Youth Services International, Inc.
Youth Services International, Inc.
2 Park Ct., #200
Owings Mills, Maryland 21117
Fax: (410) 356-8634
Web site: http://www.youthservices.com
Sales: $100.4 million (1996)
Stock Exchanges: NASDAQ
SICs: 8299 Schools and Educational Services
Youth Services International, Inc. (YSI) is the nation’s foremost private provider of treatment programs for troubled youth, operating 22 residential and community-based educational and behavioral modification programs for approximately 3,000 youths in 12 states. Two thousand of these young people are enrolled in juvenile justice programs within eight states. YSI has taken a leadership role in defining the youth care industry— an industry that does not yet exist, the company claims. YSI believes that it is the only company that has developed a comprehensive strategy for providing services to troubled and at-risk youth. It is strategically poised through its expanding infrastructure to maintain its position of prominence in the field. YSI estimates that the youth care market encompasses 7.5 million juveniles who suffer from mental, behavioral, or developmental disorders.
The company was founded by W. James Hindman, who began serving as chairman and CEO. Hindman had first-hand experience of orphanages, having spent his second through ninth grades in the Boys and Girls School in Sioux City, Iowa. His father had left the family and his mother could not take care of him on her own. According to Joanna Sullivan of the Baltimore Business Journal, Hindman was “headed toward juvenile delinquency before some coaches and teachers set him straight.” He told John R. Dorfman in a Wall Street Journal interview that “We had Bible study every night. It was the best spiritual training that you could have. I learned to work,” he continued, “shoveling coal, doing laundry and farm labor.” He maintained that most of his memories of those days were pleasant ones.
He later served as a Marine, a football coach, and became involved in the health care industry from 1967 to 1979, serving as an administrator, owner, and operator of 25 nursing facilities—the sale of which earned him his first million. He moved on to establish Jiffy Lube International, Inc., a chain of quick oil-change outlets, which soon grew to more than 1,000 locations. Jiffy Lube encountered financial difficulties accompanied by declining stock prices and layoffs, primarily as a result of the company’s lending of too much money—mostly to franchisees, some of whom were former football players Hindman had coached in college. The Texas-based Pennzoil Company bought out Jiffy Lube in 1990 for the “bargain” price of $100 million. The following year Hindman founded YSI. In early 1992, the company accepted its first student at the Clarinda Academy in Clarinda, Iowa, with a staff of 43 employees. In an effort to foster the moral, intellectual, and physical growth of students, YSI advertises its “Formula for Success,” it’s commitment to providing “certified educational programs, individualized behavior treatment plans, highly structured athleuc programs, world of work experiences and intensely scheduled activities.” Revenues for YSI’s first fiscal year amounted to $436,000.
Criticized by some for mixing profit motive with philanthropy, Hindman feels justified in setting an example of financial success, and in providing programs aimed at helping others to become productive, self-sufficient members of society. In his words, “We believe that our fundamental strengths [include] a deep understanding of our students’ needs and ‘hot buttons’.” Statistics cited by YSI support the exigency of efforts such as theirs: U.S. Justice Department studies estimate that the arrest rate of juveniles for violent crimes will more than double by the year 2010; A report by the Juvenile Offenders and Victims group claims that the homicide rate among 14- to 17-year-olds increased 165 percent in the past decade, and in 1991 children committed 20 percent of all violent crimes. Where many government programs have failed, YSI promises an alternative solution that operates efficiently. Figures for 1994 show that it costs approximately $50,000 to put a child into a reform school. In 1995 the company collected an average of $110 per student per day from state agencies, an amount comparable to what is spent in state-run programs. According to Sullivan, Hindman says “hogwash” to those who say he is in the business only for the money. He added, “Of course money is important. I don’t think money is the end of all things, but the expectation is if they [young people] can learn to manage money and save money, they’re on the road to becoming owners instead of renters, and taxpayers instead of tax eaters.”
September 1993: First Profitable Quarter
In 1993 YSI contracted to manage the Charles Hickey School, a Baltimore County facility for young male offenders, a school reputed for repeated escapes, overcrowding and violence, which was previously managed by the state of Maryland. The length of stay at Hickey ranges from one month to two years, following assignment by a state judge. Challenged to improve the lives of some of the state’s toughest juvenile offenders, the company added a broader range of activities: horseback riding, auto repair, and computer training, aiming to accommodate the interests of most any youth. Students may also receive training in printing, horticulture, electronics, and plumbing. Privileges are granted based on an incentive system, allowing exemplary and cooperative students such amenities as later bedtimes, a voice in rule-making, television, and snack privileges. YSI’s schools emphasize keeping students busy. Every minute of the day is planned. They generally get up at 5:30 a.m. and must be in bed by 10 p.m. With a 1-to-l staff ratio, their programs include a heavy dose of academics, athletics, and paid job assignments. Money earned pays back any criminal penalties, child support, and like expenses. In 1994 Juvenile Services officials in Maryland were critical of YSI for not producing the programs it promised when it was awarded a three-year, $49 million contract to run the Hickey facility. The company also came under fire and was prompted to tighten security when a counselor was raped by an inmate of the school—a young sex offender who officials say should never have been allowed to be alone with a woman. YSI pointed out the rarity of criminal offenses at its facilities, claiming that the aforementioned case was an unfortunate exception.
