1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission File Number
September 30, 1997 0-23284
------------------ -------
YOUTH SERVICES INTERNATIONAL, INC.
-------------------------------------------------------------------------------
(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
-------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code:
410-356-8600
------------
Not Applicable
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year
if changed since last report)
Number of shares of common stock outstanding on September 30, 1997: 10,159,334
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
----- -----
2
YOUTH SERVICES INTERNATIONAL, INC.
INDEX - FORM 10-Q
SEPTEMBER 30, 1997
PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations -
For the Three Months and Nine Months Ended
September 30, 1997 and 1996 2
Consolidated Balance Sheets -
As of September 30, 1997 and December 31, 1996 3
Consolidated Statements of Cash Flows-
For the Nine Months Ended
September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II - OTHER INFORMATION
Items 2 through 5 have been omitted since the item is either inapplicable or the
answer is negative.
Item 6 Exhibits and Reports on Form 8-K 17
Signatures 18
1
3
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN $000'S EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1997 1996 1997 1996
---------------------- ----------------------
REVENUES $28,504 $27,696 $ 84,802 $81,057
------- ------- -------- -------
PROGRAM EXPENSES:
Direct operating 24,955 24,316 74,273 70,687
Start-up costs 57 - 57 28
------- ------- -------- -------
CONTRIBUTION FROM OPERATIONS 3,492 3,380 10,472 10,342
OTHER OPERATING EXPENSES:
Development costs 300 264 694 155
Selling, general and administrative 1,775 1,585 6,097 4,653
Restructuring costs - - 27,000 -
Costs of attempted acquisitions - - - 569
------- ------- -------- -------
INCOME (LOSS) FROM OPERATIONS 1,417 1,531 (23,319) 4,965
INTEREST AND OTHER EXPENSE, net (647) (764) (2,238) (2,319)
------- ------- -------- -------
INCOME (LOSS) BEFORE TAXES 770 767 (25,557) 2,646
INCOME TAX EXPENSE(BENEFIT) 297 197 (5,554) 1,075
------- ------- -------- -------
NET INCOME(LOSS) $ 473 $ 570 $(20,003) $ 1,571
======= ======= ======== =======
EARNINGS(LOSS) PER SHARE $ 0.04 $ 0.06 $ (2.00) $ 0.17
======= ======= ======== =======
WEIGHTED AVERAGE SHARES
OUTSTANDING 10,563 10,147 9,979 9,464
======= ======= ======== =======
The accompanying notes are an integral part of these financial statements.
2
4
PAGE 1 OF 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN $000'S)
ASSETS
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------- ------------
(AUDITED)
CURRENT ASSETS:
Cash $ 2,303 $ 3,408
Investments - 5,204
Accounts receivable, net 18,652 23,175
Refundable income taxes - 1,046
Current portion of notes receivable 136 128
Prepaid expenses, supplies and other 2,482 3,360
Deferred tax asset 323 110
------- -------
Total current assets 23,896 36,431
------- -------
PROPERTY AND EQUIPMENT, net 21,412 27,425
------- -------
OTHER ASSETS:
Deferred debt issue costs, net 2,292 2,511
Goodwill, net 2,272 20,675
Notes receivable, net of current portion 2,953 3,056
Deferred tax asset 7,218 591
Other assets, net 3,144 2,400
------- -------
17,879 29,233
------- -------
Total assets $63,187 $93,089
======= =======
The accompanying notes are an integral part of these financial statements.
3
5
PAGE 2 OF 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN $000'S)
LIABILITIES AND SHAREHOLDERS' EQUITY
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------- ------------
(AUDITED)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 9,660 $10,175
Short-term borrowings 2,026 11,313
Current portion of long-term debt and
capital lease obligations 89 602
-------- -------
Total current liabilities 11,775 22,090
DEFERRED REVENUE 73 1,469
LONG-TERM DEBT AND CAPITAL LEASE
OBLIGATIONS, net of current portion 2,155 3,752
7% CONVERTIBLE SUBORDINATED DEBENTURES 32,200 32,200
12% SUBORDINATED DEBENTURES, net of
unamortized discount 995 988
-------- -------
Total liabilities 47,198 60,499
-------- -------
SHAREHOLDERS' EQUITY
Common stock 102 93
Additional paid-in capital 30,835 27,500
Unrealized loss on investments - (58)
Retained (deficit) earnings (14,948) 5,055
-------- -------
Total shareholders' equity 15,989 32,590
-------- -------
Total liabilities and shareholders' equity $ 63,187 $93,089
======== =======
The accompanying notes are an integral part of these financial statements.
