Creating Healthy Communities
ANNUAL REPORT 2013
A COMPASSIONATE CULTURE
A s a collective communit y,
we are c aring , suppor tive,
and empathic in our actions .
BEING TRUE TO OUR WORD
Ever y interaction is conducted
with respect and integrit y.
We are a national leader
in the management and
provision of the highest-quality
human social services,
collaborative care services and
community transportation.
CUSTOMER CENTERED CARE
We listen to and identif y
customer needs to ensure
exceptional ser vice and
exceed expectations .
INNOVATION AND EVOLUTION
O ur culture encourages
and rewards the discover y
and creation of new and
ef ficient ways to ser ve
our stakeholders .
EMBRACING AND
RESPECTING DIVERSITY
We promote principles of
diversit y in all aspects of
our business practices .
By 2020 we will enhance
the quality of life for
50 million people with
innovative and efficient
community based solutions.
D E A R S T O CK H O L D E R S :
We have made great strides over the past year to position Providence
in home and community based settings. Cash flow generation was out-
for the future. Current healthcare trends, including the Affordable Care
standing, with a total of $55.2 million in cash from operations gener-
Act, increased Medicaid enrollment, the trend toward home and
ated during the year. At December 31, 2013, unrestricted cash and cash
community based care and the industry-wide focus on the reduction in
equivalents approached $100 million and our long term obligations were
healthcare delivery costs mean significant opportunities for our com-
reduced to $123.5 million at year end.
pany. During 2013 we refined our mission and our vision to more closely
align ourselves with these opportunities and further strengthened
our management team. We also delivered favorable financial results,
significant positive cash flow and enhanced our borrowing capacity to
support our company-wide growth initiatives.
C R E AT I N G H E A LT H Y CO M M U N I T I E S
Our newly refined mission of delivering exceptional value by creating
healthy communities through exceptional people working side by side
can be seen in everything we do. It is our vision that by 2020, we
enhance the quality of life for 50 million people with innovative and
efficient community based solutions. As part of this mission and vision
we are committed to customer centered care, innovation and evolution,
being true to our word, a compassionate culture, embracing and
respecting diversity, results and collaboration.
S T R O N G F I N A N C I A L F O U N D AT I O N
Continued positive financial results in 2013 resulted in further strength-
ening of our financial foundation. While revenue rose modestly to
over $1.1 billion, net income more than doubled to $19.4 million, or
$1.41 per diluted share. Our NET Services segment had a great year,
benefitting from prior year start-up efforts, expanded business, negoti-
ated rate adjustments and the exit from some of its less profitable mar-
kets. We currently provide coordination and oversight for the personal
transportation needs of more than 17 million people. Our Human
Services segment saw the roll out of new workforce development and
foster care contracts as we strengthened our position as the leader in
providing a comprehensive list of counseling and support services
We further improved our financial capacity and flexibility in August of
last year when we completed a financial restructuring, refinancing our
existing credit facility with an amended and restated senior secured
credit facility in an aggregate principal amount of $225 million at his-
torically low interest rates. In addition to utilizing this added debt capac-
ity in conjunction with the May 2014 maturity of our remaining 6.5%
Convertible Senior Subordinated Notes, we intend to continue to pay
down debt and to further invest in our business and pursue acquisitions
to strengthen our position in today’s evolving healthcare environment.
NET CASH PROVIDED
BY OPERATIONS
($ IN MILLIONS)
CASH POSITION
($ IN MILLIONS)
LONG-TERM
OBLIGATIONS
($ IN MILLIONS)
$60
50
40
30
20
10
0
$
5
5
.
2
$
4
2
.
5
$
3
1
.
0
2011 2012 2013
$100
80
60
40
20
0
$
9
9
.
0
$
5
5
.
9
$
4
3
.
2
2011 2012 2013
$200
150
100
50
0
$
1
5
0
.
5
$
1
3
0
.
0
$
1
2
3
.
5
2011 2012 2013
Providence Service Corporation
COLLABORATION
We leverage our collective
strengths delivering exceptional
outcomes and creating paths
for new oppor tunities .
RESULTS
We hold ourselves accountable
for measurable outcomes that
produce positive results .
We deliver exceptional
value by creating
healthy communities
through exceptional
people working side
by side.
E X PA N D I N G O U R P R O G R A M S A N D C A PA B I L I T I E S
With debt at manageable levels, during the year we successfully
Human Services, will be heading the Human Services division. We also
strengthened our corporate finance group with several experienced
acquired two small tuck-ins on the Human Services side in North
new hires.
Carolina, expanding our programs and capabilities in this market. More
recently we announced the acquisition of Ingeus, a global leader in
work force development. Expected to close in mid-2014, the acquisition
of Ingeus is a good match for Providence, with strong management,
deep client relationships and a proven track record of delivering high-
quality services. It is a business we know and it is also similar to the
government contracting we do with LogistiCare, just with federal RFPs
rather than state RFPs. Ingeus, with revenue of approximately $345
million and adjusted EBITDA of $56 million, complements our existing
businesses, both strategically and culturally, and shares our core values,
focus on integrity, and commitment to customer-centered care through
innovation. Financially, with the upfront consideration of approximately
$58 million representing less than 40% of the total potential acquisition
cost and the remaining consideration tied to performance thresholds,
we are confident we have aligned incentives towards generating cash
flow and value for our shareholders. The deal is also expected to be
accretive to 2014 financial results.
S T R E N G T H E N E D M A N A G E M E N T T E A M
The Ingeus management team will be joining Providence, and Ingeus’
founder, Thérèse Rein, will continue to lead the company’s operations,
bringing extensive experience in global government services to the
Providence platform and a proven history of successful delivery.
On the Providence side, we have further strengthened our management
team in 2014. Michael-Bryant Hicks recently joined the firm as Senior
Vice President, General Counsel, Corporate Secretary and Chief
Compliance Officer, bringing significant corporate and regulatory
experience in the healthcare industry. We also hired Providence’s first
Senior Vice President and Chief People Officer, Justina Sanchez-Uzzell.
Additionally, Mike Fidgeon, Chief Operating Officer of Providence
A N E X C I T I N G F U T U R E
As we look to the future, we continue to work hard to position
Providence’s human services and non-emergency transportation man-
agement divisions as providers of choice with respect to the changing
healthcare landscape. Strategically, we remain focused on improving
operating efficiencies, growing organically and inorganically, and estab-
lishing performance driven management systems to further improve our
margins and return revenue growth to more historic levels. Our broad
geographic reach and collective expertise make us an excellent partner
for managed care organizations and others to meet the anticipated
growth and needs of high-risk, high-cost Medicaid populations in a cost
effective way. Additionally, our consistently positive cash flow, strong
cash position and substantial borrowing capacity will continue to
support our company-wide growth initiatives.
I am extremely thankful for the continued support of our employees,
our network of subcontracted transportation providers and our stock-
holders, and I look forward to welcoming the entire Ingeus organization
to Providence in the year ahead. Together I believe we will achieve great
things as we pursue our mission of creating healthy communities that
enhance the quality of life for millions of people with our innovative and
efficient community based solutions.
Sincerely,
Warren S. Rustand
Chief Executive Officer
Annual Report 2013
2013 Form 10-K
Providence Service Corporation
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-34221
The Providence Service Corporation
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
86-0845127
(I.R.S. Employer Identification No.)
64 East Broadway Blvd.,
Tucson, Arizona
(Address of principal executive offices)
85701
(Zip code)
Registrant’s telephone number, including area code
(520) 747-6600
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class
Common Stock, $0.001 par value per share
Preferred Stock Purchase Rights
Name of each exchange on which registered
The NASDAQ Global Select Market
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
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 Exchange 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 ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☐
☐ (Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
☒
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No
The aggregate market value of the voting and non-voting common equity of the registrant held by non-affiliates based on the closing price for such common
equity as reported on The NASDAQ Global Select Market on the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2013)
was $317.2 million.
As of March 11, 2014, there were outstanding 13,556,906 shares (excluding treasury shares of 959,803 of the registrant’s Common Stock, $.001 par value per
share, which is the only outstanding capital stock of the registrant.
All or a portion of items 10 through 14 in Part III of this Form 10-K are incorporated by reference to our definitive proxy statement on Schedule 14A for our
2014 stockholder meeting; provided that if such proxy statement is not filed on or before April 30, 2014, such information will be included in an amendment to this
Report on Form 10-K filed on or before such date.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
Item 1.
PART I
Business ..................................................................................................................................................
1
Page No.
Item 1A. Risk Factors ............................................................................................................................................
12
Item 1B. Unresolved Staff Comments ...................................................................................................................
25
Item 2.
Properties ................................................................................................................................................
25
Item 3.
Legal Proceedings ...................................................................................................................................
25
Item 4.
Mine Safety Disclosures .........................................................................................................................
25
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities ................................................................................................................................
26
Item 6.
Selected Financial Data ..........................................................................................................................
28
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations .................
30
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................................................................
56
Item 8.
Financial Statements and Supplementary Data .......................................................................................
57
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ................
95
Item 9A. Controls and Procedures .........................................................................................................................
95
Item 9B. Other Information ...................................................................................................................................
96
PART III
Item 10. Directors, Executive Officers and Corporate Governance ......................................................................
96
Item 11. Executive Compensation ........................................................................................................................
96
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters ...............................................................................................................................................
96
Item 13. Certain Relationships and Related Transactions, and Director Independence ........................................
96
Item 14. Principal Accounting Fees and Services .................................................................................................
