1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Cmmission File Number
December 31, 1996 0-23284
- ---------------------- ----------------------
YOUTH SERVICES INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
Maryland 52-1715690
- ------------------------------- -------------------------------------------
(State of Incorporation) (I.R.S. Employer Identification Number)
2 Park Center Court, Suite 200, Owings Mills, Maryland, 21117
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(Address of principal executive offices)
Registrant's telephone number, including area code: 410-356-8600
------------
Not Applicable
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(Former name, former address and former fiscal year if changed since last
report)
Number of shares of common stock outstanding on December 31, 1996: 9,314,765
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
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YOUTH SERVICES INTERNATIONAL, INC.
INDEX - FORM 10-Q
DECEMBER 31, 1996
PAGE
PART I - FINANCIAL INFORMATION ----
Item 1. Financial Statements
Consolidated Statements of Income -
For the Three Months and Six Months Ended
December 31, 1996 and 1995 ..................................... 1
Consolidated Balance Sheets -
As of December 31, 1996 and June 30, 1996 ...................... 2
Consolidated Statements of Cash Flows-
For the Three Months and Six Months Ended
December 31, 1996 and 1995 ..................................... 4
Notes to Consolidated Financial Statements ..................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................ 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 14
Item 2. Changes in Securities .......................................... 14
Items 3 has been omitted since the item is either inapplicable or the answer is negative.
Item 4. Submission of Matters to a Vote of Security Holders ............ 14
Items 5 has been omitted since the item is either inapplicable or the answer is negative.
Item 6. Exhibits and Reports on Form 8-K ............................... 15
Signatures ............................................................................... 17
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YOUTH SERVICES INTERNATIONAL, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN 000'S EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
December 31, December 31,
--------------------- ----------------------
1996 1995 1996 1995
--------------------- ----------------------
REVENUES $29,347 $24,234 $57,043 $46,992
------- ------- ------- -------
PROGRAM EXPENSES
Direct operating 24,068 20,607 48,000 40,012
Amortization of goodwill 627 213 1,010 478
Start-up costs 142 30 142 30
------- ------- ------- -------
CONTRIBUTION FROM OPERATIONS 4,510 3,384 7,891 6,472
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 1,911 1,452 3,761 2,801
------- ------- ------- -------
INCOME FROM OPERATIONS 2,599 1,932 4,130 3,671
OTHER INCOME (EXPENSE)
Interest expense (934) (670) (1,908) (1,234)
Other, net 48 (162) 258 (189)
------- ------- ------- -------
(886) (832) (1,650) (1,423)
------- ------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE 1,713 1,100 2,480 2,248
INCOME TAX EXPENSE 748 572 946 978
------- ------- ------- -------
NET INCOME $ 965 $ 528 $ 1,534 $ 1,270
======= ======= ======= =======
EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE $ 0.10 $ 0.06 $ 0.15 $ 0.14
======= ======= ======= =======
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING 10,141 9,089 10,027 8,898
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
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Page 1 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN 000'S)
ASSETS
December 31, June 30,
1996 1996
------------- -------------
(Audited)
CURRENT ASSETS:
Cash $ 3,037 $ 7,046
Restricted cash 371 500
Investments available-for-sale 5,204 9,798
Accounts receivable, net 23,625 17,467
Refundable income taxes 1,046 1,046
Current portion of notes receivable 51 113
Prepaid expenses, supplies and other 2,713 1,918
Deferred tax asset -- 78
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Total current assets 36,047 37,966
---------- ---------
PROPERTY, EQUIPMENT AND IMPROVEMENTS:
Land 1,086 621
Leasehold improvements 9,794 7,134
Program equipment 4,004 2,289
Buildings 11,698 5,162
Office furniture and equipment 4,181 3,874
Vehicles 1,543 1,320
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32,306 20,400
Accumulated depreciation (4,881) (3,265)
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27,425 17,135
---------- ---------
OTHER ASSETS:
Deposits 273 160
Deferred debt issue costs, net 2,511 2,613
Goodwill, net 20,675 9,613
Non-compete agreements, net 225 277
Notes receivable, net of current portion 3,133 4,133
Deferred tax asset 750 750
Other assets, net 1,899 1,992
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29,466 19,538
---------- ---------
Total assets $ 92,938 $ 74,639
========== =========
The accompanying notes are an integral part of these financial statements.
