprised the Company's
behavioral health business. On October 31, 1997, the Company consummated the
sale of the behavioral health business, other than the two behavioral health
programs in Texas, for $20,400,000 resulting in a loss on sale of $20,898,000.
The Company's Texas Programs continue to be operated while being held for sale
by the Company. YSI believes that the net assets of the Texas Programs of
approximately $1.1 million are properly valued at their estimated fair value
less selling costs.
Unaudited revenues and contribution from operations for the behavioral health
businesses including the Texas Programs for the year ended December 31, 1997,
the six months ended December 31, 1996 and the years ended June 30, 1996 and
1995 are as follows (in thousands):
<TABLE>
<CAPTION>
Year Six Months Year Year
Ended Ended Ended Ended
December 31, December 31, June 30, June 30,
1997 1996 1996 1995
----------------- ------------------ -------------- -------------
<S> <C> <C> <C> <C>
Revenues $35,761 $24,869 $44,759 $9,304
Contribution from Operations 150 1,659 3,394 694
</TABLE>
F-22
<PAGE> 51
15
16. SIGNIFICANT CUSTOMER:
The Company derives a significant portion of its revenues from two contracts
with one state agency. This state agency provided 22%, 22%, 24% and 46% of total
revenues for the year ended December 31, 1997, the six months ended December 31,
1996 and the years ended June 30, 1996 and 1995, respectively. One of the
two contracts with this state agency will expire on June 30, 1998. The Company
has submitted its proposal to retain the contract and to continue to provide
the services.
17. 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
-------
Contribution from operations 6,472
Development costs 426
General and Administrative Expenses 2,375
-------
Income from Operations 3,671
Income Before Income Tax Expense 2,248
Income Tax Expense 978
=======
Net Income $ 1,270
=======
Earnings per Common Share:
Basic $ 0.16
=======
Diluted $ 0.14
=======
</TABLE>
F-23
<PAGE> 52
Youth Services International, Inc.
Exhibit Index
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
-------- ----------------------------------------------------------------------------
<S> <C>
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.
(Incorporated by reference to Exhibit 3.2 of the Company's Annual Report on Form
10-K for the Fiscal Year Ended June 30, 1996.)
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.)
4.6 Indenture, dated October 15, 1996, by and between the Company and the Chase Manhattan
Bank, as trustee. (Incorporated by reference to Exhibit 4(d) to the Company's Registration
Statement on Form S-3 (Registration No. 333-09089).)
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.)
10.45 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.)
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.)
10.58 Consulting Services Agreement, dated August 30, 1995, between ATSG, Inc. and Youth
Services International, Inc. (Incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q, filed with the SEC on November 14, 1995.)
10.59 Management Agreement, dated as of September 1, 1995, by and between Brazos
Valley Youth Corporation and Youth Services International of Texas, Inc.
(Incorporated by reference to Exhibit 10.5 to the Company's Form 10-Q,
filed with the SEC on November 14, 1995.)
10.60 Employment Agreement, dated as of July 16, 1996, by and between Timothy
P. Cole and Youth Services International, Inc. (Incorporated by reference
to Exhibit 10 to the Company's Form 10-Q, filed with the SEC on
November 14, 1996.)
10.61 First Amendment to Loan and Security Agreement dated December 12, 1996
by Signet Bank and the Company and certain of its subsidiaries. (Incorporated
by reference to Exhibit 10(a) to the Company's Form 10-Q, filed with SEC on
February 11, 1997.
10.62 Amended and Restated Master Revolving Promissory Note from the Company and
certain of its subsidiaries to Signet Bank dated December 12, 1996.
(Incorporated by reference to Exhibit 10(a) to the Company's Form 10-Q,
filed with the SEC on February 11, 1997.)
10.63 Memorandum of understanding, between Youth Services International,
Inc. and International Youth Insititute. (Incorporated by reference to Exhibit
10.2 to the Company's Form 10-Q, filed with the SEC on February 11, 1997.)
10.64 Stock Purchase Agreement By and Among Youth and Family Centered Services, Inc.,
Youth Services International Holdings, Inc. and Youth Services International, Inc.
dated as of July 22, 1997. (Incorporated by reference to Exhibit 2 to the Company's
Current Report on Form 8-K, filed with the SEC on August 6, 1997.)