96
PART IV
Item 15. Exhibits, Financial Statement Schedules ................................................................................................
96
EXHIBIT INDEX .....................................................................................................................................................
98
SIGNATURES .......................................................................................................................................................... 101
i
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Item 1.
Business.
Background
PART I
The Providence Service Corporation (“Providence”, the “Company”, “we”, or “us”) provides and manages
government sponsored human services and non-emergency transportation services. With respect to our human services, our
counselors, social workers and behavioral health professionals work with clients who are eligible for government assistance
due to income level, emotional/educational disabilities or court order. The state and local government agencies that fund
the human services we provide are required by law to provide counseling, case management, foster care and other support
services to eligible individuals and families. We provide human services primarily in the client’s home or community,
reducing the cost to the government of such services while affording the client a better quality of life. With respect to our
non-emergency transportation services, we manage transportation networks and arrange for client transportation to health
care related facilities and services for state or regional Medicaid agencies, managed care organizations (“MCOs”) and
commercial insurers.
Our human services revenue is derived from our provider contracts with state and local government agencies and
government intermediaries, HMOs, and commercial insurers, and our management contracts with not-for-profit social
services organizations. The government entities that pay for our human services include welfare, child welfare and justice
departments, public schools and state Medicaid programs. We are paid on a fee-for-service basis for the majority of our
human services provider contracts. For the remainder of our human services provider contracts, we are paid on a fixed-fee
or a cost reimbursement, plus allowable margins, basis to provide agreed upon services. For contracts where we provide
operations management services of not-for-profit social services organizations, we receive management fees based on a
percentage of revenues of the managed entity, or a fixed fee.
We contract with either state or regional Medicaid agencies, local governments, or private managed care
organizations to provide management services for non-emergency transportation. Most of our contracts for non-emergency
transportation management services are capitated, where our compensation is based on a per member per month payment
for each eligible member. For the majority of our contracts we do not direct bill our payers for non-emergency
transportation services, as our revenue is based on covered lives.
The Company was formed as a Delaware corporation in 1996. At that time, most government human services were
delivered directly by governments in institutional settings such as psychiatric hospitals, residential treatment centers or
group homes. We recognized that the human services we provide could be delivered more economically and effectively in a
home or community based setting, rather than an institutional setting. Additionally, we anticipated that payers would
increasingly seek to privatize the provision of these human services in order to reduce costs and provide quality human
services to an increasing number of recipients. Based on this outlook, we developed a system for delivering these services
that is less costly and, we believe, more effective than the traditional human services delivery system.
We have made, and anticipate that we will continue making, strategic acquisitions as part of our growth strategy.
During our first year of operations, we acquired Parents and Children Together, Inc. (now known as Providence of Arizona,
Inc.) and Family Preservation Services, Inc., which provided the foundation upon which our business was built. From 2002
to 2008 we completed 22 acquisitions which we believe broadened our home based and foster care platform, expanded our
reach into many new states, enhanced our workforce development services and presented opportunities for us to offer home
and community based and foster care services in Canada. We expanded our continuum of services to include the
management of non-emergency transportation services in 2007 with the acquisition of LogistiCare Solutions, LLC. On
June 1, 2011, we acquired all of the equity interest of The ReDCo Group, Inc., (“ReDCo”). ReDCo is a Pennsylvania
corporation that provides home and community based services. During 2012 and 2013 we completed a few small
acquisitions expanding our presence in North Carolina for home and community based services. In 2014 and future years,
we intend to continue to review opportunities to acquire other businesses that would complement our current services,
expand our markets or otherwise offer prospects for growth.
1
Since our inception, we have grown from 1,333 human service clients served to 56,320 human service clients as of
December 31, 2013. Additionally, individuals eligible to receive services under our non-emergency transportation services
contracts have grown from approximately 7.2 million as of December 31, 2007 to 15.8 million as of December 31, 2013.
We operate from an aggregate of approximately 382 locations in 43 states, the District of Columbia, and 3 provinces in
Canada as of December 31, 2013.
Historically, we have relied exclusively on decentralized field offices to drive growth initiatives and independently
manage business development activities. This approach has served us well by supporting steady and consistent organic
growth at a local level. As our industry continues to rapidly change, we see an opportunity to coordinate our efforts
globally to pursue potential acquisitive and organic growth in our businesses by focusing on improving operating
efficiencies and developing performance management systems designed to enhance and leverage our core competencies.
Some of our core competencies include our enduring customer relationships, geographic reach, breadth of services and
experience, management of populations that consist primarily of covered lives and provider networks, contract bidding
infrastructure, managed care contracting experience and technology platform development. By enhancing and leveraging
our core competencies, we believe we can benefit from emerging trends in healthcare such as healthcare reform and
integrated healthcare, which includes providing services to individuals who are eligible for both Medicaid and Medicare
benefits. Further, by managing more populations eligible to receive our services, and outsourcing transportation
management, we believe we can reduce the cost of care.
Financial information about our segments
We operate in two segments, Human Services (formerly known as the Social Services segment) and Non-Emergency
Transportation Services (“NET Services”). During the third quarter of 2013, we changed the name of the Social Services
segment to Human Services to better describe the broad spectrum of services it provides and to reflect the future strategy of
the business. Financial information about segments and geographic areas, including revenues, net income and long-lived
assets of each segment and from domestic and foreign operations for the Company as a whole is included in Note 8 of our
consolidated financial statements presented elsewhere in this report and is incorporated herein by reference. Additionally,
see Item 1A, Risk Factors, for a discussion of risks related to our foreign operations.
Business description
NET Services
Services offered. We are the preferred provider of non-emergency transportation management servicing clients under
83 contracts in 40 states and the District of Columbia. We provide responsive and innovative solutions for a healthcare
recipient’s covered transportation requirements through centralized call processing, development and management of
transportation networks through the use of proprietary technologies. Our current payers include state Medicaid programs,
local government agencies, hospital systems and MCOs providing Medicare, Medicaid and commercial products. For 2013,
2012 and 2011, our NET services accounted for 68.6%, 67.9% and 61.7%, respectively, of our consolidated revenue.
We provide services to a wide variety of people with varying needs. Our clients are primarily state Medicaid agencies
and managed care organizations. Non-emergency transportation services are provided to eligible members, as defined by
our clients, most of whom may include individuals with limited mobility, people with limited means of transportation and
people with disabilities that prevent them from using conventional methods of transportation. The majority of our programs
provide non-emergency transportation services to Medicaid members. Utilization rates and vehicle requirements differ
depending on the individual’s condition, the location of the individual relative to the final destination, and other available
transportation systems. We also provide transportation services to school children, including special needs students who are
physically fragile, or mentally ill children who cannot commute to school via traditional mainstream transportation, or need
to be taken out of school for therapy.
2
As a transportation logistics manager, we match transportation services with the recipient’s needs. We employ a
proprietary information technology platform and operational processes to manage the transportation services through a
contracted network of transportation providers. As such, we typically do not provide direct transportation to end users.
Rather, to fulfill requests under our contracts, we contract with local transportation providers, such as operators of multi-
passenger and wheelchair equipped vans, taxi companies and ambulance companies. We receive transportation requests
from members or their representatives, such as social workers, and arrange for the least costly and most effective
transportation. We process transportation requests at one of our 20 regional reservation centers and assign appropriate local
transportation providers. These decisions are aided by our proprietary logistics software. After we assign an appropriate
transportation provider to the member we carefully monitor the transportation service provided to ensure that the transport
was completed before we pay the transportation vendor. We do not normally pay for services if the member does not show
up for transport, or if the transport is not completed. A majority of the requests for transportation are standing orders,
mostly for patients who require frequent, recurring services such as dialysis treatment. Most transportation requests are
required to be scheduled with 48 to 72 hour advance notice, with a small number of requests scheduled on the same day,
such as with hospital discharges.
We contract with larger transportation companies as well as a number of diverse, small, local companies in order to
provide superior coverage in both urban and rural areas. As part of this comprehensive provider network management we
provide access to third party screening and credentialing of drivers and transportation companies, provide program rule
orientation, and monitor performance on an ongoing basis through field audits, performance reporting and other reviews.
We use multiple transportation providers in each state, with an average provider fleet size of less than 10 vehicles. To
ensure compliance and safety quality standards for all transportation providers, we perform a credentialing process for all
of our network transportation providers who must meet minimum standards set by us and our payers. These standards
include: (i) successful completion of criminal and driving record checks; (ii) required drug testing; (iii) required driver and
program training on such things as the Health Insurance Portability and Accountability Act of 1996, or HIPAA, defensive
driving, patient sensitivity, cultural diversity and first aid; (iv) both scheduled and random inspections of provider owned
and/or leased vehicles and communication systems; and (v) insurance coverage that complies with contractual statutory
requirements. Our contracts with transportation providers are on a per completed trip basis and do not contain volume
guarantees. They can be cancelled without cause with 60 days’ notice.
Revenue and payers. We contract primarily with state and local government entities and managed care organizations.
Approximately 78.9% of our non-emergency transportation services revenue in 2013 was generated under capitated
contracts where we assume the responsibility of meeting the covered transportation requirements of a specific geographic
population. These contracts are generally structured with per member, per month rates based on a defined scope of work
and population to be served. Typical state payer contracts are for three to five years with renewal options and range in size
from approximately $2 million to $118 million annually. Approximately 6.8% of our non-emergency transportation
services revenue is derived from fee-for-service contracts and approximately 9.6% is derived from flat fee contracts.