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Page 2 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN 000'S)
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, June 30,
1996 1996
------------ ---------
(Audited)
CURRENT LIABILITIES:
Accounts payable $ 4,404 $ 1,465
Accrued payroll 1,859 1,641
Accrued interest payable 965 1,093
Other accrued expenses 3,926 3,018
Short-term borrowings 189 -
Current portion of long-term debt and
capital lease obligations 604 788
Deferred tax liability 50 -
----------- ----------
Total current liabilities 11,997 8,005
----------- ----------
DEFERRED REVENUE 288 38
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, net of current portion 14,876 4,212
7% CONVERTIBLE SUBORDINATED DEBENTURES 32,200 37,950
12% SUBORDINATED DEBENTURES, net of
unamortized discount 988 983
----------- ----------
Total liabilities 60,349 51,188
----------- ----------
SHAREHOLDERS' EQUITY
Common stock, $.01 par value: authorized
shares 70,000,000, issued and outstanding
9,314,765 at December 31, 1996 and
8,597,712 at June 30, 1996 93 86
Additional paid-in capital 27,499 20,099
Unrealized loss on investments available-for-sale (58) (255)
Retained earnings 5,055 3,521
----------- ----------
Total shareholders' equity 32,589 23,451
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Total liabilities and shareholders' equity $ 92,938 $ 74,639
=========== ==========
The accompanying notes are an integral part of these financial statements.
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Page 1 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN 000'S)
Six Months Ended
December 31,
---------------------
1996 1995
---- ----
OPERATING ACTIVITIES:
Net income $ 1,534 $ 1,270
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,968 1,290
Income from Introspect operations (371) 135
Net change in operating assets and liabilities (3,427) 807
-------- -------
Net cash provided by operating activities 704 3,502
INVESTING ACTIVITIES:
Purchases of property, equipment and improvements, net (7,686) (4,383)
Proceeds from sale of assets 33 363
Goodwill (3,470) (82)
Collections of notes receivable 62 -
Proceeds from sale of investments available-for-sale, net 4,887 -
Other long-term assets (405) (1,360)
-------- -------
Net cash used in investing activities (6,579) (5,462)
FINANCING ACTIVITIES:
Proceeds from borrowings 21,616 4,929
Repayments of long-term debt and capital lease obligations (21,354) (2,347)
Proceeds from the issuance of common stock under
the Employee Stock Option Plan and the Employee
Stock Purchase Plan, net 1,656 392
Other (52) -
-------- -------
Net cash provided by financing activities 1,866 2,974
NET (DECREASE) INCREASE IN CASH (4,009) 1,014
CASH, beginning of period 7,046 784
-------- -------
CASH, end of period $ 3,037 $ 1,798
======== =======
The accompanying notes are an integral part of these financial statements.
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Page 2 of 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN 000'S)
Six Months Ended
December 31,
--------------------
1996 1995
--------------------
CHANGE IN OPERATING ASSETS AND LIABILITIES, NET OF BUSINESS
ACQUIRED IN 1996:
Cash held in escrow $ - $ 2,543
Restricted cash 131 (39)
Accounts receivable (4,350) (4,574)
Prepaid expenses, supplies and other (720) (368)
Deferred tax asset - 57
Deposits (3) (1)
Management fee receivable - 30
Accounts payable and accrued expenses 1,575 2,531
Accrued payroll (60) 591
Deferred tax liability - 37
-------- -------
Net change in operating assets and liabilities $ (3,428) $ 807
======== =======
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 2,050 $ 643
======== =======
Cash paid for taxes $ 723 $ 776
======== =======
Noncash reduction of accounts receivable through
application of advance payments for services $ 19 $ 46
======== =======
Noncash asset acquisition through notes payable,
assumption of liabilities and issuance of long-term $ 13,104 $ 9,315
debt ======== =======
Noncash converstion of 7% Convertible Subordinated
Debentures $ 5,750 -
======== =======
Change in market value of investments available-for-sale $ 326 -
======== =======
The accompanying notes are an integral part of these financial statements.
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YOUTH SERVICES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL INFORMATION
In management's opinion, the accompanying interim unaudited
consolidated financial statements include all adjustments, consisting only of
normal, recurring adjustments, necessary for a fair presentation of Youth
Services International, Inc.'s ("YSI's" or the "Company's" ) financial position
at December 31, 1996 and the results of its operations for the three months and
six months ended December 31, 1996 and 1995 and its cash flows for the three
months and six months ended December 31, 1996 and 1995. The accompanying
consolidated balance sheet as of June 30, 1996 is presented herein as set forth
in YSI's Annual Report on Form 10-K for the year ended June 30, 1996. These
statements are presented in accordance with the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in YSI's annual consolidated financial statements
have been omitted from these statements, as permitted under the applicable
rules and regulations. Readers of these statements should refer to the
consolidated financial statements and notes thereto as of June 30, 1996 and
1995 and for the years then ended filed with the Securities and Exchange
Commission on Form 10-K.
The consolidated financial statements as of and for the three months
and six months ended December 31, 1995 have been adjusted to reflect the
consolidation of the results of operations of Introspect Healthcare,
Corporation. See NOTE 2. ACQUISITION for further discussion.
The weighted average common and common equivalent shares and the per
share amounts as of and for the three months and six months ended December 31,
1995 have been restated to reflect a three-for-two stock split which was
effective May 24, 1996.