10.65 Amendment No. 1 to Stock Purchase Agreement By and Among Youth and Family Centered
Services, Inc., Youth Services International Holdings, Inc. and Youth Services
International, Inc. dated as of October 31, 1997. (Incorporated by reference to Exhibit
2 to the Company's Form 10-Q, filed with the SEC on November 13, 1997)
10.66 The Company's 1997 Employee Stock Option Plan. (Incorporated by reference to Exhibit to
the Company's Registration Statement on Form S-8 (registration number 333-47305) filed with
the SEC on March 4, 1998.)
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.
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
YOUTH SERVICES INTERNATIONAL, INC.
(AMENDED AND RESTATED AS OF OCTOBER 31, 1997)
ARTICLE I
Stockholders
Section 1. Annual Meetings.
The annual meeting of the stockholders of the Corporation shall be held
on such date within the month of May as may be fixed from time to time by the
Board of Directors. Not less than ten nor more than 90 days' written notice
stating the place, day and hour of each annual meeting shall be given in the
manner provided in Section 1 of Article IX hereof. The business to be
transacted at the annual meetings shall include the election of directors,
consideration and action upon the reports of officers and directors, and any
other business within the power of the Corporation. All annual meetings shall
be general meetings.
Section 2. Special Meetings Called by Chairman, CEO, or Board of
Directors.
At any time in the interval between annual meetings, special meetings
of stockholders may be called by the Chairman, by the CEO or by the Board of
Directors. Not less than ten days' nor more than 90 days' written notice
stating the place, day and hour of such meeting and the matters proposed to be
acted on thereat shall be given in the manner provided in Section 1 of Article
IX. No business shall be transacted at any special meeting except that
specified in the notice.
Section 3. Special Meeting Called by Stockholders.
Upon the request in writing delivered to the Secretary by the
stockholders entitled to cast at least 25% of all the votes entitled to be cast
at the meeting, it shall be the duty of the Secretary to call forthwith a
special meeting of the stockholders. Such request shall state the purpose of
such meeting and the matters proposed to be acted on thereat, and no other
business shall be transacted at any such special meeting.
Section 4. Place of Meetings.
All meetings of stockholders shall be held at the principal office of
the Corporation in the State of Maryland or at such other place within the
United States as may be fixed from time to time by the Board of Directors and
designated in the notice.
<PAGE> 2
Section 5. Quorum.
At any meeting of stockholders the presence in person or by proxy of
stockholders entitled to cast a majority of the votes thereat shall constitute
a quorum. In the absence of a quorum, the stockholders present in person or by
proxy, by majority vote and without notice other than by announcement, may
adjourn the meeting from time to time, but not for a period exceeding 60 days
until a quorum shall attend.
Section 6. Adjourned Meetings.
A meeting of stockholders convened on the date for which it was called
(or one adjourned to achieve a quorum as above provided in Section 5 of this
Article) may be adjourned from time to time without further notice to a date
not more than 120 days after the record date, and any business may be
transacted at any adjourned meeting which could have been transacted at the
meeting as originally called.
Section 7. Voting.
At all meetings of stockholders, every stockholder shall be entitled to
one vote for each share of stock of the Corporation registered in his or her
name upon the books of the Corporation on the date the Board of Directors may
fix (as provided in Article VIII, Section 3 of these Bylaws) as the date of
record for the determination of stockholders entitled to vote at such meeting.
All elections and matters submitted to a vote at meetings of stockholders shall
be decided by the vote of the holders of a majority of the votes cast, in
person or by proxy, unless a different vote is required by law or by charter,
or is provided for in these bylaws. If the officer presiding over the meeting
shall so determine, a vote by ballot may be taken upon any matter, and the vote
shall be so taken upon the request of the holders of 10% of the stock present
and entitled to vote on the matter.
Section 8. Proxies.