We generate a significant portion of our revenue from a few payers. We derived approximately 15.3%, 15.2% and
17.9% of our non-emergency transportation services revenue from our contract with the State of New Jersey for the years
ended December 31, 2013, 2012 and 2011, respectively. Additionally, we derived approximately 9.2%, 9.6% and 12.7% of
our non-emergency transportation services revenue from our contract with the State of Virginia’s Department of Medical
Assistance Services for the years ended December 31, 2013, 2012 and 2011, respectively. Our next three largest payers in
the aggregate comprised approximately 19.2%, 18.4% and 18.6% of our non-emergency transportation services revenue for
the years ended December 31, 2013, 2012 and 2011, respectively.
Our contracted per member, per month fee is predicated on actual historical transportation data for a defined
population and geographical region, future assumptions on key cost and program drivers, actuarial analysis performed in-
house as well as by third party actuarial firms and actuarial analysis provided by our payers. Our contract pricing is
regularly reevaluated and may be reset based on actual experience under the contract, with adjustments for membership
fluctuations and inflation factors such as cost of labor, fuel, insurance and utilization increases and decreases stemming
from program re-designs.
Seasonality. The quarterly operating income and cash flows of our NET Services segment normally fluctuate as a
result of seasonal variations in the business, principally due to lower client demand for non-emergency transportation
services during the holiday and winter seasons. Due to the fixed revenue stream and variable expense base structure of our
NET Services operating segment, expenses vary with these changes and, as a result, such expenses fluctuate on a quarterly
basis. We expect quarterly fluctuations in operating income and cash flows to continue as a result of the seasonal demand
for non-emergency transportation services.
3
Competition. We compete with a variety of organizations that provide similar non-emergency transportation services
to Medicaid eligible beneficiaries in local markets such as American Medical Response, Coordinated Transportation
Solutions, Inc., First Transit, Inc., Medical Transportation Management Inc., MV Transportation, Inc., and Southeast
Trans., as well as a host of local/regional transportation providers. Most local competitors may seek to win contracts for
specific counties or small geographic territories whereas we and the larger competitors listed above seek to win contracts
for an entire state or large regional area. Historically, we have been successful in competitively bidding our non-emergency
transportation management services for state-wide or other large Medicaid population programs, as well as specialized non-
emergency transportation benefits often offered to populations covered by managed care organizations. We compete based
on our technical expertise and experience, which is delivered in a high service, competitive price environment, although we
are not necessarily the lowest priced management service provider in many instances. We have experienced, and expect to
continue to experience, competition from new entrants into our markets that may be willing to provide services at a lower
cost. Regardless of how well we perform under our contracts (based on service or cost), we face competitive rebid
situations from time to time. Increased competitive pressure could result in pricing pressures, loss of or failure to gain
market share or loss of payers, any of which could harm our business.
Business development. With respect to our non-emergency transportation services sales and marketing strategy, we
focus on providing information to key legislators and agency officials. We pursue potential opportunities through various
methods including engaging lobbyists to assist in tracking legislation and funding that may impact non-emergency
transportation programs, and monitoring state websites for upcoming requests for proposals. In addition, we generate new
business leads through trade shows and conferences, referrals, the Internet and direct marketing. The sales cycle usually
takes between 6 to 24 months and there are various decision makers who provide input into the decision to outsource. By
providing valuable information to key legislators and agency officials and creating a strong presence in the regions we
serve, we are able to solidify the chance of renewal when contract terms expire. Additional payers are targeted within
existing states in order to leverage pre-existing provider networks, technology, office and human resources investments.
Furthermore, we target key commercial accounts which we define as accounts that are growing and located in multiple
geographic areas.
In many of the states where we have regional contracts, we seek to expand to include additional regions in these states
and in contiguous states. All decisions about which RFPs to consider are centralized and selectively targeted based on our
goals and service capabilities. Medicaid non-emergency transportation contracts with state agencies and larger Medicaid
MCOs represent the largest source of our non-emergency transportation revenue.
Human Services
Services offered. We provide home and community based services, foster care and provider management services,
directly and through entities we manage. The following describes such services:
Home and community based counseling
• Home based and intensive home based counseling. Our home based counselors are trained professionals or para-
professionals providing counseling services in the client’s own home. These services average five hours per client
per week and can include individual, group or family sessions. Topics are prescriptive to each client and can
include family dynamics, peer relationships, anger management, substance abuse prevention, conflict resolution
and parent effectiveness training.
We also provide intensive home based counseling, which consists of up to 20 or more hours per client per week.
Our intensive home based counselors are masters or Ph.D. level professional therapists or counselors. Intensive
home based counseling is designed for clients struggling to cope with everyday situations. Our counselors are
qualified to assist with marital and family issues, depression, drug or alcohol abuse, domestic violence,
hyperactivity, criminal or anti-social behavior, sexual misbehavior, school expulsion or chronic truancy and other
disruptive behaviors. In the absence of this type of counseling, many of these clients would be considered for 24-
hour institutional care or incarceration.
•
Substance abuse treatment services. Our substance abuse treatment counselors provide services in the office,
home and counseling centers designed especially for clients with drug or alcohol abuse problems. Our counselors
use peer contacts, treatment group process and a commitment to sobriety as treatment methods. Our professional
counseling, peer counseling and group and family sessions are designed to introduce clients dependent upon drugs
or alcohol to a sober lifestyle.
4
•
School support services. Our professional counselors are assigned to and stationed in public schools to assist in
dealing with problematic and at-risk students. Our counselors provide support services such as teacher training,
individual and group counseling, logical consequence training, anger management training, gang awareness and
drug and alcohol abuse prevention techniques. In addition, we provide in-home educational tutoring in numerous
markets where we contract with individual school districts to assist students who need assistance in learning.
• Correctional services. We provide private probation supervision services, including monitoring and supervision of
those sentenced to probation, rehabilitative services, and collection and disbursement of court-ordered fines, fees
and restitution.
• Workforce development. We assist individuals in obtaining and retaining meaningful employment through
services that include vocational evaluation, job placement, skills training, and employment support.
For 2013, 2012 and 2011, our home and community based services represented approximately 27.2%, 28.0% and
33.4%, respectively, of our consolidated revenue.
Foster care
• Foster care. We recruit and train foster parents and license family foster homes to provide 24-hour care to children
who have been removed from their homes due to physical or emotional abuse, abandonment, or the lack of
appropriate living situations. We place individual children, and sometimes sibling groups, in a licensed home. Each
child is provided 24-hour care and supervision by trained foster parents. Our professional staff and counselors
match and supervise the child and foster family. We also provide tutoring and other services to the child and foster
family.
•
Therapeutic foster care. We provide therapeutic foster care services. This is a 24-hour care service designed for
children exhibiting serious emotional problems who may otherwise require institutional treatment. We recruit,
license and train professional foster parents to care for foster children for up to a year of therapeutic intervention.
Social, psychological and psychiatric services are provided on a prescriptive basis to each child and therapeutic
foster care family by a team of licensed, professional staff.
Not-for-profit managed services
• Administrative support, information technology, accounting and payroll services. In most cases we provide and
manage the back office and administrative functions such as accounting, cash management, billing and collections,
human resources and quality management.
•
Intake, assessment and referral services. We contract on behalf of our managed entities with governments to
receive and handle telephone inquiries regarding need and eligibility for government sponsored human services, to
arrange for face-to-face interviews and to conduct benefit eligibility reviews.
• Monitoring services. Monitoring services include face-to-face and telephone interactions in which we provide
guidance and assistance to clients.
• Case management. In providing case management services, we supervise all aspects of an eligible client’s case
and assure that the client receives the appropriate care, treatment and resources.
Revenue and payers. Substantially all of our revenue related to our Human Services operating segment is derived
from contracts with state or local government agencies, government intermediaries or the not-for-profit social services
organizations we manage.
Fee-for-service contracts
The majority of our contracts are negotiated fee-for-service arrangements with payers. Home and community based
services are generally payable by the hour depending on the type and intensity of the service. Foster care services are
generally payable pursuant to a fixed monthly fee. Approximately 72.0%, 72.5% and 71.1% of our Human Services
operating segment revenue for the fiscal years ended December 31, 2013, 2012 and 2011 was related to fee-for-service
arrangements. A significant number of our fee-for-service contracts allow the payer to terminate the contract immediately
for cause, such as for our failure to meet our contract obligations. Additionally, these contracts typically permit the payer to
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terminate the contract at any time prior to its stated expiration date without cause, at will and without penalty to the payer,
either upon the expiration of a short notice period, typically 30 days, or immediately, in the event federal or state
appropriations supporting the programs serviced by the contract are reduced or eliminated.
We generate a significant portion of our revenue from a few payers. Under our contract with the State of Virginia’s
Department of Medical Assistance Services, we derived approximately 11.1%, 10.1% and 11.5% of our Human Services
segment revenue for the years ended December 31, 2013, 2012 and 2011, respectively.
Cost-based service contracts
Revenues from our cost-based service contracts are generally recorded based on a combination of direct costs,
indirect overhead allocations, and stated contractual margins on those incurred costs. These revenues are compared to
annual contract budget limits and, depending on reporting requirements, allowances may be recorded for certain
contingencies such as projected costs not incurred, excess cost per service over the allowable contract rate and/or
insufficient encounters. This results in revenue from these contracts being recorded based on allowable costs incurred. The
annual contract amount is based on projected costs to provide services under the contracts with adjustments for changes in
the total contract amount. Annually, we submit projected costs for the coming year which assist the contracting payers in
establishing the annual contract amount to be paid for services provided under the contracts. After the contracting payers’
fiscal year end, we submit cost reports which are used by the contracting payers to determine the amount, if any, by which
funds paid to us for services provided under the contracts were greater than the allowable costs to provide these services.