Operating results for the three months and six months ended December
31, 1996 and 1995 are not necessarily indicative of the results that may be
expected for a full fiscal year.
2. ACQUISITION
In September 1996, the Company exercised its option (the "Option") to
acquire all of the stock of Introspect Healthcare, Corporation ("Introspect").
The Company acquired the Option on July 1, 1995, in conjunction with acquiring
the Desert Hills New Mexico program from Introspect and entering into a
management agreement to manage Introspect for a period of five years. As a
result of the "early" exercise of the Option effective as of September 1, 1996
(the Option was exercisable at any time during the five year period) and the
significant degree of Introspect's financial dependence on the Company,
accounting principles required that the pre-acquisition operating results of
Introspect be consolidated with those of the Company. As a result, the three
months and six months ended December 31, 1995 have been adjusted to reflect
revenues of $3,858,000 and $7,268,000, expenses of $3,820,000, and $6,812,000,
and a net loss of $242,000 and $135,000, respectively, related to the
pre-acquisition consolidation of Introspect.
3. CERTAIN TRANSACTIONS
During the second quarter of fiscal 1997, the Company restructured
its arrangement with International Youth Institute ("IYI"). As previously
reported, the Company began outsourcing its training of its child care staff
workers from IYI as of July 1, 1996. In connection with this arrangement, a
number of YSI employees who were trainers of other YSI employees were hired by
IYI. In late calendar year 1996, YSI renegotiated the arrangement in order to
be compensated for the know-how, training materials and other intellectual
property that had been transferred to IYI by virtue of the transfer of former
YSI employees to IYI. Under the new agreement, IYI will pay $700,000 for the
transfer of such assets, and will not be compensated for training services it
provided prior to January 1, 1997. The sale amount of $700,000 has been
included in revenues in the accompanying statements of income for the three
months and six months ended December 31, 1996. In addition, IYI grants YSI
perpetual, fully-paid and
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royalty-free license to use the intellectual property in its operations. YSI
and IYI also are entering into a training services agreement pursuant to which
IYI will provide certain training services to YSI for a period of five years
at a rate of approximately $34 per month per full-time employee of YSI.
During the second quarter, the Company reached agreement with
Evergreen National Development, Inc. ("Evergreen") regarding termination of its
agreement with YSI. As previously reported, YSI had entered into an agreement
with Evergreen in early calendar year 1996 for services relating to property
and facility maintenance, mergers and acquisitions, business development and
general consulting matters. The Company terminated the agreement in September
1996 in connection with its determination that these services could more
efficiently and effectively be performed by Company personnel. As a result of
the termination, Evergreen agreed to pay the Company $648,000 of which
approximatey $360,000 was recorded as revenue in the quarter ended December 31,
1996.
In December 1996, the Company amended its Revolving Line of Credit
agreement with a bank to increase the loan amount to the lesser of $20,000,000
or the sum of 85% of the eligible accounts receivable and 95% of the cash and
cash equivalents on deposit with the bank. Amounts drawn under this line of
credit bear interest at prime plus one-half percent and are payable on demand.
As of December 31, 1996, YSI borrowed approximately $13,000,0000 to fund the
Introspect acquisition and repayment of related debt, and to fund general
working capital needs of the Company.
Effective November 8, 1996, the stockholder's of the Company approved
an increase in the Company's authorized common stock from 20,000,000 shares to
70,000,000 shares.
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YOUTH SERVICES INTERNATIONAL, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
As of December 31, 1996, YSI operated 20 residential programs in 12
states. The Company operates its programs through wholly-owned subsidiaries
pursuant to contracts directly with government agencies and third party payors
or, in certain instances, with unaffiliated not-for-profit entities that have
contracts with government agencies.
The Company's programs are operated pursuant to fixed per diem
contracts based upon program occupancy and management contracts, including
management contracts with not-for-profit entities, as well as various third
party payor reimbursement contracts. The Company recognizes revenues under
all contracts as the services are performed. Under certain cost-based
reimbursement contracts, certain costs may be subject to audit and adjustment
as determined through negotiations with government or third party payor
representatives. Under these contracts, contract revenues are recorded at
amounts that are expected to be realized. In addition, the Company recognizes
revenue from its consulting and development services as they are performed.
The contribution from operations, in general, is lower in the initial
stages of a program's development primarily due to costs associated with
staffing requirements needed to obtain licensing prior to admitting students
into a program as well as costs incurred during the period prior to the
achievement of stable program occupancy. The Company's contribution from
operations as a percentage of revenue is greater under some of its contractual
arrangements with unaffiliated not-for-profit entities because the
not-for-profit entity is responsible for certain elements of operating the
program and incurs some of the costs. Therefore, in these instances, the
Company earns its margin on a lower base of costs and revenues.