4
6
PAGE 1 OF 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN $000'S)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1997 1996
---------- -----------
OPERATING ACTIVITIES:
Net (loss) income $(20,003) $ 1,571
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation and amortization 4,378 3,305
Income from Introspect operations - (210)
Loss on sale of investments 203 -
Stock granted as compensation 75 -
Restructuring charge 27,000 -
Loss on sale of fixed assets 23 64
Net change in operating assets and liabilities (3,911) (6,657)
-------- --------
Net cash provided by (used in) operating activities 7,765 (1,927)
-------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (4,659) (5,460)
Purchase of investments - (10,394)
Repayments of (increase in) notes receivable 95 (3,197)
Proceeds from sale of investments 5,101 -
Proceeds from sale of fixed assets 984 80
Increase in other assets (1,369) (4,044)
Cash paid for businesses acquired, net of cash received (629) (7,971)
-------- --------
Net cash used in investing activities (477) (30,986)
-------- --------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock
purchase plan 3,007 2,603
Repayments of short-term borrowings, long-term debt and
capital lease obligations, net (11,400) (19,616)
Proceeds from short-term borrowings and long-term debt - 11,226
Proceeds from issuance of convertible debentures - 37,950
-------- --------
Net cash (used in) provided by financing activities (8,393) 32,163
-------- --------
NET DECREASE IN CASH (1,105) (750)
CASH, beginning of period 3,408 2,492
-------- --------
CASH, end of period $ 2,303 $ 1,742
======== ========
The accompanying notes are an integral part of these financial statements.
5
7
PAGE 2 OF 2
YOUTH SERVICES INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN $000'S)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1996
--------------------------
CHANGE IN OPERATING ASSETS AND LIABILITIES, NET OF BUSINESSES
ACQUIRED:
Accounts receivable and refundable income taxes $ 4,803 $(5,198)
Prepaid expenses, supplies and other 1,163 (892)
Deferred taxes (6,840) (266)
Accounts payable and accrued expenses (1,641) (650)
Deferred revenue (1,396) 349
------- -------
Net change in operating assets and liabilities $(3,911) $(6,657)
======= =======
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 2,937 $ 1,807
======= =======
Cash paid for taxes, net of refunds $ (343) $ 1,615
======= =======
The accompanying notes are an integral part of these financial statements.
6
8
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 September 30, 1997 and the results of its operations for the three months and
nine months ended September 30, 1997 and 1996 and its cash flows for the nine
months ended September 30, 1997 and 1996. The accompanying audited consolidated
balance sheet as of December 31, 1996 is presented herein as set forth in YSI's
Form 10-K for the six months ended December 31, 1996. This transition report on
Form 10-K was filed due to the Company's decision in April 1997 to change its
fiscal year end from June 30 to December 31. The statements herein 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 consolidated financial statements on Form 10-K 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 December 31, 1996 and June 30, 1996 and for
the periods then ended filed with the Securities and Exchange Commission on Form
10-K. The consolidated financial statements for the three and nine months ended
September 30, 1996 have been adjusted to reflect the consolidation of the
results of operations of Introspect HealthCare, Corporation. See NOTE 3 -
ACQUISITION OF INTROSPECT for further discussion.
The weighted average shares outstanding and the per share amounts as
of and for the three months and nine months ended September 30, 1996 have been
restated to reflect a three-for-two stock split which was effective May 24,
1996.
Operating results for the three months and nine months ended September
30, 1997 and 1996 are not necessarily indicative of the results that may be
expected for a full fiscal year.