Completion of this review process may range from one month to several years from the date we submit the cost report. In
cases where funds paid to us exceed the allowable costs to provide services under contract, we may be required to pay back
the excess funds.
Our cost reports are routinely audited by our contracted payers on an annual basis. We periodically review our
provisional billing rates and allocation of costs and provide for estimated adjustments from the contracting payers. We
believe that adequate provisions have been made in our consolidated financial statements for any adjustments that might
result from the outcome of any cost report audits. Differences between the amounts provided and the settlement amounts
are recorded in our consolidated statement of income in the year of settlement. Cost-based service contracts represented
approximately 20.3%, 18.6% and 19.3% of our Human Services operating segment revenue for the years ended
December 31, 2013, 2012 and 2011.
Block purchase (capitated) contract
We also provide certain services under an annual block purchase contract. We are required to provide or arrange for
the behavioral health services to eligible populations of beneficiaries as defined in the contract. We must provide a
complete range of behavioral health services, including clinical, case management, therapeutic and administrative. We are
obligated to provide services only to those clients with a demonstrated medical necessity. There is no contractual limit to
the number of eligible beneficiaries that may be assigned to us, or a limit to the level of services that must be provided to
these beneficiaries if the services are deemed to be medically necessary. Therefore, we are at-risk if the costs of providing
necessary services exceed the associated reimbursement under the contractual arrangement. The terms of the contract
typically are reviewed prospectively and amended as necessary to ensure adequate funding of our service offerings under
the contract; however, no assurances can be made that such funding will adequately cover the costs of services previously
provided. The annual block purchase contract represented 5.4%, 5.4% and 6.1% of our Human Services operating segment
revenue for the years ended December 31, 2013, 2012 and 2011, respectively.
Seasonality. Our quarterly operating results and operating cash flows normally fluctuate as a result of seasonal
variations in our Human Services operating segment, principally due to lower client demand for our home and community
based services during the holiday and summer seasons. As our business has grown, our exposure to seasonal variations has
also grown, and will continue to grow, particularly with respect to our school based, educational and tutoring services. We
experience lower home and community based services revenue when school is not in session. Our operating expenses,
however, which are comprised largely of payroll and related costs, do not vary significantly with these changes. As a result,
our Human Services operating segment experiences lower operating margins during the holiday and summer seasons. We
expect quarterly fluctuations in operating results and operating cash flows to continue as a result of the seasonal demand for
our home and community based services.
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Competition. The human services industry is a highly fragmented industry. We compete for clients with a variety of
organizations that offer similar services. Most of our competition consists of local human services organizations that
compete with us for local contracts, such as agencies supported by the United Way, and faith-based agencies such as
Catholic Social Services, Jewish Family and Children’s Services and the Salvation Army. Other competitors include local
not-for-profit organizations and community based organizations. Historically, these types of organizations have been
favored in our industry as incumbent providers of services to government entities. On a national level, there are very few
organizations that compete for local, county and state contracts to provide the types of services we offer. We also compete
with larger companies, such as Res-Care, Inc., which provides support services, training and educational programs
predominantly to Medicaid eligible beneficiaries. National Mentor, Inc. is the country’s largest provider of foster care
services and competes with us in certain markets for foster care services. Many institutional providers offer some type of
community based care including such organizations as The GEO Group, Inc. and The Devereaux Foundation. While we
believe that we compete on the basis of price and quality, many of our competitors have greater financial, technical,
political and marketing resources, name recognition, and a larger number of clients and payers than we do. In addition,
some of these organizations offer more services than we do. We have experienced, and expect to continue to experience,
competition from new entrants into our markets. Increased competition may result in pricing pressures, loss of or failure to
gain market share or loss of clients or payers, any of which could harm our business.
Business development. Substantially all of our marketing is performed at the local and regional level. Through our
local and regional managers, we have successfully developed and maintained extensive relationships with various payers.
These relationships allow us to develop leads on new business, cross-sell our other services to existing payers and negotiate
payer contracts. A significant portion of our business is procured in this manner. We also seek to market our services to
payers in geographical areas contiguous to existing markets and in which we believe our reputation as a low cost quality
service provider will enhance our ability to compete for and win business. From time to time we respond to requests for
proposals, or RFPs. Additionally, we subscribe to a service that keeps us informed of and tracks on a national basis RFPs
for privatization of human services. We selectively choose the RFPs to which we respond based upon whether our
reputation enhances our ability to compete or if the RFP presents a unique opportunity to develop a new service offering.
Employees
As of December 31, 2013, we conducted our operations with approximately 8,500 clinical, client service
representatives and administrative personnel.
We believe that our employee relations are good because we offer competitive compensation, including stock-based
compensation to key employees, training, education assistance and career advancement opportunities. By offering
competitive compensation and benefit packages to our employees, we believe we are able to consistently deliver high
quality service, recruit qualified candidates and increase employee confidence, satisfaction and retention.
Regulatory environment
Overview. As a provider of human services, we are subject to numerous federal, state and local laws and regulations.
These laws and regulations significantly affect the way in which we operate various aspects of our business. We must also
comply with state and local licensing requirements and requirements for participation in Medicaid, federal block grant
requirements, requirements of various state Children’s Health Insurance Programs, (“CHIP”), and contractual requirements
imposed upon us by the state and local agencies with which we contract for such health care and human services. CHIP is a
federal program providing benefits administered by states that submit plans for health benefits for children whose parents
meet certain financial needs tests. Failure to follow the rules and requirements of these programs can significantly affect
our ability to be paid for the services we provide.
In addition, our revenue is largely derived from contracts that are directly or indirectly paid or funded by government
agencies, including Medicaid. A significant decline in expenditures, or shift of expenditures or funding, could cause payers
to reduce their expenditures under those contracts or not renew such contracts, either of which could have a negative impact
on our future operating results. As funding for our contracts is dependent in part upon federal funding, such funding
changes could have a significant effect on our business.
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The healthcare industry is highly regulated and the federal and state laws that affect our business are significant.
Federal law and regulations are based primarily upon the Medicare and Medicaid programs, each of which is financed, at
least in part, with federal money. State jurisdiction is based upon a state’s authority to license certain categories of
healthcare professionals and providers and the state’s interest in regulating the quality of healthcare in the state, regardless
of the source of payment. The significant areas of federal and state regulatory laws that may affect our business, include,
but are not limited to the following:
● false and other improper claims;
● HIPAA and its privacy, security, breach notification and enforcement and code set regulations, along with
evolving state laws protecting patient privacy and requiring notifications of unauthorized access to, or use of,
patient medical information;
● civil monetary penalties law;
● anti-kickback laws;
● the Stark Law and other self-referral and financial inducement laws;
● state licensure laws.
A violation of any laws could result in civil and criminal penalties, the refund of monies paid by government and/or
private payers, our exclusion from participation in federal healthcare payer programs, and/or the loss of our license to
conduct business within a particular state’s boundaries. Although we believe that we are able to maintain material
compliance with all applicable laws, these laws are complex and a review of our practices by a court, or applicable law
enforcement or regulatory authority, could result in an adverse determination that could harm our business. Furthermore,
the laws applicable to our business are subject to change, interpretation and amendment, which could adversely affect our
ability to conduct its business.
Federal Law. Federal healthcare laws apply in any case in which we are providing an item or service that is
reimbursable by a federal healthcare payer program. The principal federal laws that affect our business include those that
prohibit the filing of false or improper claims with federal healthcare payer programs and those that prohibit unlawful
inducements for the referral of business reimbursable under federal healthcare payer programs.
False and Other Improper Claims. Under the federal False Claims Act (31 U.S.C. §§ 3729-3733) and similar state
laws, the government may impose civil liability on us if we knowingly submit, or participate in submitting, any claims for
payment to the federal or state government that are false or fraudulent, or that contain false or misleading information.
Liability can be incurred not only for submitting false claims with actual knowledge, but also for doing so with reckless
disregard or deliberate ignorance. In addition, knowingly making or using a false record or statement to receive payment
from the federal government is also a violation. Recent amendments to the False Claims Act expand liability by eliminating
any requirement that a false claim be submitted, or a false record or statement be made, directly to the government. The
amendments also create new liability for “knowingly and improperly avoiding or decreasing an obligation to pay or
transmit money or property to the government.” Consequently, a provider need not take an affirmative action to conceal or
avoid an obligation to the government, but the mere retention of an overpayment from the government could lead to
potential liability under the False Claims Act.
If we are ever found to have violated the False Claims Act, we could be required to make significant payments to the
government (including damages and penalties in addition to the return of reimbursements previously collected) and could
be excluded from participating in federal healthcare programs. Many states also have similar false claims statutes. In
addition, healthcare fraud is a priority of the U.S. Department of Justice, Office of Inspector General and the Federal
Bureau of Investigation and state Attorneys General. These agencies have devoted a significant amount of resources to
investigating healthcare fraud.
While the criminal statutes generally are reserved for instances evidencing fraudulent intent, the civil and
administrative penalty statutes are being applied by the federal government in an increasingly broad range of
circumstances. Examples of the types of activities giving rise to liability for filing false claims include billing for services
not rendered, misrepresenting services rendered (i.e., mis-coding) and applications for duplicate reimbursement.