CERTAIN TRANSACTIONS
During the second quarter of fiscal 1997, the Company restructured
its arrangement with International Youth Institute ("IYI"). As previously
reported, the Company began outsourcing its training of its child care staff
workers from IYI as of July 1, 1996. In connection with this arrangement, a
number of YSI employees who were trainers of other YSI employees were hired by
IYI. In late calendar year 1996, YSI renegotiated the arrangement in order to
be compensated for the know-how, training materials and other intellectual
property that had been transferred to IYI by virtue of the transfer of former
YSI employees to IYI. Under the new agreement, IYI will pay $700,000 for the
transfer of such assets, and will not be compensated for training services it
provided prior to January 1, 1997. The sale amount of $700,000 has been
included in revenues in the accompanying statements of income for the quarter
ended December 31, 1996. In addition, IYI grants YSI a perpetual, fully-paid
and royalty-free license to use the intellectual property in its operations.
YSI and IYI also are entering into a training services agreement pursuant to
which IYI will provide certain training services to YSI for a period of five
years at a rate of approximately $34 per month per full-time employee of YSI.
During the second quarter, the Company reached agreement with
Evergreen National Development, Inc. ("Evergreen") regarding termination of its
agreement with YSI. As previously reported, YSI had entered into an agreement
with Evergreen in early calendar year 1996 for services relating to property
and facility maintenance, mergers and acquisitions, business development and
general consulting matters. The Company terminated the agreement in September
1996 in connection with its determination that these services could more
efficiently and effectively be performed by Company personnel. As a result of
the termination, Evergreen agreed to pay the Company $648,000 of which
approximately $360,000 was recorded as revenue in the quarter ended December
31, 1996.
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In December 1996, the Company amended its Revolving Line of Credit
agreement with a bank to increase the loan amount to the lesser of $20,000,000
or the sum of 85% of the eligible accounts receivable and 95% of the cash and
cash equivalents on deposit with the bank. Amounts drawn under this line of
credit bear interest at prime plus one-half percent and are payable on demand.
As of December 31, 1996, YSI borrowed approximately $13,000,0000 to fund the
Introspect acquisition and repayment of related debt, and to fund general
working capital needs of the Company.
In October 1996, the Company was awarded a contract by the State of
Florida, Department of Juvenile Justice, to operate a 102 bed juvenile
corrections facility for adjudicated youth in Dade County, Florida. The
Company commenced operations in early December 1996.
RECENT DEVELOPMENTS
During the second quarter, YSI entered into an agreement to operate a
juvenile facility at a former air force base in Michigan. The Company
commenced operations of the Keweenaw Academy in January 1997.
RESULTS OF OPERATIONS
The following table sets forth selected items from the Company's
consolidated financial statements expressed as a percentage of total revenues:
- ------------------------------------------------------------------------------------------------------
For the Three For the Six
Months Ended Months Ended
December 31, December 31,
- ------------------------------------------------------------------------------------------------------
1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------
Revenues 100.0% 100.0% 100.0% 100.0%
Program expense:
Direct operating 82.0 85.0 84.2 85.2
Amortization of goodwill 2.1 1.0 1.8 1.0
Start-up costs 0.5 0.1 0.2 0.1
--- --- --- ---
Contribution from operations 15.4 13.9 13.8 13.7
Other operating expenses:
Selling, general and administrative 6.5 6.0 6.6 5.9
--- --- --- ---
Income from operations 8.9 7.9 7.2 7.8
Other income (expense):
Interest expense (3.2) (2.8) (3.3) (2.6)
Other, net 0.1 (0.6) 0.4 (0.4)
--- ----- --- -----
Income before income tax expense 5.8 4.5 4.3 4.8
Income tax expense (2.5) (2.4) (1.7) (2.1)
----- ----- ----- -----
Net income 3.3 2.1 2.6 2.7
--- --- --- ---
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THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO THREE MONTHS ENDED DECEMBER
31, 1995
Revenues. Revenues increased $5,113,000, or 21.1%, to $29,347,000 for
the three months ended December 31, 1996 from $24,234,000 for the three months
ended December 31, 1995 primarily as a result of the addition of new programs
operated by the Company during each period and the continued expansion
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at existing facilities. Of the total increase in revenues, $2,321,000 was
attributable to the operations of four programs that were acquired, opened or
managed after the second quarter of fiscal 1996; $2,114,000 was attributable to
the sixteen programs that were operated by the Company in both the three months
ended December 31, 1996 and 1995; $700,000 was attributable to the sale of the
Company's training material and other intellectual property to IYI (see
"Certain Transactions"); and $360,000 was attributable to the termination of the
Company's agreement with Evergreen (see "Certain Transactions"). The increase
in revenues was partially offset by a decrease in revenues of $482,000
resulting from the closing of one program in fiscal 1996. The average daily
enrollment for all of the Company's programs increased 21.9% to 2,198 youth for
the three months ended December 31, 1996 from 1,803 youth for the three months
ended December 31, 1995, including a 15.3% increase in average daily enrollment
in the sixteen programs that the Company operated for both the three months
ended December 31, 1996 and 1995 to 2,078 youth from 1,803 youth. The Company
reported an occupancy rate of 92.2% for the second quarter of fiscal 1997
compared to 91.2% for the second quarter of fiscal 1996 based on an average
daily licensed capacity of 2,385 beds for the three months ended December 31,
1996 and 1,977 beds for the three months ended December 31, 1995.