2. DISPOSITION OF BEHAVIORAL HEALTH BUSINESS
In March 1997, the board of directors approved, and management
committed to, a plan to sell the nine programs that comprise the Company's
behavioral health business. As a result of this decision to dispose of the
behavioral health business, the Company recorded a restructuring charge in the
quarter ended March 31, 1997 of $27.0 million to reduce the carrying amount of
behavioral health assets to their estimated fair value less selling costs. In
July 1997, the Company entered into a definitive agreement to sell the
behavioral health business for approximately $21.7 million. On October 31, 1997,
the Company entered into an amendment to the definitive agreement pursuant to
which the Company agreed to sell all of the behavioral health business other
than the two programs in Texas for $16.0 million in cash and an additional
payment of $4.5 million in cash if operating results of the behavioral health
business (other than the Texas programs) for September, October and November,
1997 exceed a certain threshold. The purchase price is subject to adjustment
based on the change in working capital of the businesses sold. Pursuant to the
amendment, the Company has the right to sell the Texas operations to the buyer
for $1.5 million in cash upon the occurrence of certain conditions, which the
Company expects to occur on or before December 31, 1997. On October 31, 1997
the Company consummated the sale of the behavioral health business (other than
the Texas programs) for $15.9 million in cash (the purchase price of $16.0
million less the estimated change in working capital). The Company continued to
operate its behavioral health businesses through the October 31, 1997 closing
and will continue to operate the Texas facilities until the closing on these
facilities is consummated. The Company will record a gain on the sale, before
the effect of taxes, of between approximately $1.5 million and $6.0 million
depending on the results of the earnout.
7
9
Revenues and contribution from operations for the behavioral health
business for the three and nine months ended September 30, 1997 and 1996 were as
follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ----------------------
1997 1996 1997 1996
---- ---- ---- ----
Revenues $9,937 $12,579 $31,666 $36,416
Contribution from
operations 24 1,033 662 2,811
3. ACQUISITION OF INTROSPECT
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. Thus, the operations of
Introspect have been included in the Company's consolidated financial results
since the July 1, 1995 Option acquisition date. See Note 2 - DISPOSITION OF
BEHAVIORAL HEALTH BUSINESS for discussion of the closing of the behavioral
health sale on October 31, 1997 which included the sale of Introspect.
4. EARNINGS PER SHARE
In March 1997, the Financial Accounting Standards Board released SFAS
128 "Earnings Per Share." The new statement is effective December 15, 1997 and
early adoption is not permitted. When adopted, SFAS 128 will require the
restatement of prior periods and disclosure of basic and diluted earnings per
share and related computations. The implementation of SFAS 128 and the
retroactive restatement process will have no effect on the Company's reported
earnings per share for the nine months ended September 30, 1997. The retroactive
restatement process would require additional disclosure of basic earnings per
share of $.05 for the three months ended September 30, 1997 and $.06 and $.18
for the three months and nine months ended September 30, 1996, respectively.
8
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
YSI operates programs designed to provide educational and treatment
services to troubled youth. As of September 30, 1997, YSI operated 24
residential programs in 12 states. The youth in these programs can be segregated
into two categories--juvenile justice programs for adjudicated youth and
behavioral health programs primarily for non-adjudicated youth. As of September
30, 1997, YSI operated 15 juvenile justice programs and nine behavioral health
programs. 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. In March 1997, the board of directors
approved, and management committed to, a plan to sell the nine programs which
comprise the behavioral health business. This plan of disposition resulted in
the recognition of a $27.0 million restructuring charge during the quarter ended
March 31, 1997. On October 31, 1997, the Company consummated the sale of seven
of the nine behavioral health programs and entered into an agreement to sell
the two remaining programs. See "RECENT DEVELOPMENTS".
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 the
hiring and training of staff required 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 revenues and expenses.
Certain oral statements made by management from time to time and
certain statements in "MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS" contained herein regarding matters which are not
historical facts are forward-looking statements (as such term is defined in the
Securities Act of 1933) and because such statements involve known and unknown
risks, uncertainties or other factors not under the Company's control, actual
results, performance or achievements of the Company may be materially different
from the results, performance or other expectations expressed or implied in
these forward-looking statements.
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.
9
11
The Company has begun renovations and intends to occupy space in
Rantoul, Illinois to operate a juvenile transition program accepting placements
of adjudicated youth. The Company expects initially to serve approximately 50
youth and ultimately 200 youth at the Rantoul facility and to commence
operations in January 1998.