Additionally, the federal government takes the position that a pattern of claiming reimbursement for unnecessary services
violates these statutes if the claimant should have known that the services were unnecessary. The federal government also
takes the position that claiming reimbursement for services that are substandard is a violation of these statutes if the
claimant should have known that the care was substandard. Criminal penalties also are available in the case of claims filed
with private insurers if the federal government shows that the claims constitute mail fraud or wire fraud or violate any of
the federal criminal healthcare fraud statutes.
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State Medicaid agencies and state Attorneys General also have authority to seek criminal or civil sanctions for fraud
and abuse violations. In addition, private insurers may bring actions under state false claim laws. In certain circumstances,
federal and state laws authorize private whistleblowers to bring false claim or “qui tam” suits on behalf of the government
against providers and reward the whistleblower with a portion of any final recovery. In addition, the federal government
has engaged a number of private audit organizations to assist it in tracking and recovering false claims for healthcare
services.
Governmental investigations and whistleblower “qui tam” suits against healthcare companies have increased
significantly in recent years, and have resulted in substantial penalties and fines. Although we monitor our billing practices
for compliance with applicable laws, such laws are very complex, and we might not be able to detect all errors or interpret
such laws in a manner consistent with a court or an agency’s interpretation.
Health information practices
Under HIPAA, the United States Department of Health and Human Services, or DHHS, issued rules to define and
implement standards for the electronic transactions and code sets for the submission of transactions such as claims, and
privacy and security of individual health information in whatever manner it is maintained.
In February 2006, DHHS published its Final Rule on Enforcement of the HIPAA Administrative Simplification
provisions, including the transaction standards, the security standards and the privacy rule. This enforcement rule
addresses, among other issues, DHHS’s policies for determining violations and calculating civil monetary penalties, how
DHHS will address the statutory limitations on the imposition of civil monetary penalties, and various procedural issues.
The rule extends enforcement provisions currently applicable to the health care privacy regulations to other HIPAA
standards, including security, transactions and the appropriate use of service code sets.
On February 17, 2009, the Health Information Technology for Economic and Clinical Health Act, (“HITECH”), was
enacted as part of the American Recovery and Reinvestment Act of 2009 to, among other things, extend certain of
HIPAA’s obligations to parties providing services to health care entities covered by HIPAA known as “business
associates,” impose new notice of privacy breach reporting obligations, extend enforcement powers to state attorney
generals and amend the HIPAA privacy and security laws to strengthen the civil and criminal enforcement of HIPAA,
establishing four categories of violations that reflect increasing levels of culpability, four corresponding tiers of penalty
amounts that significantly increase the minimum penalty amount for each violation, and a maximum penalty amount of
$1.5 million for all violations of an identical provision. With the additional HIPAA enforcement power under HITECH, the
Office of Civil Rights of the Department of Health and Human Services and states are increasing their investigations and
enforcement of HIPAA compliance. We have taken steps to ensure compliance with HIPAA and we are monitoring
compliance on an ongoing basis.
Lastly, on January 17, 2013, DHHS released the HITECH Final Rule. The HITECH Final Rule imposes various new
requirements on covered entities and business associates, and also expands the definition of “business associates.” The
various requirements of the HITECH Final Rule must be implemented before certain transition period deadlines. Certain of
the deadlines have passed and the final deadline in the transition period is September 24, 2014. We will continue to assess
our compliance obligations as regulations under HIPAA as modified by HITECH, continue to become effective and more
guidance becomes available from DHHS and other federal agencies. The evolving privacy and security requirements,
however, may require substantial operational and systems changes, associate education and resources and there is no
guarantee that we will be able to implement them adequately or prior to their effective date. Given HIPAA’s complexity
and the evolving regulations, which may be subject to changing and perhaps conflicting interpretation, our ongoing ability
to comply with all of the HIPAA requirements is uncertain, which may expose us to the criminal and increased civil
penalties provided under HITECH and may require us to incur significant costs in order to seek to comply with its
requirements.
9
Federal and state anti-kickback laws
Federal law commonly known as the “Anti-Kickback Statute” prohibits the knowing and willful offer, solicitation,
payment or receipt of anything of value (direct or indirect, overt or covert, in cash or in kind) which is intended to induce:
the referral of an individual for a service for which payment may be made by Medicare, Medicaid or certain other federal
healthcare programs; or the ordering, purchasing, leasing, or arranging for, or recommending the purchase, lease or order
of, any service or item for which payment may be made by Medicare, Medicaid or certain other federal healthcare
programs.
Interpretations of the Anti-Kickback Statute have been very broad and under current law, courts and federal
regulatory authorities have stated that this law is violated if even one purpose (as opposed to the sole or primary purpose)
of the arrangement is to induce referrals. Even bona fide investment interests in a healthcare provider may be questioned
under the Anti-Kickback Statute if the government concludes that the opportunity to invest was offered as an inducement
for referrals.
This act is subject to numerous statutory and regulatory “safe harbors.” The safe harbor regulations, however, do not
cover all lawful relationships between healthcare providers and referral sources. Failure of an arrangement to satisfy all of
the requirements of a particular safe harbor does not mean that the arrangement is unlawful. However, it may mean that
such an arrangement will be subject to scrutiny by the regulatory authorities.
While we believe that our operations are in compliance with applicable Medicare and Medicaid fraud and abuse laws,
there can be no guarantee. We seek to structure all applicable arrangements to comply with applicable safe harbors where
reasonably possible. There is a risk however, that the federal government might investigate such arrangements and
conclude they violate the Anti-Kickback Statute. If our arrangements are found to violate the Anti-Kickback Statute, we,
along with our clients would be subject to civil and criminal penalties, which may include exclusion from participation in
government reimbursement programs, and our arrangements would not be legally enforceable, which could materially and
adversely affect our business.
Many states, including some where we do business, have adopted anti-kickback laws that are similar to the federal
Anti-Kickback Statute. Some of these state laws are very closely patterned on the federal Anti-Kickback Statute; others,
however, are broader and reach reimbursement by private payers. If our activities were deemed to be inconsistent with state
anti-kickback or illegal remuneration laws, we could face civil and criminal penalties or be barred from such activities, any
of which could harm our business.
Federal and State Self-Referral Prohibitions
We may be subject to federal and state statutes banning payments for referrals of patients and referrals by physicians
to healthcare providers with whom the physicians have a financial relationship. Section 1877 of the Social Security Act,
also known as the “Stark Law”, prohibits physicians from making a “referral” for “designated health services” for Medicare
(and in many cases Medicaid) patients from entities or facilities in which such physicians directly or indirectly hold a
“financial relationship”.
A financial relationship can take the form of a direct or indirect ownership, investment or compensation arrangement.
A referral includes the request by a physician for, or ordering of, or the certifying or recertifying the need for, any
designated health services.
Certain services that we provide may be identified as “designated health services” for purposes of the Stark Law. We
cannot provide assurance that future regulatory changes will not result in other services we provide becoming subject to the
Stark Law’s ownership, investment or compensation prohibitions in the future.
Many states, including some states where we do business, have adopted similar or broader prohibitions against
payments that are intended to induce referrals of clients. Moreover, many states where we operate have laws similar to the
Stark Law prohibiting physician self-referrals. We contract with a significant number of human services providers and
practitioners, including therapists, physicians and psychiatrists, and arrange for these individuals or entities to provide
services to our clients. While we believe that these contracts are in compliance with the Stark Law, no assurance can be
made that such contracts will not be considered in violation of the Stark Law.
10
Healthcare Reform. On March 23, 2010, the President of the United States signed into law comprehensive health
reform through the Patient Protection and Affordable Care Act (Pub. L. 11-148), or PPACA. On March 30, 2010, the
President signed a reconciliation budget bill that included amendments to the PPACA (Pub. L. 11-152). These laws in
combination form the “Health Care Reform Act” referred to herein. The changes to various aspects of the healthcare system
in the Health Care Reform Act are far-reaching and include, among many others, substantial adjustments to Medicare
reimbursement, establishment of individual mandates for healthcare coverage, extension of coverage to certain populations,
expansion of Medicaid and CHIP, restrictions on physician-owned hospitals, and increased efficiency and oversight
provisions.
Some of the provisions of the Health Care Reform Act took effect immediately, while others will take effect later or
will be phased in over time, ranging from a few months following approval to ten (10) years. Due to the complexity of the
Health Care Reform Act, it is likely that additional legislation will be considered and enacted. The Health Care Reform Act
requires the promulgation of regulations that will likely have significant effects on the health care industry and third party
payers. Thus, the healthcare industry and our operations may be subjected to significant new statutory and regulatory
requirements and contractual terms and conditions, and consequently to structural and operational changes and challenges.
The Health Care Reform Act also implements significant changes to healthcare fraud and abuse laws that will
intensify the risks and consequences of enforcement actions. These include expansion of the False Claims Act by: (a)
narrowing the public disclosure bar; and (b) explicitly stating that violations of the Anti-Kickback Statute trigger false
claims liability. In addition, the Health Care Reform Act lessens the intent requirements under the Anti-Kickback Statute to
provide that a person may violate the statute without knowledge or specific intent. The Health Care Reform Act also
provides new funding and expanded powers to investigate fraud, including through expansion of the Medicare Recovery
Audit Contractor (RAC) program to Medicare Parts C and D and Medicaid and authorizing the suspension of Medicare and
Medicaid payments to a provider of services pending an investigation of a credible allegation of fraud. Finally, the
legislation creates enhanced penalties for noncompliance, including increased criminal penalties and expansion of
administrative penalties under Medicare and Medicaid. Collectively, such changes could have a material adverse impact on
our operations.