Program Direct Operating Expenses. Program direct operating expenses
increased $3,461,000, or 16.8%, to $24,068,000 for the three months ended
December 31, 1996 from $20,607,000 for the three months ended December 31, 1995
primarily as a result of the addition of new programs operated by the Company
during each period and the continued expansion of existing facilities. Of the
total increase in expenses, $2,372,000 is attributable to the operations of
four programs that were acquired, opened or managed after the second quarter of
fiscal 1996. The increase in expenses was partially offset by a decrease in
expenses of $587,000 resulting from the closing of one program in fiscal 1996.
Salaries and related employee benefits constituted approximately 65.6% of
program direct operating expenses for the three months ended December 31, 1996
compared to 62.9% of program direct operating expenses for the three months
ended December 31, 1995.
Contribution from Operations. Contribution from operations for the
three months ended December 31, 1996 increased $1,126,000, or 33.3%, to
$4,510,000 from $3,384,000 for the three months ended December 31, 1995.
Contribution from operations increased as a percentage of revenues to 15.4% for
the three months ended December 31, 1996 compared to 13.9% for the three months
ended December 31, 1995.
Selling, General and Administrative Expenses. For the three months
ended December 31, 1996, selling, general and administrative expenses increased
$459,000, or 31.6%, to $1,911,000 from $1,452,000 for the three months ended
December 31, 1995. As a percentage of revenues, selling, general, and
administrative expenses increased to 6.5% for the three months ended December
31, 1996 from 6.0% for the three months ended December 31, 1995. The most
significant components of these costs relate to the compensation expense and
consulting fees associated with business professionals necessary for the
development and oversight of the Company's operations.
Interest Expense. Interest expense increased $264,000 to $934,000 for
the three months ended December 31, 1996 from $670,000 for the three months
ended December 31, 1995. Of the increase in interest expense, $563,000 was
attributable to the 7% Convertible Subordinated Debentures Due 2006 that were
issued on January 29, 1996, and the remaining increase of $75,000 was
attributable to interest payable on the financing of the Company's personal
property and increases in borrowings on the Company's revolving line of credit.
The increase in interest expense was partially offset by a decrease in interest
expense of $374,000 resulting from the repayment of debt incurred in connection
with the acquisitions of Desert Hills of New Mexico and Introspect.
Interest Income. Interest income increased $160,000 to $195,000 for
the three months ended December 31, 1996 from $35,000 for the three months
ended December 31, 1995. The increase is primarily attributable to $123,000 of
dividend income earned on temporary investments, and $69,000 of interest income
earned on the mortgage note receivable related to the Tampa Bay Academy
acquisition.
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The increase in interest income was partially offset by a decrease in interest
income resulting from the termination of the line of credit agreement with
Introspect as part of the acquisition of Introspect.
Income Taxes. The provision for income taxes was $748,000,
representing an effective tax rate of 43.7% for the three months ended December
31, 1996 as compared to $572,000, representing an effective tax rate of 52.0%
for the three months ended December 31, 1995. The decrease in the effective
tax rate was primarily attributable to the inclusion for accounting purposes of
the pre-acquisition consolidation loss generated by Introspect for the three
months ended December 31, 1995 which resulted in an unfavorable impact on the
effective tax rate.
Net Income. Net income was $965,000, or $.10 per share for the three
months ended December 31, 1996 compared to $528,000, or $.06 per share for the
three months ended December 31, 1995.
SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO SIX MONTHS ENDED
DECEMBER 31, 1995
Revenues. Revenues increased $10,051,000, or 21.4%, to $57,043,000
for the six months ended December 31, 1996 from $46,992,000 for the six months
ended December 31, 1995 primarily as a result of the addition of new programs
operated by the Company during each period and the continued expansion of
existing facilities. Of the total increase in revenues, $4,605,000 was
attributable to the operations of four programs that were acquired, opened or
managed after the second quarter of fiscal 1996; $5,519,000 was attributable to
the sixteen programs that were operated by the Company in both the six months
ended December 31, 1996 and 1995; $700,000 was attributable to the sale of the
Company's training material and other intellectual property to IYI (see
"Certain Transactions"); and $360,000 was attributable to the termination of
the Company's agreement with Evergreen (see "Certain Transactions"). The
increase in revenues was partially offset by a decrease in revenues of
$1,262,000 resulting from the closing of one program in fiscal 1996. The
average daily enrollment for all of the Company's programs increased 22.1% to
2,172 youth for the six months ended December 31, 1996 from 1,779 youth for the
six months ended December 31, 1995, including a 15.7% increase in average daily
enrollment in the sixteen programs that the Company operated for both the six
months ended December 31, 1996 and 1995 to 2,059 youth from 1,779 youth. The
Company reported an occupancy rate of 91.7% for the six months ended December
31, 1996 compared to 91.8% for the six months ended December 31, 1995 based on
an average daily licensed capacity of 2,368 beds for the six months ended
December 31, 1996 and 1,937 beds for the six months ended December 31, 1995.