A stockholder may vote the stock the stockholder owns of record either
in person or by proxy. A stockholder may sign a writing authorizing another
person to act as proxy. Signing may be accomplished by the stockholder or the
stockholder's authorized agent signing the writing or causing the stockholder's
signature to be affixed to the writing by any reasonable means, including
facsimile signature. A stockholder may authorize another person to act as
proxy by transmitting, or authorizing the transmission of, a telegram,
cablegram, datagram, or other means of electronic transmission to the person
authorized to act as proxy or to a proxy solicitation firm, proxy support
service organization, or other person authorized by the person who will act as
proxy to receive the transmission. Unless a proxy provides otherwise, it is not
valid more than 11 months after its date. A proxy is revocable by a
stockholder at any time without condition or qualification unless the proxy
states that it is irrevocable and the proxy is coupled with an interest. A
proxy may be made irrevocable for so long as it is coupled with an interest.
The interest with which a
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proxy may be coupled includes an interest in the stock to be voted under the
proxy or another general interest in the Corporation or its assets or
liabilities.
Section 9. Order of Business.
Meetings of stockholders shall be presided over by the Chairman or, in
his or her absence, by the Vice Chairman of the board or, if neither of those
officers is present, by a chairman to be elected at the meeting. The Secretary
shall act as secretary of meetings of the stockholders, and in his or her
absence, the record of the proceedings shall be kept and authenticated by any
other person at the meeting appointed for that purpose by the presiding
officer.
At all meetings of stockholders, any stockholder, present and entitled
to vote in person or by proxy shall be entitled to require, by written request
to the Chairman of the meeting, that the order of business shall be as follows:
(1) Organization
(2) Proof of notice of meeting or of waivers thereof. (The
certificate of the Secretary of the Corporation, or the affidavit of any other
person who mailed or published the notice or caused the same to be mailed or
published, shall be proof of service of notice.)
(3) Submission by Secretary of the Corporation of a list of the
stockholders entitled to vote, present in person or by proxy.
(4) A reading of unapproved minutes of preceding meetings and
action thereon.
(5) Reports.
(6) If an annual meeting, or a special meeting called for that
purpose, the election of directors.
(7) Unfinished business.
(8) New business.
(9) Adjournment.
Section 10. List of Stockholders.
Prior to each meeting of the stockholders, the Secretary shall prepare,
as of the record date fixed by the Board of Directors with respect to the
meeting, a full and accurate list of all stockholders entitled to vote at the
meeting, indicating the number of
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<PAGE> 4
shares held by each. The Secretary shall be responsible for the production of
the list at the meeting.
ARTICLE II
Directors
Section 1. Powers.
The property, business and affairs of the Corporation shall be managed
under the direction of its Board of Directors. They shall have and exercise in
the name of the Corporation and on its behalf all the rights and privileges
legally exercisable by the Corporation, except as otherwise provided by law, by
the Charter or by these Bylaws. A director need not be a stockholder. The
Board of Directors shall keep minutes of its meetings and full and fair
accounts of its transactions.
Section 2. Number of Directors.
The number of directors of the Corporation shall be determined by the
vote of two-thirds of the entire Board of Directors provided, however, that the
number of directors shall not be more than eleven (11) nor less than three (3).
The tenure of office of a director may not be affected by any change in the
number of directors.
Section 3. Election.
Except as hereinafter provided, the members of the Board of Directors
shall be elected each year at the annual meeting of stockholders by a plurality
of all the votes cast, in person or by proxy, provided a quorum is present.
Directors need not be stockholders. Each director shall hold office until the
next annual meeting of stockholders held after his or her election and until
his or her successor has been duly elected and qualifies, until his or her
death, or until he or she has resigned or has been removed pursuant to the
applicable provisions of these by-laws.
Section 4. Removal.
At a duly called meeting of the stockholders at which a quorum is
present, the stockholders, by vote of the holders of a majority of the votes
cast, in person or by proxy, may remove with or without cause any director or
directors from office, and may elect a successor or successors to fill any
resulting vacancy for the remainder of the term of the director so removed.
Section 5. Vacancies.
If any director shall die or resign, or if the stockholders shall
remove any director without electing a successor to fill the remaining term,
the vacancy may be filled by the
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<PAGE> 5
vote of a majority of the remaining members of the Board of Directors, although
the remaining directors may be less than a quorum. Vacancies in the Board of
Directors created by an increase in the number of directors may be filled by
the vote of a majority of the entire Board of Directors as constituted prior to
the increase. A director elected by the Board of Directors to fill any
vacancy, however created, shall hold office until the next annual meting of
stockholders and until his or her successor has been duly elected and
qualifies.