The Company also has begun construction and plans to establish an
academy program serving approximately 150 youth in Elmore, Minnesota. The
Company anticipates the facility will be open for placements for adjudicated
youth in January 1998.
In March 1997, the board of directors approved, and management
committed to, a plan to sell the nine programs that comprise the Company's
behavioral health business. As a result of this decision to dispose of the
behavioral health business, the Company recorded a restructuring charge in the
quarter ended March 31, 1997 of $27.0 million to reduce the carrying amount of
behavioral health assets to their estimated fair value less selling costs. In
July 1997, the Company entered into a definitive agreement to sell the
behavioral health business for approximately $21.7 million. On October 31, 1997,
the Company entered into an amendment to the definitive agreement pursuant to
which the Company agreed to sell all of the behavioral health business other
than the two programs in Texas for $16.0 million in cash and an additional
payment of $4.5 million in cash if operating results of the behavioral health
business (other than the Texas programs) for September, October and November,
1997 exceed a certain threshold. The purchase price is subject to adjustment
based on the change in working capital of the businesses sold. Pursuant to the
amendment, the Company has the right to sell the Texas operations to the buyer
for $1.5 million in cash upon the occurrence of certain conditions, which the
Company expects to occur on or before December 31, 1997. On October 31, 1997
the Company consummated the sale of the behavioral health business (other than
the Texas programs) for $15.9 million in cash (the purchase price of $16.0
million less the estimated change in working capital). The Company continued to
operate its behavioral health businesses through the October 31, 1997 closing
and will continue to operate the Texas facilities until the closing on these
facilities is consummated. The Company will record a gain on the sale, before
the effect of taxes, of between approximately $1.5 million and $6.0 million
depending on the results of the earnout.
10
12
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:
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Revenues 100.0% 100.0% 100.0% 100.0%
Program expense:
Direct operating 87.5 87.8 87.6 87.2
Start-up costs 0.2 - 0.1 -
-------- -------- --------- ---------
Contribution from operations 12.3 12.2 12.3 12.8
Selling, general and administrative 6.2 5.7 7.2 5.7
Income (loss) from operations 5.0 5.5 (27.5) 6.1
Income (loss) before taxes 2.7 2.8 (30.1) 3.3
Net income (loss) 1.7 2.1 (23.6) 1.9
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:
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
1997 1996 1997 1996
------ ------ ------ ------
Revenues 100.0% 100.0% 100.0% 100.0%
Program expense:
Direct operating 81.0 84.5 81.4 83.1
Start-up costs .3 - .1 -
-------- --------- --------- ---------
Contribution from operations 18.7% 15.5% 18.5% 16.9%
11
13
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
Juvenile Justice and Behavioral Health
Revenues. Revenues increased $808,000, or 2.9%, to $28,504,000 for the
three months ended September 30, 1997 from $27,696,000 for the three months
ended September 30, 1996. This net increase resulted from the addition of five
new juvenile justice programs subsequent to September 30, 1996 which provided
additional revenues of $2,700,000 and the expansion of juvenile justice
programs existing at September 30, 1996 which generated an increase of
$750,000. These increases were partially offset by a decrease of $2,642,000 in
the revenues generated from the behavioral health business between periods
which was due to the reductions in overall funding and rates from certain
primary revenue sources as well as minor declines in census. (See "RECENT
DEVELOPMENTS" for further discussion of the sale of the Company's behavioral
health business.) The average daily enrollment for all of the Company's
programs increased 16.7% to 2,505 youth for the three months ended September
30, 1997 from 2,146 youth for the three months ended September 30, 1996,
including a 5.4% increase in average daily enrollment in the 19 programs that
the Company operated for both the full three months ended September 30, 1997
and 1996 to 2,262 youth from 2,146 youth. The Company reported an occupancy
rate of 89.0% for the quarter ended September 30, 1997 compared to 91.6% for
the quarter ended September 30, 1996 based on an average daily residential
licensed capacity of 2,816 beds for the three months ended September 30, 1997
and 2,344 beds for the three months ended September 30, 1996. The decrease in
occupancy percentage is due primarily to the fact that several of the five new
juvenile justice programs were still in various stages of development where
maximum occupancy had not yet been reached as well as a slight decline in
overall census at the behavioral health facilities.