Program Direct Operating Expenses. Program direct operating expenses
increased $7,988,000, or 19.9%, to $48,000,000 for the six months ended
December 31, 1996 from $40,012,000 for the six months ended December 31, 1995
primarily as a result of the addition of new programs operated by the Company
during each period and the continued expansion of existing facilities. Of the
total increase in expenses, $4,599,000 is attributable to the operations of
four programs that were acquired, opened or managed after the second quarter of
fiscal 1996. The increase in expenses was partially offset by a decrease in
expenses of $1,270,000 resulting from the closing of one program in fiscal
1996. Salaries and related employee benefits constituted approximately 66.4%
of program direct operating expenses for the six months ended December 31, 1996
compared to 64.5% of program direct operating expenses for the six months ended
December 31, 1995.
Contribution from Operations. Contribution from operations for the
six months ended December 31, 1996 increased $1,419,000, or 21.9%, to
$7,891,000 from $6,472,000 for the six months ended December 31, 1995.
Contribution from operations decreased as a percentage of revenues to 13.8% for
the six months ended December 31, 1996 compared to 13.7% for the six months
ended December 31, 1995.
Selling, General and Administrative Expenses. For the six months
ended December 31, 1996, selling, general and administrative expenses increased
$960,000, or 34.3%, to $3,761,000 from $2,801,000 for the six months ended
December 31, 1995. As a percentage of revenues, selling, general, and
administrative expenses increased to 6.6% for the six months ended December 31,
1996 from 5.9% for the
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six months ended December 31, 1995. The most significant components of these
costs relate to the compensation expense and consulting fees associated with
business professionals necessary for the development and oversight of the
Company's operations. The increase as a percentage of revenue for the six
months ended December 31, 1996 as compared to the six months ended December 31,
1995 is primarily attributable to the Company's efforts to develop the
infrastructure necessary to enhance its current operations and continue its
growth.
Interest Expense. Interest expense increased $674,000 to $1,908,000
for the six months ended December 31, 1996 from $1,234,000 for the six months
ended December 31, 1995. Of the increase in interest expense, $1,127,000 was
attributable to the 7% Convertible Subordinated Debentures Due 2006 that were
issued on January 29, 1996, and the remaining increase of $308,000 was
attributable to interest payable on the financing of the Company's personal
property and increases in borrowings on the Company's revolving line of credit.
The increase in interest expense was partially offset by a decrease in interest
expense of $761,000 resulting from paying off debt incurred in connection with
the acquisitions of Desert Hills of New Mexico and Introspect.
Interest Income. Interest income increased $439,000 to $483,000 for
the six months ended December 31, 1996 from $44,000 for the six months ended
December 31, 1995. The increase is primarily attributable to $292,000 of
dividend income earned on temporary investments, and $135,000 of interest
income earned on the mortgage note receivable related to the Tampa Bay Academy
acquisition.
Income Taxes. The provision for income taxes was $945,000,
representing an effective tax rate of 38.1% for the six months ended December
31, 1996 as compared to $978,000, representing an effective tax rate of 43.5%
for the six months ended December 31, 1995. The decrease in the effective tax
rate was attributable to a $264,000 increase in the pre-acquisition operating
results of Introspect. These operating results were not taxable to the
Company, and therefore, had a favorable impact on the Company's effective tax
rate.
Net Income. Net income was $1,534,000, or $.15 per share for the six
months ended December 31, 1996 compared to $1,270,000, or $.14 per share for
the six months ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had $3,037,000 in cash and
$24,050,000 of working capital, which included $5,204,000 of investments
available-for-sale. Net cash provided by operating activities was $704,000 for
the six months ended December 31, 1996 compared to net cash provided by
operating activities of $1,956,000 for the year ended June 30, 1996. Net
accounts receivable increased $6,158,000 to $23,625,000, at December 31, 1996
from $17,467,000 at June 30, 1996 primarily as a result of the acquisition of
Introspect effective September 1, 1996.