Expansion and Diversification: 1994
In order to meet the perceived demand for its services, in February 1994 the company sold 1.3 million shares of common stock at $10 per share in its initial public offering. YSI used the proceeds of the offering to reduce long-term indebtedness, borrowings under its lines of credit and other short-term borrowings, to provide working capital, and to fund acquisitions. Expecting to increase revenues by $12 million a year, YSI then moved into the California market and negotiated a deal to buy buildings in a residential treatment facility in Mammoth, California, for $376,000, before expanding into the South where it leased a vacant college property in Tarkio, Missouri, to operate a juvenile offenders program. The company also established Pare Place, a wholly owned subsidiary in Arizona, a residential facility created to serve more than 60 youths with chemical addiction and emotional disorders.
All of the company’s programs are operated by wholly owned subsidiaries of YSI pursuant to contracts negotiated directly with government agencies or, alternatively, with unaf-filiated not-for-profit entities which have contracts directly with government agencies. From their for-profit programs the company reported a 1993 net loss of $1.6 million, but acquisitions and the growing numbers of students soon enhanced its financial standing. By 1994, the Reflections Treatment Agency, Victor Cullen Academy, Hickey School, YSI of Utah, and Western Youth were operated via direct contracts with government agencies. Revenues earned from those programs quadrupled in one year, climbing to $34.7 million by the end of 1994. Clarinda Academy, Forest Ridge, and Missouri River Academy were managed by the company pursuant to agreements with unaffiliated not-for-profit entities. Hindman has also set up a charitable foundation to pay for “extras” including flying lessons, and the funding of expenses for athletes traveling overseas to basketball competitions.
The national epidemic of juvenile lawlessness has a very high cost to businesses, communities and the lawful working public. Consequently, the market for services dedicated to troubled youth, both adjudicated and at-risk, is growing rapidly and we believe the market will continue to expand. The majority of non-government organizations serving this population currently consists of small, not-for-profit providers who generally cannot invest the significant sums of capital or provide other necessary resources needed to meet the expected onslaught of new offenders. As a result, this rapidly growing, highly fragmented industry is starting to consolidate. We intend to capitalize on these opportunities for rapid growth in the following ways: (1) Maximize the licensed capacity and occupancy at existing schools; (2) Merge with or acquire other youth care providers; (3) Pursue additional state contracts as the trend toward privatization grows; (4) Seek opportunities to convert existing vacant buildings into residential treatment facilities; (5) Diversify into other youth care services.
The company earmarked 1995 for focusing on “how we do business.” In an effort to improve its existing systems, YSI committed to improving margins and delivering a better product. One major initiative was the improvement of communications throughout the layers of the company. Areas of management affected by the new strategy involved the improvement of services such as information technology, centralized purchasing, food services, and fleet management. They prioritized training, in-service education, and the assessment of their programs in terms of outcomes. YSI also entered into agreements with a Tucson-based behavioral health company, Introspect Health Care Corporation, a multimillion-dollar business operating under the name of Desert Hills. The company acquired Introspect’s Desert Hills business in Albuquerque, New Mexico, and agreed to manage the remainder of Desert Hills’s programs. The new venture broadened the array of services for behaviorally difficult, at-risk, and adjudicated youth, including programs for prevention, education, vocational training, and mental health and substance abuse counseling.
Almost 1,200 students were guided through YSI’s Juvenile Justice program during fiscal 1995. Of those, 871 students returned to high school, 240 entered the work force, 63 enrolled in college, and 24 students joined the military, began trade schools, or followed other vocational pursuits, according to company reports. YSI is supported by the Youth Outreach Foundation, a not-for-profit organization whose mission is to assist students leaving residential programs with their re-entry into society. The Foundation provided a variety of functions affecting YSI students, such as supplying 200 computers for YSI programs. In addition, they found employment for 55 YSI students, assisted 70 with college and trade school tuition, and guided 20 into the military. The Foundation also provides aftercare counselling and assistance with independent living.