Program Direct Operating Expenses. Program direct operating expenses
increased $639,000, or 2.6%, to $24,955,000 for the three months ended September
30, 1997 from $24,316,000 for the three months ended September 30, 1996. As a
percentage of revenue, program direct operating expenses were 87.5% and 87.8%,
thereby generating program contribution margin percentage of 12.5% and 12.2%,
for the three months ended September 30, 1997 and 1996, respectively. This
slight improvement between periods is due to certain operating efficiencies and
consolidations implemented throughout the Company's juvenile justice programs.
These operating efficiencies were partially offset by the poor financial
performance of the behavioral health business in the 1997 period. Salaries and
related employee benefits constituted approximately 74.4% of program direct
operating expenses for the three months ended September 30, 1997 compared to
74.8% of program direct operating expenses for the three months ended September
30, 1996.
Start-up Costs. Start-up costs were $57,000 for the three months ended
September 30, 1997 compared to $0 for the three months ended September 30, 1996.
All start-up costs in the 1997 period relate to the Elmore, Minnesota "de novo"
project. There were no start-up projects in the 1996 period.
Contribution from Operations. Contribution from operations, which
includes the effects of start-up costs in each period, increased $112,000, or
3.3%, for the three months ended September 30, 1997 to $3,492,000 from
$3,380,000 for the three months ended September 30, 1996. Contribution from
operations increased as a percentage of revenues to 12.3% for the three months
ended September 30, 1997 compared to 12.2% for the three months ended September
30, 1996.
Selling, General and Administrative Expenses. For the three months
ended September 30, 1997, selling, general and administrative expenses increased
$190,000, or 12.0%, to $1,775,000 from $1,585,000 for the three months ended
September 30, 1996. As a percentage of revenues, selling, general, and
administrative expenses increased to 6.2% for the three months ended September
30, 1997 from 5.7% for the three months ended September 30, 1996. This increase
primarily resulted from the Company's efforts to develop the infrastructure
necessary to enhance its current operations and continue its growth.
12
14
Development Costs. For the three months ended September 30, 1997,
development costs increased $36,000, or 13.6%, to $300,000 from $264,000 for the
three months ended September 30, 1996. This increase was primarily due to the
Company's focus on growth and the hiring of individuals specifically targeting
development activities in new markets.
Net Interest and Other Expense. Net interest and other expense
decreased $117,000, or 15.3%, to $647,000 for the three months ended September
30, 1997 from $764,000 for the three months ended September 30, 1996. The
decrease was primarily attributable to a decrease in the average outstanding
line of credit balance from the 1996 period to the 1997 period.
Income Taxes. The provision for income taxes was $297,000, representing
an effective tax rate of 38.6% for the three months ended September 30, 1997 as
compared to an income tax provision of $197,000, representing an effective tax
rate of 25.7% for the three months ended September 30, 1996. The increase in the
effective tax rate was primarily attributable to the fact that in the 1996
period, the pre-acquisition consolidated Introspect earnings (SEE "ACQUISITION
OF INTROSPECT") were not taxable to the Company.
Net Income. Net income was $473,000, or $0.04 per share, for the three
months ended September 30, 1997 compared to $570,000, or $.06 per share, for the
three months ended September 30, 1996.
Juvenile Justice Operations
During the quarter ended March 31, 1997, the Board of Directors approved,
and management committed to, a plan to sell the nine programs that comprise the
Company's behavioral health business and on October 31, 1997, the Company
consummated the sale of seven of the nine behavioral health programs and entered
into an agreement to sell the two remaining programs. See "RECENT DEVELOPMENTS".
To demonstrate the operating performance of the Company excluding the behavioral
health business, the operating results derived from the Company's juvenile
justice programs for the quarter ended September 30, 1997 compared to the
quarter ended September 30, 1996 were as set forth below.
