Florida firm will acquire Youth Services Correctional Services has high revenue, but faces abuse lawsuits

'Strategic benefits' seen

Operations at Hickey, Victor Cullen schools to remain the same


September 25, 1998|By Kristine Henry | Kristine Henry,SUN STAFF

Youth Services International Inc., an Owings Mills-based operator of juvenile-offender facilities, said yesterday that it has agreed to be acquired by a Florida corrections firm with impressive revenues but a history tainted by allegations of abuse.

Correctional Services Corp., based in Sarasota, Fla., will exchange 0.375 of a Correctional Services share for each YSI share -- about $43 million, based on yesterday's Correctional Services closing price. Correctional Services will also assume $32.2 million in YSI debt.

The deal was unanimously approved by the boards of directors at both companies. The acquisition is expected to be completed in January, pending approval from shareholders and the U.S. Justice Department's antitrust division.

Correctional Services has 35 contracts to manage facilities in nine states and Puerto Rico, with a total of nearly 8,000 beds. Its acquisition of YSI will increase the number of juveniles served by about 3,000 and put the company in 20 states.

In May, YSI's stock plunged 54 percent to $7.7813 on news that earnings would be substantially less than expected. The company then reported a second-quarter loss of $1.9 million, or 17 cents a share, with revenue of $21.9 million. YSI's stock closed at $3.0625 yesterday -- a 52-week low -- down 84.375 cents.

It hired SunTrust Equitable Securities in June to evaluate financial and strategic alternatives to improve shareholder value, with possibilities including joint ventures, mergers and acquisitions.

SunTrust represented YSI in the Correctional Services transaction.

Meanwhile, Correctional Services is involved in numerous lawsuits, with allegations including abusive guards, negligence and rape at several of its facilities.

In 1995, the U.S. Immigration and Naturalization Service canceled a contract with the company -- then known as Esmor Correctional Services -- to run a New Jersey detention center. It ,, also issued a critical report that included charges of abuse by guards.

Ira Cotler, Correctional Services' chief financial officer, said the lawsuits have no merit and that the company denies any wrongdoing. He also noted that Correctional Services has two current contracts with the INS to run detention centers in Washington and Texas.

"We have insurance coverage, and our insurance company is defending us, so this will not adversely affect us financially," he said. "We don't think it's problematic at all."

Correctional Services reported record revenue of $20 million last quarter, with $1 million in net income. Its shares lost $1.125 yesterday to close at $10, near its 52-week low of $9.5625 of Dec. 19.

"The transaction is positive to both companies; it provides a lot of strategic benefits to our clients, and the transaction allows us to provide the broadest spectrum of services of any company to these agencies and to solve their problems in ways other companies can't," Cotler said.

"It's an exciting time for both companies."

Cotler said YSI will continue normal operations, keeping its name and retaining most employees at the facility level. Possible job cuts at the managerial level will be examined next year, he said.

YSI employs nearly 550 people in Maryland, including 29 at its Owings Mills headquarters.

YSI's chief executive, Timothy P. Cole, will leave the company after the deal is completed, as will YSI's general counsel and acting CFO, Mark Demilio.

In accordance with their employment contracts, Cole will receive a severance package of just over $1 million, and Demilio will receive just under $1 million.

"I think this merger between Correctional Services and YSI is really a great combination of companies that have many complimentary service offerings," Cole said.

"I'm comfortable with the change in control."

In Maryland, YSI manages the Charles H. Hickey Jr. School in nTC Baltimore County and the Victor Cullen Academy in Sabillasville. The acquisition will not affect YSI's contracts with the facilities.

"We don't think there will be any difficulty. It should be business as usual," said Walt Wirsching, assistant secretary for program services at the state Department of Juvenile Justice. "We are very vigilant in terms of making sure the contractors are adhering to the contract and license regulations."

The YSI contracts to manage the Hickey school and the Cullen academy were valued at $15 million and $8 million, respectively, for fiscal year 1998, which ended June 30.

Pub Date: 9/25/98

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