Section 6. Annual Meeting; Regular Meetings; Special Meetings.
As soon as practicable after each annual meeting of stockholders, the
Board of Directors shall meet for the purpose of election of officers of the
Corporation and for the transaction of other business. No notice of the annual
meeting of the Board of Directors need be given if it is held immediately
following the annual meeting of stockholders and at the same place. Other
regular meetings of the Board of Directors may be held at such times as the
Board of Directors may determine by resolution or as may be designated by the
Chairman or Vice Chairman of the Board. Special meetings of the Board of
Directors may be called at any time by the Chairman, the Vice Chairman or by
any three directors. Special meetings of the Board of Directors may be called
by the Chairman, by the vice Chairman or by any three directors.
Section 7. Place of Meetings.
Regular or special meetings of the Board may be held within or without
the State of Maryland, as the Board may from time to time determine. Members
of the Board of Directors may participate in meetings by means of a conference
call or similar communication equipment if all persons participating in the
meeting can hear and speak to each other at the same time. Participation in a
meeting by these means constitutes presence in person at such meeting.
Section 8. Quorum; Voting.
A majority of the Board of Directors shall constitute a quorum for the
transaction of business at every meeting of the Board of Directors; but, if at
any meeting there be less than a quorum present, a majority of those present
may adjourn the meeting from time to time, but not for a period exceeding ten
days at any one time or 60 days in all, without notice other than by
announcement at the meeting, until a quorum shall attend. At any such adjourned
meeting at which a quorum shall be present, any business may be transacted
which might have been transacted at the meeting as originally called. Except
as hereinafter provided or as otherwise provided by the Charter or by law,
directors shall act by a vote of a majority of those members in attendance at a
meeting at which a quorum is present.
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<PAGE> 6
Section 9. Presumption of Assent.
A director of the Corporation who is present at a meeting of the Board
of Directors at which action on any corporate matter is taken shall be presumed
to have assented to the action taken unless the director announces his or her
dissent at the meeting, and such dissent is entered in the minutes of the
meeting, or the director files his or her written dissent to the action before
the meeting adjourns with the person acting as the secretary of the meeting, or
the director forwards his or her written dissent within 24 hours after the
meeting is adjourned by registered or certified mail to the secretary of the
meeting or the Secretary of the Corporation. The right to dissent does not
apply to a director who voted in favor of the action or who failed to make his
or her dissent known at the meeting. A director may abstain from voting on any
matter coming before the meeting by stating that he or she is so abstaining at
the time the vote is taken and by causing his or her abstention to be recorded
or stated in writing in the same manner as provided above for a dissent.
Section 10. Notice of Meetings.
Except for the meeting immediately following the annual meeting of
stockholders, notice of the place, day and hour of a regular meeting of the
Board of Directors shall be given to each director not less than three days
prior to the meeting, and notice of special meetings of the Board of Directors
shall be given not less than one day prior to the meeting, in the manner
provided in Section 2 of Article IX hereof. Subsequent to each Board meeting,
and as soon as practicable thereafter, each director shall be furnished with a
copy of the minutes of said meeting. At least 24 hours notice shall be given
of all meetings. The purpose of any meeting of the Board of Directors need not
be stated in the notice.
Section 11. Rules and Regulations.
The Board of Directors may adopt such rules and regulations for the
conduct of its meetings and the management of the affairs of the Corporation as
it may deem proper and not inconsistent with the laws of the State of Maryland
or these Bylaws or the Charter.
Section 12. Compensation.
The directors may receive a stated salary for their services, and/or
fixed sum and expense of attendance may be allowed for attendance at each
regular or special meeting. The stated salary and attendance fee, if any,
shall be determined by resolution of the Board; provided, however, that nothing
herein contained shall be construed as precluding a director from serving the
Corporation in any other capacity and receiving compensation therefor.
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<PAGE> 7
Section 13. Informal Action by the Directors.
Any action required or permitted to be taken at any meeting of the
Board may be taken without a meeting, if a written consent to such action is
signed by all of the directors entitled to vote on the matter and such consent
is filed with the minutes of the Board.