State Law
Surveys and audits
Our programs are subject to periodic surveys by government authorities and/or their contractors to ensure compliance
with various requirements. Regulators conducting periodic surveys often provide reports containing statements of
deficiencies for alleged failures to comply with various regulatory requirements. In most cases, if a deficiency finding is
made by a reviewing agency, we will work with the reviewing agency to agree upon the steps to be taken to bring our
program into compliance with applicable regulatory requirements. In some cases, however, an agency may take a number
of adverse actions against a program, including:
• the imposition of fines or penalties;
• temporary suspension of admission of new clients to our program’s service;
• in extreme circumstances, exclusion from participation in Medicaid or other programs;
• revocation of our license; or
• contract termination.
While we believe that our programs are in compliance with Medicaid and other program certification requirements
and state licensure requirements, failure to comply with these requirements could have a material adverse impact on our
business and our ability to enter into contracts with other agencies to provide services.
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Billing/claims reviews and audits
Agencies and other payers periodically conduct pre-payment or post-payment medical reviews or other audits of our
claims. In order to conduct these reviews, payers request documentation from us and then review that documentation to
determine compliance with applicable rules and regulations, including the eligibility of clients to receive benefits, the
appropriateness of the care provided to those clients, and the documentation of that care.
For-profit ownership
Certain of the agencies for which we provide services restrict our ability to contract directly as a for-profit
organization. Instead, these agencies contract directly with a not-for-profit organization and in certain cases we negotiate to
provide administrative and management services to the not-for-profit providers. The extent to which other agencies impose
such requirements may affect our ability to continue to provide the full range of services that we provide or limit the
organizations with which we can contract directly to provide services.
Corporate practice of medicine and fee splitting
Some states in which we operate prohibit general business entities, such as we are, from “practicing medicine,” which
definition varies from state to state and can include employing physicians, professional therapists and other mental health
professionals, as well as engaging in fee-splitting arrangements with these health care providers. Among other things, we
currently contract with professional therapists to provide intensive home based counseling. Although we are not in the
business of practicing medicine and believe that we have structured our operations appropriately, we could be alleged or
found to be in violation of some or all of these laws. If a state determines that some portion of our business violates these
laws, it may seek to have us discontinue those portions or subject us to penalties, fines, certain license requirements or
other measures. Any determination that we have acted improperly in this regard may result in liability to us. In addition,
agreements between the corporation and the professional may be considered void and unenforceable.
Professional licensure and other requirements
Many of our employees are subject to federal and state laws and regulations governing the ethics and practice of their
professions. In addition, professionals who are eligible to participate in Medicaid as individual providers must not have
been excluded from participation in government programs at any time. Our ability to provide services depends upon the
ability of our personnel to meet individual licensure and other requirements.
Additional information
Our website is www.provcorp.com. We make available, free of charge at this website, our annual report on Form 10-
K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the United States Securities and Exchange Commission. The
information on the website listed above is not and should not be considered part of this annual report on Form 10-K and is
not incorporated by reference in this document. In addition, we will provide, at no cost, paper or electronic copies of our
Forms 10-K, 10-Q and 8-K and amendments to those reports filed with or furnished to the Securities and Exchange
Commission. Requests for such filings should be directed to Robert Wilson, Chief Financial Officer, telephone number:
(520) 747-6600.
Item 1A.
Risk Factors.
The following risks should be read in conjunction with other information contained, or incorporated by reference, in
this report, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
section and our consolidated financial statements and related notes. If any of the following risks actually occurs, our
business, financial condition and operating results could be adversely affected.
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General Risks
Our annual operating results and stock price may be volatile or may decline regardless of our operating performance.
The market price for our common stock may fluctuate significantly in response to a number of factors, most of which
we cannot control, including:
• changes in rates by payers;
• changes in Medicaid rules or regulations;
• the development of increased competition;
• price and volume fluctuations in the overall stock market;
• changes in the competitive landscape of the market for our services, including new entrants to the market;
• changes in financial estimates by any securities analysts who follow our common stock, our failure to meet these
estimates or failure of those analysts to initiate or maintain coverage of our common stock;
• ratings downgrades by any securities analysts who follow our common stock;
• the public's response to press releases or other public announcements by us or third parties, including our filings
with the SEC;
• market conditions or trends in our industry or the economy as a whole;
• the development and sustainability of an active trading market for our common stock;
• future sales of our common stock by our officers, directors and significant stockholders;
• other events or factors, including those resulting from war, incidents of terrorism, natural disasters or responses to
these events; and
• changes in accounting principles.
In addition, the stock markets, and in particular the NASDAQ Global Market, have experienced considerable price
and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies.
In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were
involved in securities litigation, we could incur substantial costs, and our resources and the attention of management could
be diverted from our business.
The domestic economic downturn in recent years and current uncertain economic environment could cause a severe
disruption in our operations.
Our business could be negatively impacted by significant domestic economic downturns or an uncertain economic
environment. If this uncertainty is prolonged or economic conditions worsen, there could be several severely negative
implications to our business that may exacerbate many of the risk factors we identified below including, but not limited to,
the following:
Liquidity
• The domestic economic uncertainty could continue or worsen and reduce liquidity and this could have a negative
impact on financial institutions and the country’s financial system, which could, in turn, have a negative impact on
our financial position.
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• We may not be able to borrow additional funds under our current credit facilities and may not be able to expand
our current facility if participating lenders become insolvent, their liquidity is limited or impaired, or if we fail to
meet covenant levels going forward. In addition, we may not be able to renew our existing credit facility at the
conclusion of its current term, particularly if its maturity is accelerated as discussed below, or renew it on terms
that are favorable to us.
Demand
• The recent recession has resulted in severe job losses, which could cause an increase in demand for our
services. However, depending on the severity of the recession’s impact on our payers, particularly our state
government payers, sufficient funds may not be allocated to compensate us for the services we provide at the
current margins, or we may be required to provide more services to a growing population of beneficiaries without
a corresponding increase in fees for these services.
Prices
• Certain markets have experienced, and may continue to experience, economic contraction, which could negatively
impact our average fees and revenue.
While we obtain some of our business through responses to government requests for proposals (“RFPs”), we may not be
awarded contracts through this process in the future, and contracts we are awarded may not be profitable.
We obtain, and will continue to seek to obtain, a significant portion of our business from state or local government
entities. To obtain business from government entities, we are often required to respond to RFPs. To propose effectively, we
must accurately estimate our cost structure for servicing a proposed contract, the time required to establish operations and
the terms of the proposals submitted by competitors. We must also assemble and submit a large volume of information
within rigid and often short timetables. Our ability to respond successfully to RFPs will greatly impact our business. We
may not be awarded contracts through the RFP process, and our proposals may not result in profitable contracts.
If we fail to establish and maintain important relationships with officials of government entities and agencies, we may
not be able to successfully procure or retain government-sponsored contracts, which could negatively impact our
revenues.
To facilitate our ability to procure or retain government-sponsored contracts, we rely in part on establishing and
maintaining relationships with officials of various government entities and agencies. These relationships enable us to
provide informal input and advice to the government entities and agencies prior to the development of an RFP or program
for privatization of human services and enhance our chances of procuring contracts with these payers. The effectiveness of
our relationships may be reduced or eliminated with changes in the personnel holding various government offices or staff
positions. We also may lose key personnel who have these relationships. We may be unable to successfully manage our
relationships with government entities and agencies and with elected officials and appointees. Any failure to establish,
maintain or manage relationships with government and agency personnel may hinder our ability to procure or retain
government-sponsored contracts.
Government unions may oppose privatizing government programs to outside vendors such as us, which could limit our
market opportunities.
Our success depends in part on our ability to win contracts to administer and manage programs traditionally
administered by government employees. Many government employees, however, belong to labor unions with considerable
financial resources and lobbying networks. These unions could apply opposing political pressure on legislators and other
officials seeking to privatize government programs. Union opposition could result in our losing government contracts or
being precluded from providing services under government contracts, or maintaining or renewing existing contracts. The
ability to renew and obtain new contracts is critical to our financial success. If we could not renew certain contracts, or
obtain new contracts, due to opposition political actions, it could have a material adverse impact on our operating results.
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Inaccurate, misleading or negative media coverage could damage our reputation and harm our ability to procure
government sponsored contracts.
The media sometimes provides news coverage about our contracts and the services we provide to clients. This media
coverage, if negative, could influence government officials to slow the pace of privatizing government services. Moreover,
inaccurate, misleading or negative media coverage about us could harm our reputation and, accordingly, our ability to
obtain government sponsored contracts.
Our business is subject to risks of litigation.
We are in the human services and non-emergency transportation services businesses which are subject to lawsuits and
claims. A substantial award could have a material adverse impact on our operations and cash flows, and could adversely
impact our ability to continue to purchase appropriate liability insurance. We can be subject to claims for negligence or
intentional misconduct (in addition to professional liability type claims) by an employee or a third party we engage to assist
with the provision of services, including but not limited to, claims arising out of accidents involving vehicle collisions, and
various claims that could result from employees or contracted third parties driving to or from interactions with clients and
while providing direct client services. We are also subject to claims alleging we did not properly treat an individual or
failed to properly diagnose and/or care for a client. We can be subject to employee related claims such as wrongful
discharge or discrimination or a violation of equal employment laws and permitting issues. While we are insured for these
types of claims, damages exceeding our insurance limits or outside our insurance coverage, such as a claim for fraud,
certain wage and hour violations or punitive damages, could adversely affect our cash flow and financial condition.