Revenues. Revenues derived from juvenile justice programs increased
$3,450,000, or 22.8%, to $18,567,000 for the three months ended September 30,
1997 from $15,117,000 for the three months ended September 30, 1996. The
increase resulted from the addition of five new juvenile justice programs
subsequent to September 30, 1996 which provided additional revenues of
$2,700,000 and the expansion of juvenile justice programs existing at September
30, 1996 which generated an increase of $750,000. The average daily enrollment
for all of the Company's residential juvenile justice programs increased 20.9%
to 1,777 youth for the three months ended September 30, 1997 from 1,470 for the
three months ended September 30, 1996, including a 4.4% increase in average
daily enrollment in the 10 programs that the Company operated for both the full
three months ended September 30, 1997 and 1996 to 1,534 from 1,470. The Company
reported an average juvenile justice occupancy rate of 90.0% for the three
months ended September 30, 1997 compared to 93.0% for the three months ended
September 30, 1996 based on an average daily licensed capacity of 1,975 beds for
the three months ended September 30, 1997 and 1,580 for the three months ended
September 30, 1996. The decrease in occupancy percentage is due primarily to the
fact that several of the five new juvenile justice programs were still in
various stages of development where maximum occupancy had not yet been reached.
Program Direct Operating Expenses. Program direct operating expenses
incurred from juvenile justice programs increased $2,272,000, or 17.8%, to
$15,042,000 for the three months ended September 30, 1997 from $12,770,000 for
the three months ended September 30, 1996. As a percentage of revenue, program
direct operating expenses were 81.0% and 84.5%, thereby generating program
contribution margin percentage of 19.0% and 15.5% for the three months ended
September 30, 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
13
15
76.3% of program direct operating expenses for the three months ended September
30, 1997 compared to 77.6% of program direct operating expenses for the three
months ended September 30, 1996.
Start-up Costs. Start-up costs incurred relating to juvenile justice
programs were $57,000 for the three months ended September 30, 1997
compared to $0 for the three months ended September 30, 1996. All start-up
costs in the 1997 period relate to the Elmore, Minnesota "de novo" project.
There were no start-up projects in the 1996 period.
Contribution from Operations. Contribution from operations derived from
juvenile justice programs, which includes the effects of start-up costs in each
period, increased $1,121,000, or 47.6% for the three months ended September 30,
1997 to $3,468,000 from $2,347,000 for the three months ended September 30,
1996. Contribution from operations increased as a percentage of juvenile justice
revenues to 18.7% for the three months ended September 30, 1997 compared to
15.5% for the three months ended September 30, 1996
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
Juvenile Justice and Behavioral Health
Revenues. Revenues increased $3,745,000, or 4.6%, to $84,802,000 for
the nine months ended September 30, 1997 from $81,057,000 for the nine months
ended September 30, 1996. The net increase resulted from the addition of five
new juvenile justice programs subsequent to September 30, 1996 which provided
additional revenues of $5,388,000 and the expansion of juvenile justice programs
existing at September 30, 1996 which generated an increase of $4,439,000. These
increases were partially offset by a decrease of $1,332,000 from certain
non-recurring consulting revenues included in the 1996 period and a decrease of
$4,750,000 in the revenues generated from the behavioral health business between
periods. The decrease in revenues from the behavioral health business was due
largely to the reductions in overall funding and rates from certain primary
revenue sources. (See "RECENT DEVELOPMENTS" for further discussion of the sale
of the Company's behavioral health business.) The average daily enrollment for
all of the Company's residential programs increased 18.5% to 2,445 youth for the
nine months ended September 30, 1997 from 2,064 youth for the nine months ended
September 30, 1996, including an 8.9% increase in average daily enrollment in
the 18 programs that the Company operated for both the full nine months ended
September 30, 1997 and 1996 to 2,199 youth from 2,020 youth. The Company
reported an occupancy rate of 91.5% for the nine months ended September 30,
1997 compared to 92.1% for the nine months ended September 30, 1996 based on an
average daily licensed capacity of 2,672 beds for the nine months ended
September 30, 1997 and 2,242 beds for the nine months ended September 30, 1996.
The decrease in occupancy percentage is due primarily to the fact that several
of the five new juvenile justice programs were still in various stages of
development where maximum occupancy had not yet been reached.
Program Direct Operating Expenses. Program direct operating expenses
increased $3,586,000, or 5.1%, to $74,273,000 for the nine months ended
September 30, 1997 from $70,687,000 for the nine months ended September 30,
1996. As a percentage of revenue, program direct operating expenses were 87.6%
and 87.2%, thereby generating program contribution margin percentage of 12.4%
and 12.8% for the nine months ended September 30, 1997 and 1996, respectively.