Section 14. Committees of Directors.
The Board of Directors may, by resolution passed by a majority of the
whole Board, designate one or more committees, each committee to consist of one
or more of the directors of the corporation, which, to the extent provided in
the resolution, shall have and may exercise the power of the Board of Directors
in the management of the business and affairs of the corporation, and may have
power to authorize the seal of the corporation to be affixed to all papers
which may require it. Such committee or committees shall have such name or
names as may be determined from time to time by resolution adopted by the Board
of Directors. Each committee of the Board of Directors shall fix its own rules
of procedure, and shall meet as provided by those rules, or by resolution of
the Board of Directors, or at the call of the chairman or any two members of
the committee. A majority of each entire committee shall constitute a quorum,
and in every case the affirmative vote of a majority of the entire committee
shall be necessary to take any action. Vacancies in any committee of the Board
of Directors shall be filled by the Board of Directors.
ARTICLE III
Officers
Section 1. In General.
The Board of Directors shall elect a Chairman of the Board, a Chief
Executive Officer, a President and Chief Operating Officer, a Chief Financial
Officer and Treasurer and a Secretary. The Board may elect a Vice Chairman of
the Board, one or more Vice Presidents and such Assistant Secretaries and
Assistant Treasurers and other officers as may be chosen by the Board of
Directors. Each officer shall be elected by a majority vote of the entire
Board and shall hold office only during the pleasure of the Board or until his
or her successor is chosen and qualifies. Any two or more of the above offices
may be held by the same person, except that the same person cannot serve as
both President and Vice President. The Board of Directors may from time to
time appoint such other agents and employees with such powers and duties as
they may deem proper. In its discretion, the Board of Directors may leave
unfilled any offices except those of President, Treasurer and Secretary.
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<PAGE> 8
Section 2. Chairman of the Board.
The Chairman of the Board (the "Chairman") shall preside at all
meetings of the stockholders and of the Board of Directors at which he or she
shall be present. The Chairman also shall have such other powers and perform
such other duties as from time to time may be assigned to him or her by the
Board of Directors. The Chairman must be a member of the Board of Directors.
Section 3. Vice-Chairman of the Board.
In the absence of the Chairman, the Vice Chairman of the Board (the
"Vice Chairman") shall preside at meetings of stockholders and of the Board of
Directors. The Vice Chairman also shall have such other powers and perform
such other duties as from time to time may be assigned to him or her by the
Board of Directors or by the Chairman. The Vice Chairman must be a member of
the Board of Directors.
Section 4. Chief Executive Officer.
The Chief Executive Officer ("CEO") shall have the responsibility for
the general supervision and direction of the affairs of the Corporation and
shall perform such other duties as may be assigned by the Board of Directors.
The CEO shall have authority to sign and execute, in the name of the
Corporation, all authorized deeds, mortgages, bonds, contracts or other
instruments and the authority on the Corporation's behalf to endorse securities
owned by the Corporation.
Section 5. President and Chief Operating Officer.
The President and Chief Operating Officer ("President") shall have
authority to sign and execute, in the name of the Corporation, all authorized
deeds, mortgages, bonds, contracts or other instruments and shall have the
responsibility for the Corporation's continued growth and development of the
juvenile justice, behavioral health and managed cared programs. The President
shall have the authority on the Corporation's behalf to endorse securities
owned by the Corporation and to execute any documents requiring the signature
of an executive officer, and shall perform such other duties as may be
prescribed by the Board of Directors or the CEO.
Section 6. Chief Financial Officer and Treasurer.
The Chief Financial Officer and Treasurer ("CFO") shall have authority
to sign and execute, in the name of the Corporation, all authorized deeds,
mortgages, bonds, contracts or other instruments and shall have the
responsibility for the active financial management of the Corporation. The CFO
shall have the authority on the Corporation's behalf to endorse securities
owned by the Corporation and to execute any documents requiring the signature
of an executive officer, and shall perform such other duties as the Board or
the CEO may direct.
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<PAGE> 9
Section 7. Vice Presidents.