Furthermore, we can be subject to miscellaneous errors and omissions liability relative to the various management
agreements we have with the not-for-profit entities we manage. In the event of a claim, and depending on, among other
things, the circumstances, allegations, and size of the management contract, we could be subject to damages that could have
a material adverse impact on our financial position and results of operations.
We face substantial competition in attracting and retaining experienced professionals, particularly professionals with
respect to our human services, and intellectual technology professionals with respect to our non-emergency
transportation services, and we may be unable to sustain or grow our business if we cannot attract and retain qualified
employees.
Our success depends to a significant degree on our ability to attract and retain highly qualified and experienced
professionals who possess the skills and experience necessary to deliver high quality services to our clients. Our objective
of providing the highest quality of service to our clients is a significant consideration when we evaluate education,
experience and qualifications of potential candidates for employment as direct care and administrative staff. To that end, we
attempt to hire professionals who have attained a bachelor’s degree, master’s degree, or higher level of education and
certification or licensure as direct care social services providers and administrators. These employees are in great demand
and are likely to remain a limited resource for the foreseeable future. We must quickly hire project leaders and case
management personnel after a contract is awarded to us. Contract provisions and client needs determine the number,
education and experience levels of social services professionals we hire. We continually evaluate client census, case loads
and client eligibility to determine our staffing needs under each contract.
Our performance in our non-emergency transportation services business largely depends on the talents and efforts of
our highly skilled intellectual technology professionals. Competition for skilled intellectual technology professionals can be
intense. Our success depends on our ability to recruit, retain and motivate these individuals.
Our ability to attract and retain employees with the requisite experience and skills depends on several factors
including, but not limited to, our ability to offer competitive wages, benefits and professional growth opportunities. Some
of the companies with which we compete for experienced personnel have greater financial, technical, political and
marketing resources, name recognition and a larger number of clients and payers than we do. The inability to attract and
retain experienced personnel could have a material adverse effect on our business.
Our success depends on our ability to manage growing and changing operations.
Since 1996, our business has grown significantly in size and complexity. This growth has placed, and is expected to
continue to place, significant demands on our management, systems, internal controls and financial and physical resources.
In addition, we expect that we will need to further develop our financial and managerial controls and reporting systems to
accommodate future growth. This could require us to incur significant expense for, among other things, hiring additional
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qualified personnel, retaining professionals to assist in developing the appropriate control systems and expanding our
information technology infrastructure. The nature of our business is such that qualified management personnel can be
difficult to find. Our inability to manage growth effectively could have a material adverse effect on our financial results.
Our success depends on our ability to compete effectively in the marketplace.
In our Human Services segment, we compete for clients and for contracts with a variety of organizations that offer
similar services. Most of our competition consists of local human services organizations that compete with us for local
contracts. Other competitors include local not-for-profit organizations and community based organizations. Historically,
these types of organizations have been favored in our industry as incumbent providers of services to government entities.
We also compete with larger companies and institutional providers that offer community based care services. Some of these
companies have greater financial, technical, political, marketing, name recognition and other resources and a larger number
of clients or payers than we do. In addition, some of these companies offer more services than we do. We have
experienced, and expect to continue to experience, competition from new entrants into the markets in which we operate our
human services business. Increased competition may result in pricing pressures, loss of or failure to gain market share or
loss of clients or payers, any of which could have a material adverse effect on our operating results.
In our NET Services segment, we compete with a variety of organizations that provide similar non-emergency
transportation management services to Medicaid eligible beneficiaries in local markets. Our competitors largely compete
for smaller-scale contract opportunities that encompass smaller geographic areas. For example, most of our competitors
seek to win contracts for specific counties, whereas we seek to win contracts for the entire state. If these competitors begin
to compete on a larger scale basis, it could result in pricing pressures, loss of, or failure to gain, market share, any of which
could have a material adverse effect on our operating results.
Our business is subject to security breaches and attacks.
We provide human services and therefore our information technology systems store client information protected by
numerous federal and state regulations. Since our systems include interfaces to third-party stakeholders, often connected
via the Internet, we are subject to cyber security risks. The nature of our business, where services are often performed
outside a secured location, adds additional risk. While we have implemented measures to detect and prevent security
breaches and cyber-attacks, our measures may not be effective. As a result of any security breach or loss of data, we could
incur liability, regulatory actions, fines or litigation, which could increase our costs and have a material adverse effect on
our operating results. Further, any such breach or loss could impact our business reputation and could result in the loss of
contractual relationships or make it more difficult to obtain new contracts, having an adverse effect on our business and
financial performance.
Regulatory Risks
We conduct business in a heavily regulated healthcare industry. Compliance with existing regulations is costly, and
changes in regulations or violations of regulations may result in increased costs or sanctions that could reduce our
revenue and profitability.
The healthcare industry is subject to extensive federal and state regulation relating to, among other things:
● professional licensure;
● conduct of operations;
● addition of facilities, equipment and services, including certificates of need;
● coding and billing for services; and
● payment for services.
Both federal and state government agencies have increased coordinated civil and criminal enforcement efforts related
to the healthcare industry. Regulations related to the healthcare industry are extremely complex and, in many instances, the
industry does not have the benefit of significant regulatory or judicial interpretation of those laws. Medicare and Medicaid
anti-fraud and abuse laws prohibit certain business practices and relationships related to items and services reimbursable
under Medicare, Medicaid and other governmental healthcare programs, including the payment or receipt of remuneration
to induce or arrange for referral of patients or recommendation for the provision of items or services covered by Medicare
or Medicaid or any other federal or state healthcare program. Federal and state laws prohibit the submission of false or
fraudulent claims, including claims to obtain reimbursement under Medicare and Medicaid. We have implemented
compliance policies to help assure our compliance with these regulations as they become effective; however, different
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interpretations or enforcement of these laws and regulations in the future could subject our practices to allegations of
impropriety or illegality or could require us to make changes in our facilities, equipment, personnel, services or the manner
in which we conduct our business.
We could be subject to actions for false claims if we do not comply with government coding and billing rules, which
could have a material adverse impact on our operating results.
If we fail to comply with federal and state documentation, coding and billing rules, we could be subject to criminal
and/or civil penalties, loss of licenses and exclusion from the Medicare and Medicaid programs, which could have a
material adverse impact on our operating results. In billing for our services to third-party payers, we must follow complex
documentation, coding and billing rules. These rules are based on federal and state laws, rules and regulations, various
government pronouncements, and on industry practice. Failure to follow these rules could result in potential criminal or
civil liability under the federal False Claims Act, under which extensive financial penalties can be imposed and/or under
various state statutes which prohibit the submission of false claims for services covered. Compliance failure could further
result in criminal liability under various federal and state criminal or civil statutes. While we plan to carefully and regularly
review our documentation, coding and billing practices, the rules are frequently vague and confusing and we cannot assure
that governmental investigators, private insurers or private whistleblowers will not challenge our practices. Such a
challenge could result in a material adverse effect on our financial position and results of operations.
If we fail to comply with the federal Anti-kickback Statute, we could be subject to criminal and civil penalties, loss of
licenses and exclusion from the Medicare and Medicaid programs, all of which could have a material adverse impact on
our operating results.
The federal Anti-kickback Statute prohibits the offer, payment, solicitation or receipt of any form of remuneration in
return for referring, ordering, leasing, purchasing or arranging for or recommending the ordering, purchasing or leasing of
items or services payable by a federally funded healthcare program. Any of our financial relationships with healthcare
providers will be potentially implicated by this statute to the extent Medicare or Medicaid referrals are implicated.
Violations of the Anti-kickback Statute could result in substantial civil or criminal penalties, including criminal fines of up
to $25,000 per violation, imprisonment of up to five years, civil penalties under the Civil Monetary Penalties Law (42
U.S.C. 1320a-7a) of up to $50,000 per violation, plus three times the remuneration involved, civil penalties under the False
Claims Act of up to $11,000 for each claim submitted, plus three times the amounts paid for such claims and exclusion
from participation in the Medicare and Medicaid programs. Any such penalties could have a significant negative effect on
our operations. Furthermore, the exclusion, if applied to us, could result in significant reductions in our revenues, which
could materially and adversely affect our business, financial condition and results of our operations. In addition, many
states have adopted laws similar to the federal Anti-kickback Statute with similar penalties.
If we fail to comply with physician self-referral laws, to the extent applicable to our operations, we could experience a
significant loss of reimbursement revenue.
We may be subject to federal and state statutes and regulations banning payments for referrals of patients and
referrals by physicians to healthcare providers with whom the physicians have a financial relationship and billing for
services provided pursuant to such referrals if any occur. Violation of these federal and state laws and regulations, to the
extent applicable to our operations, may result in prohibition of payment for services rendered, loss of licenses, fines,
criminal penalties and exclusion from Medicare and Medicaid programs. To the extent we do maintain such financial
relationships with physicians, we rely on certain exceptions to self-referral laws that we believe will be applicable to such
arrangements. Any failure to comply with such exceptions could result in the penalties discussed above.
We are subject to regulations relating to privacy and security of patient information. Failure to comply with privacy
regulations could result in a material adverse impact on our operating results.
There are numerous federal and state regulations addressing patient information privacy and security concerns. In
particular, the federal regulations issued under HIPAA contain provisions that:
● protect individual privacy by limiting the uses and disclosures of patient information;
●
require the implementation of security safeguards to ensure the confidentiality, integrity and availability of
individually identifiable health information in electronic form; and
● prescribe specific transaction formats and data code sets for certain electronic healthcare transactions.