This slight decrease between periods is due to the 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.
The effects of this decrease were partially offset by the operating efficiencies
and consolidations implemented throughout the Company's juvenile justice
programs. Salaries and related employee benefits constituted approximately 73.0%
of program direct operating expenses for the nine months ended September 30,
1997 compared to 70.8% of program direct operating expenses for the nine months
ended September 30, 1996.
14
16
Start-up Costs. Start-up costs increased $29,000 for the nine months
ended September 30, 1997 to $57,000 from $28,000 for the nine months ended
September 30, 1996. The increase between periods is due to the fact that the
1997 start-up costs relate to the Elmore, Minnesota "de novo" project, which is
a much larger facility and entailed more start-up activities than the Virginia
Bootcamp which incurred the start-up costs in the 1996 period.
Contribution from Operations. Contribution from operations, which
includes the effects of start-up costs in each period, increased $130,000, or
1.3% for the nine months ended September 30, 1997 to $10,472,000 from
$10,342,000 for the nine months ended September 30, 1996. Contribution from
operations decreased as a percentage of revenues to 12.3% for the nine months
ended September 30, 1997 compared to 12.8% for the nine months ended September
30, 1996.
Selling, General and Administrative Expenses. For the nine months ended
September 30, 1997, selling, general and administrative expenses increased
$1,444,000, or 31.0%, to $6,097,000 from $4,653,000 for the nine months ended
September 30, 1996. As a percentage of revenues, selling, general and
administrative expenses increased to 7.2% for the nine months ended September
30, 1997 from 5.7% for the nine months ended September 30, 1996. 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 between
periods primarily resulted from the Company's efforts to develop the
infrastructure necessary to enhance its current operations and continue its
growth.
Development Costs. For the nine months ended September 30, 1997,
development costs, including "Costs of Attempted Acquisitions" totaling
$569,000 in the 1996 period, decreased $30,000, or 4.1%, to $694,000 from
$724,000 for the nine months ended September 30, 1996. This net decrease was
primarily due to the fact that the 1996 period included certain one-time costs
incurred in connection with an attempted and failed acquisition. The decrease
was partially offset by an increase in juvenile justice development personnel
and activities.
Net Interest and Other Expense. Net interest and other expense
decreased $81,000, or 3.5%, to $2,238,000 for the nine months ended September
30, 1997 from $2,319,000 for the nine months ended September 30, 1996. The
decrease was primarily attributable to a decrease in the average outstanding
line of credit balance from the 1996 period to the 1997 period.
Income Taxes. The benefit for income taxes was $5,554,000, representing
an effective tax benefit rate of 21.7% for the nine months ended September 30,
1997 as compared to an income tax provision of $1,075,000, representing an
effective tax rate of 40.6% for the nine months ended September 30, 1996. The
decrease in the effective tax rate was primarily attributable to the Company's
inability to fully recognize 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.
Net (Loss) Income. Net loss was $20,003,000, or $2.00 per share, for
the nine months ended September 30, 1997 compared to net income of $1,571,000,
or $.17 per share, for the nine months ended September 30, 1996.
Juvenile Justice Operations
During the quarter ended March 31, 1997, the Board of Directors
approved, and management committed to, a plan to sell the nine programs that
comprise the Company's behavioral health business and on October 31, 1997, the
Company consummated the sale of seven of the nine behavioral health programs and
entered into an agreement to sell the two remaining programs. See "RECENT
DEVELOPMENTS". To demonstrate the operating performance of the Company excluding
the behavioral health business, the
15
17
Company's operating results derived from the Company's juvenile justice programs
for the nine months ended September 30, 1997 compared to the nine months ended
September 30, 1996 were as set forth below.