Each Vice President shall have the power to sign and execute, unless
otherwise provided by resolution of the Board of Directors, all contracts or
other obligations in the name of the Corporation in the ordinary course of
business, and with the Secretary, or with the Treasurer, or with an Assistant
Secretary, or with an Assistant Treasurer, may sign certificates of stock of
the Corporation. At the request of the President or in his or her absence or
during his or her inability to act, the Vice President or Vice Presidents shall
perform the duties and exercise the functions of the President, and when so
acting shall have the powers of the President. If there be more than one Vice
President, the Board of Directors may determine which one or more of the Vice
Presidents shall perform any of such duties or exercise any of such functions,
or if such determination is not made by the Board of Directors, the President
may make such determination. The Vice President or Vice Presidents shall have
such other powers and perform such other duties as may be assigned to him or
them by the Board of Directors, by the CEO or by the President.
Section 8. Secretary.
The Secretary shall keep the minutes of the meetings of the
stockholders and of the Board of Directors and shall attend to the giving and
serving of all notices of the Corporation required by law or these Bylaws. The
Secretary shall maintain at all times in the principal office of the
Corporation at least one copy of the Bylaws with all amendments to date, and
shall make the same, together with the minutes of the meeting of the
stockholders, the annual statement of affairs of the Corporation and any
stockholders agreement on file at the office of the Corporation, available for
inspection by any officer, director or stockholder during reasonable business
hours. The Secretary shall perform such other duties as may be assigned by the
Board of Directors, the CEO or the President.
Section 9. Compensation; Removal; Vacancies.
The Board of Directors shall have power to fix the compensation of all
officers of the Corporation. It may authorize any committee or officer, upon
whom the power of appointing subordinate officers may have been conferred, to
fix the compensation of such subordinate officers. The Board of Directors, by
vote of a majority of the entire Board, shall have the power at any regular or
special meeting to remove any officer, if in the judgment of the Board the best
interests of the Corporation will be served by such removal. The Board of
Directors may authorize any officer to remove subordinate officers. The Board
of Directors may authorize the Corporation's employment of an officer for a
period in excess of the term of the Board. The Board of Directors at any
regular or special meeting shall have the power to fill a vacancy occurring in
any office for the unexpired portion of the term.
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Section 10. Substitutes.
The Board of Directors may from time to time in the absence of any one
of the officers or at any other time, designate any other person or persons, on
behalf of the Corporation to sign any contract, deeds, notes or other
instruments in the place or stead of any of such officers, and may designate
any person to fill any one of said offices, temporarily or for any particular
purpose; and any instruments so signed in accordance with a resolution of the
Board shall be the valid act of the Corporation as fully as if executed by any
regular officer.
ARTICLE IV
Resignation
Any director or officer may resign the office at any time. Such
resignation shall be made in writing and shall take effect from the time of its
receipt by the Corporation, unless some time be fixed in the resignation, and
then from that date. The acceptance of a resignation shall not be required to
make it effective.
ARTICLE V
Commercial Paper, Etc.
All bills, notes, checks, drafts and commercial paper of all kinds to
be executed by the Corporation as maker, acceptor, endorser or otherwise, and
all assignments and transfers of stock, contracts, or written obligations of
the Corporation, and all negotiable instruments, shall be made in the name of
the Corporation and shall be signed by any one or more of the following
officers: the Chairman, the CEO, the President, or the CFO, or by such other
person or persons as the Board of Directors may from time to time designate.
ARTICLE VI
Fiscal Year
The fiscal year of the Corporation shall be a 12 month period, ending
December 31 of each and every year.
ARTICLE VII
Seal
The seal of the Corporation shall be in the form of two concentric
circles inscribed with the name of the Corporation and the year and State in
which it is incorporated. The Secretary or Treasurer, or any Assistant
Secretary or Assistant Treasurer, shall have the
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right and power to attest to the corporate seal. In lieu of affixing the
corporate seal to any document, it shall be sufficient to meet the requirements
of any law, rule or regulation relating to a corporate seal to affix the word
"(SEAL)" adjacent to the signature of the authorized officer of the
Corporation.
ARTICLE VIII
Stock
Section 1. Issue.