Net cash used in investing activities was $6,579,000 for the six
months ended December 31, 1996, of which $3,445,000 was used to fund the
acquisition of Introspect; $4,241,000 was invested in leasehold improvements,
vehicles, computer equipment and other capital expenditures in support of
existing programs, as well as the start-up of Keweenaw Academy in Michigan;
$4,887,000 represents the net principal and dividend income related to the
sale of a temporary investment; $3,470,000 represents goodwill, $2,610,000
of which resulted from the acquisition of Introspect and $860,000 of which
resulted from the acquisition of a group home business in Utah; and $405,000
represents investments in deferred software costs, a prepaid consulting
agreement and other long-term asset investments.
Net cash provided by financing activities was $1,866,000 for the six
months ended December 31, 1996 comprised of $15,396,000 of borrowings under the
Company's lines of credit, $6,220,000 of various notes payable and $1,656,000
of net proceeds from the Employee Stock Option and Employee Stock Purchase
Plans, offset by the repayment of
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$10,339,000 of debt assumed as part of the acquisition of Introspect, repayment
of $10,471,000 of borrowings under the lines of credit, and the repayment of
$596,000 of other long-term borrowings. As of December 31, 1996, the Company
had approximately $3,800,000 available on its existing bank revolving line of
credit.
Total debt of $48,857,000 on December 31, 1996 consisted primarily of
$32,200,000 of 7% Convertible Subordinated Debentures Due 2006, approximately
$12,977,000 of borrowings under the Company's lines of credit, approximately
$2,167,000 for a capital lease assumed in the acquisition of Desert Hills New
Mexico, $988,000 of 12% Subordinated Debentures, and approximately $525,000 in
other debt and capital leases.
The Company believes that its current funds and funds available under
its amended line of credit, together with existing capital resources and cash
flow from its existing operations, will be sufficient to meet all indebtedness
payments, to make all planned capital additions and improvements and meet other
working capital needs for the next twelve months. However, if the Company
should identify one or more acquisition targets or begins substantial "de novo"
programs, it may need to access additional capital.
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YOUTH SERVICES INTERNATIONAL, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings other than routine
litigation which the Company does not believe is significant to its future
financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES
On September 30, 1996, the Company commenced an exchange offer pursuant
to which the Company offered to issue an aggregate principal amount of
$31,600,000 of 7% Convertible Subordinated Debentures due 2006 under an
Indenture dated as of October 15, 1996 with The Chase Manhattan Bank (the
"Exchange Debentures") in exchange for an equal principal amount of 7%
Convertible Subordinated Debentures due 2006 originally issued by the Company
(the "Original Debentures") under a Fiscal and Paying Agency Agreement dated as
of January 29, 1996 with The Chase Manhattan Bank, N.A., New York, The Chase
Manhattan Bank, N.A. London and Chase Manhattan Bank Luxembourg, S.A. (the
"Fiscal Agency Agreement"). The exchange offer, which was required by the
Fiscal Agency Agreement, was for all of the Original Debentures that were
originally issued pursuant to Rule 144A or Regulation D under the Securities
Act of 1933 (the "Act"). The exchange offer terminated on October 31, 1996 and
all $31,600,000 of Original Debentures for which exchange was offered were
exchanged for an aggregate principal amount of $31,600,000 of Exchange
Debentures. The terms of the Exchange Debentures are substantially the same as
the terms of the Original Debentures. As a result of the exchange, as of
October 31, 1996, there were outstanding an aggregate principal amount of
$31,600,000 of Exchange Debentures and an aggregate principal amount of $600,000
of Original Debentures that were originally issued pursuant to Regulation S
under the Act.
The Company filed a registration statement with respect to
resales of the Exchange Debentures and resales of the shares of Common
Stock issuable upon conversion of the Exchange Debentures which registration
statement became effective with the Securities and Exchange Commission on
October 29, 1996. Under the Fiscal Agency Agreement and the Indenture, the
Company is required to keep such registration statement effective until January
29, 1999.
ITEM 3 has been omitted since the item is either inapplicable or the answer is
negative.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of Youth Services International,
Inc. was held on November 8, 1996. The following items were submitted to a
vote of security holders:
1. Election of Directors of the Company - 7,603,612
shares, or 99.5% of the shares voted were in favor of the election of each of
the Directors nominated and presented to this meeting; 36,276 shares, or less
than 1% of the shares voted, abstained.
2. Approval and Adoption of the 1997 Employee Stock
Purchase Plan - 6,113,889 shares, or 99.25% of the shares voted, were in favor
of the approval and adoption of the 1997 Employee Stock Purchase Plan; 19,572
shares, or less than 1% of the shares voted, were against adoption of the plan;
26,593 shares, or less than 1% of the shares voted, abstained.
