Youth Services International Inc. surprised investors yesterday by warning of another quarterly loss and telling shareholders they'll receive less than expected in the company's merger with Correctional Services Corp.
Under a revised formula, Correctional Services would pay about $35.3 million in stock for Owings Mills-based Youth Services, down from $48.1 million under terms announced in September.
It was another blow for the struggling juvenile corrections company, which only a year ago had a stock market value of about $200 million.
Under the deal's new price, approved by both companies' boards, each Youth Services share will command 0.275 shares of Correctional Services stock. That's about $3.09 based on Correctional Services' $11.25 close yesterday, down sharply from the $4.22 investors had been expecting.
The earlier agreement called for 0.375 Correctional Services shares to be paid for each Youth Services share.
As a result, Youth Services stock slid $1.03 yesterday to close at $2.69 on the Nasdaq.
Youth Services employs about 30 people at its Owings Mills headquarters and 500 in programs elsewhere in Maryland. The merger may reduce the headquarters staff slightly but not its Maryland program staff, which operates the Charles H. Hickey Jr. School in Glen Arm and the Victor Cullen Academy in Sabillasville, in Frederick County, officials have said.
Yesterday's repricing was required by continued disappointments in Youth Services' financial results, said Ira Cotler, executive vice president of finance for Correctional Services, based in Sarasota, Fla.
Even though Youth Services' revenue and client numbers are improving, its profit margins have been falling, and that threatened the results of the combined company, Cotler said. Correctional Services had told shareholders its earnings per share would rise after the merger, but Youth Services' recent lackluster results threatened that prediction, he said.
"We've repriced the deal so the accretion expectation is what it was" in September, when the merger was originally announced, he said. Even though Youth Services shareholders will receive less Correctional Services stock, "they benefit from the ability to reach the accretion potential that Wall Street expects."
If Correctional Services' stock rises after the merger, "the adjustment is in the best interests of all shareholders," Cotler said.
The merger's new terms may slightly delay its completion, said Mark Demilio, Youth Services' chief financial officer. "We were hoping to close by the end of March," he said. Now, "it's likely to be in April."
Youth Services' struggles started in the spring, when use of its campus-like corrections facilities started to slide. As recently as April, its stock sold for close to $20 a share.
The number of juveniles at the company's facilities has recovered from about 3,000 juveniles last summer to about 3,200, Demilio said. But now profit is under pressure from labor costs, among other things.
"Payroll costs went up faster than revenue," Cotler said, adding that the problem could be fixed with better administration. "We're only going to do it where it makes sense and doesn't harm the program," he said. "It's just a matter of tracking the staffing situation, more than anything else."
Youth Services expects to lose between $5.9 million and $6.5 million for the fourth quarter, which ended Dec. 31, the company said. Much of the loss is blamed on one-time charges for bad debts, higher-than-expected employee health insurance claims and canceling a contract with a vendor.
But the nonrecurring costs added up to just $5.7 million, meaning Youth Services would have lost money even without them, Demilio said. The company will report precise results for the fourth quarter later.
Pub Date: 3/03/99