Each stockholder shall be entitled to a certificate or certificates
which shall represent and certify the number and class of shares of stock owned
in the Corporation. Each certificate shall be signed by the Chairman, the CEO
or the President and countersigned by the Secretary or any Assistant Secretary
or the CFO, the Treasurer or any Assistant Treasurer, and sealed with the seal
of the Corporation. Stock certificates shall be in such form not inconsistent
with law or with the Charter, as shall be approved by the Board of Directors.
In case any officer of the Corporation who has signed any certificate ceases to
be an officer of the Corporation, whether by reason of death, resignation or
otherwise, before such certificate is issued, then the certificate may
nevertheless be issued by the Corporation with the same effect as if the
officer had not ceased to be such officer as of the date of such issuance.
Section 2. Transfers.
The Board of Directors shall have power and authority to make all such
rules and regulations as it may deem expedient concerning the issue, transfer
and registration of stock certificates. The Board of Directors may appoint one
or more transfer agents and/or registrars for its outstanding stock, and their
duties may be combined. No transfer of stock shall be recognized or binding
upon the Corporation until recorded on the books of the Corporation, or, as the
case may be, of its transfer agent upon surrender and cancellation of a
certificate or certificates for a like number of shares.
Section 3. Record Dates for Dividends and Stockholders' Meeting.
The Board of Directors may fix a date not exceeding 90 days preceding
the date of any meeting of stockholders, any dividend payment date or any date
for the allotment of rights, as record date for the determination of the
stockholders entitled to notice of and to vote at such meeting, or entitled to
receive such dividends or rights, as the case may be, and only stockholders of
record on such date shall be entitled to notice of and to vote at such meeting
or to receive such dividends or rights, as the case may be. In the case of a
meeting of stockholders, the record date shall be fixed not less than ten days
prior to the date of the meeting.
11
<PAGE> 12
Section 4. New Certificates.
In case any certificate of stock is lost, stolen, mutilated or
destroyed, the Board of Directors may authorize the issue of a new certificate
in place thereof upon indemnity to the Corporation against loss and upon such
other terms and conditions as it may deem advisable. The Board of Directors
may delegate such power to any officer or officers of the Corporation or to any
transfer agent or registrar of the Corporation; but the Board of Directors,
such officer or officers or such transfer agent or registrar may, in their
discretion, refuse to issue such new certificate save upon the order of some
court having jurisdiction in the premises.
ARTICLE IX
Notice
Section 1. Notice to Stockholders.
Whenever by law or these Bylaws notice is required to be given to any
stockholder, such notice shall be in writing and may be given to each
stockholder by delivery to the stockholder's residence or usual place of
business, or by mailing it, postage prepaid, and addressed at the address as it
appears on the books of the Corporation or its transfer agent. Such leaving or
mailing of notice shall be deemed the time of giving such notice.
Section 2. Notice to Directors and Officers.
Whenever by law or these Bylaws notice is required to be given to any
director or officer, such notice may be given in any one of the following ways:
by personal notice to such director or officer, by telephone communication with
such director or officer personally, by telegram, cablegram or radiogram,
addressed to such director or officer at the address as it appears on the books
of the Corporation, or by depositing the same in writing in the post office or
in a letter box in a postage paid, sealed wrapper addressed to such director or
officer at the address as it appears on the books of the Corporation. The time
when such notice shall be consigned to a communication company for delivery
shall be deemed to be the time of the giving of such notice, and 48 hours after
the time when such notice shall be mailed shall be deemed to be the time of the
giving of such notice by mail.
Section 3. Waiver of Notice.
Notice to any stockholder or director of the time, place and/or purpose
of any meeting of stockholders or directors required by these Bylaws may be
dispensed with if such stockholder shall either attend in person or by proxy,
or if such director shall attend in person, or if such absent stockholder or
director shall, in writing filed with the records of the meeting either before
or after the holding thereof, waive such notice.
12
<PAGE> 13
ARTICLE X
Stockholder Distributions and Finance
Section 1. Distributions.
Subject to any conditions and limitations of the charter or law, the
Board of Directors may in its discretion determine what, if any, distributions
shall be made to the stockholders of the Corporation, the date when such
distributions shall be made, and the date for the determination of holders of
record to whom such distributions shall be made.
Section 2. Depositories.