Revenues. Revenues derived from juvenile justice programs increased
$8,495,000, or 19.0%, to $53,136,000 for the nine months ended September 30,
1997 from $44,641,000 for the nine months ended September 30, 1996. The increase
resulted primarily from the addition of five new juvenile justice programs
subsequent to September 30, 1996 which provided additional revenues of
$5,388,000 and the expansion of juvenile justice programs existing at September
30, 1996 which generated an increase of $4,439,000. These increases were
partially offset by a decrease of $1,332,000 from certain non-recurring
consulting revenues in the 1996 period. The average daily enrollment for all of
the Company's residential juvenile justice programs increased 20.2% to 1,716
youth for the nine months ended September 30, 1997 from 1,428 for the nine
months ended September 30, 1996, including a 8.1% increase in average daily
enrollment in the 10 programs that the Company operated for both the full nine
months ended September 30, 1997 and 1996 to 1,544 from 1,428. The Company
reported an average occupancy rate of 92.8% for the nine months ended
September 30, 1997 compared to 93.2% for the nine months ended September 30,
1996 based on an average daily licensed capacity of 1,849 beds for the nine
months ended September 30, 1997 and 1,533 for the nine months ended September
30, 1996. The decrease in occupancy percentage is due primarily to the fact
that several of the five new juvenile justice programs were still in various
stages of development where maximum occupancy had not yet been reached.
Program Direct Operating Expenses. Program direct operating expenses
incurred from juvenile justice programs increased $6,187,000, or 16.7%, to
$43,269,000 for the nine months ended September 30, 1997 from $37,082,000 for
the nine months ended September 30, 1996. As a percentage of revenue, program
direct operating expenses were 81.4% and 83.1%, thereby generating program
contribution margin percentage of 18.6% and 16.9% for the nine months ended
September 30, 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 75.1% of program direct operating expenses for the
nine months ended September 30, 1997 compared to 74.4% of program direct
operating expenses for the nine months ended September 30, 1996.
Start-up Costs. Start-up costs incurred relating to juvenile justice
programs increased $29,000 for the nine months ended September 30, 1997 to
$57,000 from $28,000 for the nine months ended September 30, 1996. The
increase between periods is due to the start-up costs in 1997 relating to the
Elmore, Minnesota "de novo" project, which is a much larger facility and
entailed more start-up activities than the Virginia Bootcamp, which incurred
the start-up costs in the 1996 period.
Contribution from Operations. Contribution from operations derived from
juvenile justice programs, which includes the effects of start-up costs in each
period, increased $2,279,000, or 30.3%, for the nine months ended September 30,
1997 to $9,810,000 from $7,531,000 for the nine months ended September 30, 1996.
Contribution from operations increased as a percentage of juvenile justice
revenues to 18.5% for the nine months ended September 30, 1997 compared to 16.9%
for the nine months ended September 30, 1996.
16
18
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had $2,303,000 in cash and
$12,121,000 of working capital. Net cash provided by operating activities was
$7,765,000 for the nine months ended September 30, 1997 compared to net cash
used in operating activities of $1,927,000 for the nine months ended September
30, 1996. This increase resulted primarily from the Company's favorable accounts
receivable collection experience between periods.
Net cash used in investing activities was $477,000 for the nine months
ended September 30, 1997, comprised primarily of $6,028,000 used to fund capital
expenditures and other assets offset by the proceeds from investment sales of
$5,101,000.
Net cash used in financing activities was $8,393,000 for the nine
months ended September 30, 1997 comprised primarily of repayments of short-term
borrowings and long-term debt of $11,400,000 offset by $3,007,000 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.
On October 31, 1997, the Line of Credit Facility was extended and currently
expires in November 1998. As of September 30, 1997, YSI had outstanding
borrowings under this line of credit of approximately $2,000,000 which was
fully repaid subsequent to September 30, 1997.
On October 31, 1997, the Company received approximately $15.9 million
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.
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.
ITEMS 2 through 5 have 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
------------- ----------------------------------------------
2 Amendment No. 1 to Stock Purchase Agreement
11 Computation of Per Share Earnings
27 Financial Data Schedule
17
19
(b) The Company filed the following reports on Form 8-K during
the quarter ended September 30, 1997:
1. Form 8-K dated July 22, 1997 to report the
Company's signed agreement for the disposition of
its behavioral health business.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
YOUTH SERVICES
INTERNATIONAL, INC.
By: /s/ WILLIAM P. MOONEY
--------------------------
William P. Mooney
Chief Financial Officer and
Treasurer
Date: November 13, 1997
18