Also in 1995, YSI contracted with the states of Colorado, Delaware, and Pennsylvania to accommodate youth who could not be placed in overcrowded state facilities. Privatization avoids large capital expenditures required to build new government-sponsored facilities. Operating at 95 percent occupancy for most of the year, YSI increased capacities at Chamberlain Academy, Victor Cullen Academy, Forest Ridge Youth Services, Reflections Treatment Agency, Tarkio Academy, and YSI of Utah. The residential population continued to increase along with the growth in accommodations. A new program, the Woodward Academy, in Woodward, Iowa, opened in order to supply Iowa and nearby youth with a short-term, high-intensity residential program. Providing for another 1,000 youth, YSI added six residential centers, 24 group homes, and more than 10 non-residential centers for programs in Phoenix, Arizona, and one each in Tucson, Arizona; Las Vegas, Nevada; Albuquerque, New Mexico; and College Station, Texas. The company estimated that annual revenues generated from the new programs and facilities should reach $30 million.
By 1996 YSI was considered a national model for the delivery of behavioral health services, becoming the first youth care company to contract to provide for the entire managed-care continuum for 1,600 Medicaid eligible youth in Tucson, Arizona. The company reports that based on their prototypical delivery system, many more states are studying the possibilities of contracting services through YSI. The state of Tennessee has merged their Departments of Juvenile Courts and Corrections, Mental Health, and Child Welfare into a single organization called the Department of Children’s Services. YSI hopes to accommodate more of these government programs through their wide array of services. Two new markets were entered in 1996: Florida and the Commonwealth of Virginia. The company acquired the Tampa Bay Academy and the award of a contract for a boot camp, a 104-bed residential treatment center which serves youth with behavioral problems and specializes in treating children with hearing impairment. The company estimates that at capacity the program could generate $1 million in annual revenues. The Carrsville, Virginia Boot Camp (Camp Washington) serves 48 male youth in a military atmosphere. A female section will be added, increasing the camp by 20 beds. YSI increased its 1996 residential population by 51%, with revenues for the year growing 89 percent over the previous fiscal year.
In June 1997 YSI reported the negotiation of a contract with the State of Florida to operate a 25-bed intensive residential treatment program for adjudicated youth in Hillsborough County, Florida, previously operated by the county Sheriffs department. The company estimates that the program has the potential to produce annual revenues of approximately $1 million. An academy program was also planned for the purchase of an Elmore, Minnesota high school property, with the intention of providing services for adjudicated youth from the state and various counties. Annual revenues for that program are estimated at $6 million. In the same month the company announced the award of a contract from the State of Maryland Department of Juvenile Justice, to operate a 184-bed secure care custody residential treatment program. YSI estimates that the program could generate approximately $41 million in revenues over the five-year period stipulated in the contract.
A new CEO was hired, Timothy P. Cole, a former chairman and executive vice president for Wackenhut Corrections Corporation. Hindman remained as board chairman and chairman of the executive committee, assuring consistency of the company’s vision toward more involvement between the industry and government youth agencies. The company announced a net loss of $21.4 million for the third quarter, ending March 31, 1997, accounted for in connection with a one-time restructuring charge of $27 million, incurred in connection with YSI’s decision to dispose of its behavioral health businesses. Cole stated that “These results are in line with our previously announced expectations. The company’s core business of juvenile justice programs continues to perform to our expectations. We have begun the process of disposing of the behavioral health programs and hope to conclude the disposition quickly.”
YSI’s 1996 annual report announced that the company would continue assuring consistency of “core values.” In Hindman’s words, “From the very beginning, our focus at YSI always has been on creating self-sustaining taxpayers who can make a contribution to this great country of ours.”
Youth Services International (YSI) of Iowa, Inc.; YSI of Tennessee, Inc.; YSI of Utah, Inc.; YSI of Baltimore, Inc.; YSI of Maryland, Inc.; YSI of Northern Iowa, Inc.; YSI of South Dakota, Inc.; YSI of Missouri, Inc.; YSI of Central Iowa, Inc.; YSI of New Mexico, Inc.; YSI of Texas, Inc.; YSI of Florida, Inc.; YSI of Virginia, Inc.; Southwestern Children’s Health Service, Inc.
Dorfman, John R., “King of Reform Schools Eyes Orphanages,” The Wall Street Journal, February 2, 1995, pp. Bl, B4.
Sullivan, Joanna, “Youth Services Has Something Different to Sell,” Baltimore Business Journal, April 1, 1994, p. 9.
“Youth Services International, Inc.,” Baltimore Business Journal, January 20, 1995, p. 30.