The Board of Directors from time to time shall designate one or more
banks or trust companies as depositories of the Corporation and shall designate
those officers and agents who shall have authority to deposit corporate funds
in such depositories. It shall also designate those officers and agents who
shall have authority to withdraw from time to time any or all of the funds of
the Corporation so deposited upon checks, drafts, or orders for the payment of
money, notices and other evidences of indebtedness, drawn against the account
and issued in the name of the Corporation. Any such designations by the Board
of Directors may be either general or specific. The signatures of such
officers or agents may be made by manual or facsimile signature. No check or
order for the payment of money shall be invalidated because a person whose
signature appears on such check or order has ceased to be an officer or agent
of the Corporation prior to the time of payment of such check or order by any
such depository.
Section 3. Corporate Obligations.
No loans shall be contracted on behalf of the Corporation and no
evidences of indebtedness or guaranties of the obligations of others shall be
issued in the name of the Corporation unless authorized by a resolution of the
Board of Directors. Such authority may be either general or specific. Unless
the authorizing resolution shall provide otherwise, all loans, promissory
notes, acceptances, other evidences of indebtedness and guaranties shall be
signed by the Chairman, the CEO President, a Vice President, the Secretary or
the Treasurer.
ARTICLE XI
Books and Records
Section 1. Books and Records.
The Corporation shall maintain a stock ledger that shall contain the
name and address of each stockholder and the number of shares of stock of the
Corporation which
13
<PAGE> 14
the stockholder holds. The ledger shall be kept at the principal offices of
the Corporation. All other books, accounts and records of the Corporation,
including the original or a certified copy of these bylaws, the minutes of all
stockholders meetings, a copy of the annual statement, and any voting trust
agreements on file with the Corporation, shall also be kept and maintained by
the Secretary at the principal offices of the Corporation.
Section 2. Inspection Rights.
Except as otherwise provided by law or by charter, the Board of
Directors shall determine whether and to what extent the books, accounts, and
records of the Corporation, or any of them, shall be open to the inspection of
stockholders. No stockholder shall have any right to inspect any book,
account, document or record of the Corporation, except as conferred by law, by
charter, or by resolution of the Board of Directors.
ARTICLE XII
Indemnification
To the maximum extent permitted by the Maryland General Corporation Law
as from time to time amended, the Corporation shall indemnify its currently
acting and its former directors, officers, agents and employees and those
persons who, at the request of the Corporation serve or have served another
corporation, partnership, joint venture, trust or other enterprise in one or
more of such capacities against any and all liabilities incurred in connection
with their services in such capacities.
ARTICLE XIII
Amendments
These Bylaws may be added to, altered, amended, repealed or suspended
by a vote of a majority of the Board of Directors at any regular meeting of the
Board or at any special meeting called for that purpose.
14
<PAGE> 1
EXHIBIT 21
YOUTH SERVICES INTERNATIONAL, INC.
LIST OF SUBSIDIARIES
1. Youth Educational Services, Inc.
2. Youth Outcomes Limited
3. Youth Services International Holdings, Inc.
4. Youth Services International Investments, LLC
5. Youth Services International Management Services, LLC
6. Youth Services International of Baltimore, Inc.
7. Youth Services International of Colorado, Inc.
8. Youth Services International of Delaware, Inc.
9. Youth Services International of Georgia, Inc.
10.Youth Services International of Illinois, Inc.
11.Youth Services International of Iowa, Inc.
12.Youth Services International of Maryland, Inc.
13.Youth Services International of Michigan, Inc.
14.Youth Services International of Minnesota, Inc.
15.Youth Services International of Missouri, Inc.
16.Youth Services International of Northern Iowa, Inc.
17.Youth Services International of Puerto Rico, Inc.
18.Youth Services International of South Dakota, Inc.
19.Youth Services International of Tennessee, Inc.
20.Youth Services International of Texas, Inc.
21.Youth Services International of Virginia, Inc.
22.Youth Services International Real Property Partnership, LLP
23.Youth Services International Southeastern Programs, Inc.
24.YSI of Central Iowa, Inc.
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this Form
10-K, into the Company's previously filed Registration Statement (File No.
33-71958).
Baltimore, Maryland,
February 20, 1998
29
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