3. Approval and Adoption of the 1997 Employee Stock
Option Plan - 5,017,752 shares, or 81.45% of the shares voted, were in favor of
the approval and adoption of the 1997 Employee Stock Option Plan; 1,111,405
shares, or 18% of the shares voted, were against adoption of the plan; 30,897
shares, or less than 1% of the shares voted, abstained.
4. Approval and Adoption of an Amendment to the 1995
Directors Stock Option Plan to increase the number of shares issuable
thereunder to 200,000 - 6,036,054 shares, or 97.98% of the shares voted, were
in favor of the approval and adoption of the amendment to the 1995 Directors
Stock Option Plan; 90,755 shares, or 1.4% of the shares voted, were against
adoption of the amendment; 65,143 shares, or less than 1% of the shares voted,
abstained.
5. Approval of an Amendment to the Charter increasing
the number of authorized shares of capital stock from 20,000,000 to 70,000,000
- - 6,251,020 shares, or 84.7% of the shares voted, were in favor of amending the
Charter; 1,066,655 shares, or 14.45% of the shares voted, were against approval
of the amendment; 61,438 shares, or less than 1% of the shares voted,
abstained.
6. Approval of Arthur Andersen LLP as the Company's
accountant - 7,615,968 shares, or 99.68% of the shares voted, were in favor of
Arthur Andersen LLP as the Company's accountant; 1,214 shares, or less than 1%
of the shares voted, were against approval of Arthur Andersen LLP; 22,706
shares, or less than 1% of the shares voted, abstained.
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ITEM 5 has been omitted since the item is either inapplicable or the answer is
negative.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
3(a) Articles of Incorporation of the Company, as amended.
3(b) Bylaws of the Company, as amended and restated (Incorporated by reference to Exhibit 3.2
to the Company's Annual Report on Form 10-K for the Fiscal Year Ended June 30, 1996).
4(a) Form of 7% Convertible Subordinated Debenture (Incorporated by reference to Exhibit 4(c)
to the Company's Registration Statement on Form S-3 (Registration No. 333-09089)).
4(b) 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(a) First Amendment to Loan and Security Agreement dated December 12, 1996 by Signet Bank and
the Company and certain of its subsidiaries.
10(b) Amended and Restated Master Revolving Promissory Note from the Company (and certain of
its subsidiaries) to Signet Bank dated December 12, 1996.
10.1 State of Florida Department of Juvenile Justice Contract
10.2 Memorandum of Understanding between Youth Services International, Inc. and International
Youth Institute
10.3 Settlement and Release Agreement between Youth Services International, Inc. and Evergreen
National Development, Inc.
11 Computation of Per Share Earnings
27 Financial Data Schedule
(b) The registrant filed a Current Report on Form 8-K on
September 25, 1996 to report its acquisition of all of the outstanding capital
stock of Introspect Healthcare, Corporation from Diversification Association,
Inc. , and filed Amendments to Current Report on Form 8-K/A on October 17, 1996
and October 23, 1996 to file the required Financial Statements of Businesses
Acquired and Pro Forma Financial Information with respect to that acquisition
that were unavailable for filing at the time of the
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original filing of the Current Report on Form 8-K. The financial statements
filed included Audited Financial Statements of Introspect Healthcare,
Corporation and Subsidiaries as of and for the year ended June 30, 1996 and Pro
Forma Consolidated Statement of Income for the year ended June 30, 1996, and
Pro Forma Consolidated Balance Sheet as of June 30, 1996.
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YOUTH SERVICES INTERNATIONAL, INC.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
YOUTH SERVICES INTERNATIONAL, INC.
By: /s/WILLIAM P. MOONEY
--------------------------------
William P. Mooney
Chief Financial Officer and Treasurer
Date: February 11, 1997
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
YOUTH SERVICES INTERNATIONAL, INC.
-----------------------------
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1996
21
YOUTH SERVICES INTERNATIONAL, INC.
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3(a) Articles of Incorporation of the Company, as amended.
3(b) Bylaws of the Company, as amended and restated (Incorporated by
reference to Exhibit 3.2 to the Company's Annual Report on
Form 10-K for the Fiscal Year Ended June 30, 1996).
4(a) Form of 7% Convertible Subordinated Debenture (Incorporated by
reference to Exhibit 4(c) to the Company's Registration Statement on
Form S-3 (Registration No. 333-09089)).
4(b) 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(a) First Amendment to Loan and Security Agreement dated
December 12, 1996 by Signet Bank and the
Company and certain of its subsidiaries.
10(b) Amended and Restated Master Revolving Promissory Note
from the Company (and certain of its subsidiaries) to
Signet Bank dated December 12, 1996.
10.1 State of Florida Department of Juvenile Justice Contract
10.2 Memorandum of Understanding between Youth Services
International, Inc. and International Youth Institute
10.3 Settlement and Release Agreement between Youth Services
International, Inc. and Evergreen National Development, Inc.
11 Computation of Per Share Earnings
27 Financial Data Schedule