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Compliance with state and federal laws and regulations is costly and requires our management to expend substantial
time and resources. Further, the HIPAA regulations and state privacy laws expose us to increased regulatory risk, as the
penalties associated with a failure to comply, even if unintentional, could have a material adverse effect on our results of
operations.
We have an internal committee to maintain our privacy and security policies regarding client information in
compliance with HIPAA. This committee is responsible for training our employees, including our regional and local
managers and staff, to comply with HIPAA and monitoring compliance with the policy. The costs associated with our
ongoing compliance could be substantial, which could negatively impact our results of operations.
As a government contractor, we are subject to an increased risk of litigation and other legal actions and liabilities.
As a government contractor, we are subject to an increased risk of investigation, criminal prosecution, civil fraud,
whistleblower lawsuits and other legal actions and liabilities that are not as frequently experienced by companies that do
not provide government sponsored services. The occurrence of any of these actions, regardless of the outcome, could
disrupt our operations and result in increased costs, and could limit our ability to obtain additional contracts in other
jurisdictions.
The federal government may refuse to grant consents or waivers necessary to permit for-profit entities to perform
certain elements of government programs.
Under current law, in order to privatize certain functions of government programs, the federal government must grant
a consent or waiver to the petitioning state or local agency. If the federal government does not grant a necessary consent or
waiver or withdraws approval of any granted waiver, the state or local agency will be unable to contract with a for-profit
entity, such as us, to provide service. Failure by state or local agencies to obtain consents or waivers could adversely affect
our continued business operations and future growth.
Our business could be adversely affected by future legislative changes that hinder or reverse the privatization of human
services or non-emergency transportation services.
The market for our services depends largely on federal, state and local legislative programs. These programs can be
modified or amended at any time. Moreover, part of our growth strategy includes aggressively pursuing opportunities
created by the federal, state and local initiatives to privatize the delivery of human services and non-emergency
transportation services. However, there are opponents to the privatization of these services and, as a result, future
privatization is uncertain. If additional privatization initiatives are not proposed or enacted, or if previously enacted
privatization initiatives are challenged, repealed or invalidated, there could be a material adverse impact on our operating
results.
Our strategic relationships with certain not-for-profit and tax exempt entities are subject to tax and other risks.
Since some government agencies in certain of our markets prefer or require contracts for privatized human services to
be administered through not-for-profit organizations, we rely on our long-term relationships with not-for-profit
organizations to provide services to these government agencies. We currently maintain strategic relationships with several
not-for-profit social services organizations with which we have management contracts of varying lengths, the majority of
which are federally tax exempt organizations. Our strategic relationships with tax exempt not-for-profit organizations are
similar to those in the hospital management industry where tax exempt or faith based not-for-profit hospitals are managed
by for-profit companies.
Federal tax law requires that the boards of directors of not-for-profit tax exempt organizations be independent. The
boards of directors of the tax exempt not-for-profit organizations for which we provide management services have a
majority of independent members. The board members are predominately selected from independent members of the local
community in which the not-for-profit entity operates. Decisions regarding our business relationships with these not-for-
profit entities are made by their independent board members including approving the management fees we charge to
manage their organizations and any discretionary bonuses. Federal tax law also requires that the management fees we
charge the not-for-profit entities we manage be fixed and at fair market rates. Typically a fairness opinion is obtained by
the not-for-profit entities we manage from an independent third party valuation consultant that substantiates the fair market
rates.
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If the Internal Revenue Service determined that any tax exempt organization was paying more than market rates for
services performed by us, the managed entity could lose its tax exempt status and owe back taxes and penalties. Generally,
under state law, not-for-profit entities may pay no more than reasonable compensation for services rendered. If the
compensation paid to us by these not-for-profit entities is deemed unreasonable, then the state could take action against the
not-for-profit entity, which could have a material adverse impact on our operating results.
Our business is subject to state licensing regulations and other regulatory provisions, including regulatory provisions
governing surveys and audits. Changes to, or violations of, these regulations could negatively impact our revenues.
In many of the locations where we operate, we are required by state law to obtain and maintain licenses. The
applicable state and local licensing requirements govern the services we provide, the credentials of staff, record keeping,
treatment planning, client monitoring and supervision of staff. The failure to maintain these licenses or the loss of a license
could have a material adverse impact on our business and could prevent us from providing services to clients in a given
jurisdiction. Most of our contracts are subject to surveys or audit by our payers. We are also subject to regulations that
restrict our ability to contract directly with a government agency in certain situations. Such restrictions could affect our
ability to contract with certain payers, and could have a material adverse impact on our results of operations.
Financial Risks
Our indebtedness may harm our financial condition and results of operations.
As of December 31, 2013, our total consolidated long-term debt was $123.5 million. On August 2, 2013, we
refinanced our then existing debt under an amended and restated credit agreement providing for a $60.0 million term loan
and a $165.0 million revolving credit facility. Under the repayment terms of the amended and restated credit agreement, we
are obligated to repay the principal amount of the term loan as follows: $3.0 million between December 31, 2014 and
September 30, 2015, $4.5 million between December 31, 2015 and September 30, 2016, $6.0 million between December
31, 2016 and September 30, 2017, $6.8 million between December 31, 2017 and June 30, 2018 and $39.7 million at
maturity in August 2018. As discussed below, the maturity date of our credit facility could be accelerated.
Our level of indebtedness could have a material adverse impact to our business:
• it could adversely affect our ability to satisfy our obligations;
• it may impair our ability to obtain additional financing in the future;
• it may limit our flexibility in planning for, or reacting to, changes in our business and industry; and
• it may make us more vulnerable to downturns in our business, our industry or the economy in general.
Our operations may not generate sufficient cash to enable us to service our debt. If we were to fail to make any
required payment under the agreements governing our indebtedness, or fail to comply with the financial and operating
covenants contained in these agreements, we could be in default. In the event we are not in compliance with the financial
and operating covenants, it is uncertain whether the lenders will grant waivers for our non-compliance. Our lenders would
have the ability to require that we immediately pay all outstanding indebtedness. If our lenders were to require immediate
payment, we might not have sufficient assets to satisfy our obligations under our credit facility, or our 6.5% convertible
senior subordinated notes due in 2014 (“Senior Notes”). In such event, we could be forced to seek protection under
bankruptcy laws, which could have a material adverse effect on our existing contracts and our ability to procure new
contracts as well as our ability to recruit and/or retain employees. Accordingly, a default could have a significant adverse
effect on the market value and marketability of our common stock.
Changes in budgetary priorities of the government entities that fund the services we provide could result in our loss of
contracts or a decrease in amounts payable to us under our contracts.
Our revenue is largely derived from contracts that are directly or indirectly paid or funded by government agencies.
All of these contracts are subject to legislative appropriations and state budget approval. The availability of funding under
our contracts with state governments is dependent in part upon federal funding to states. Changes in Medicaid methodology
may further reduce the availability of federal funds to states in which we provide services. Among the alternative Medicaid
funding approaches that states have explored are provider assessments as tools for leveraging increased Medicaid federal
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matching funds. Provider assessment plans generate additional federal matching funds to the states for Medicaid
reimbursement purposes, and implementation of a provider assessment plan requires approval by the Centers for Medicare
and Medicaid Services in order to qualify for federal matching funds. These plans usually take the form of a bed tax or a
quality assessment fee, which were historically required to be imposed uniformly across classes of providers within the
state, except that such taxes only applied to Medicaid health plans.
However, the Deficit Reduction Act of 2005, or Deficit Reduction Act, requires states that desire to impose provider
taxes to impose taxes on all managed care organizations, not just Medicaid managed care organizations. This uniformity
requirement as it relates to taxing all managed care organizations may make states more reluctant to use provider
assessments as a vehicle for raising matching funds and, thus, reduce the amount of funding that the states receive and have
available. Moreover, under the Deficit Reduction Act, states may be allowed to reduce the benefits provided to certain
Medicaid enrollees, which could affect the services that states contract for with us. We cannot make any assurances that
these Medicaid changes will not negatively affect the funding under our contracts. As funding under our contracts is
dependent in part upon federal funding, such funding changes could have a significant effect upon our business.
Currently, many of the states in which we operate are facing budgetary shortfalls or changes in budgetary priorities.
In addition, in some states eligibility requirements for human services clients have been tightened to stabilize the number of
eligible clients and in certain instances states have implemented or are considering implementing a single point of access to
care or a managed care model, which reduces the size of our potential market in those states. While many of these states are
dealing with budgetary concerns by shifting costs from institutional care to home and community based care such as we
provide, there is no assurance that this trend will continue. Consequently, a significant decline in government expenditures,
shift of expenditures or funding away from programs that call for the types of services that we provide, or change in
government contracting or funding policies could cause payers to terminate their contracts with us or reduce their
expenditures under those contracts, either of which could have a negative impact on our operating results.
We derive a significant amount of our revenues from a few payers, which puts us at risk. Any changes in the funding,
financial viability or our relationships with these payers could have a material adverse impact on our results of
operations.
We provide, or manage the provision of, government sponsored human services and non-emergency transportation
services to individuals and families who are eligible for government assistance pursuant to federal mandate with respect to
government sponsored human services and members of the disability community, or senior citizens with respect to non-
emergency transportation services under various contracts with state and local governmental entities. We generate a
significant amount of our revenues from a few payers under a small number of contracts. For example, for the years ended
December 31, 2013, 2012 and 2011, we generated approximately 48.0%, 48.5% and 48.6%, respectively, of our total
revenue from our top ten payers. Additionally, our top five payers related to our NET Services operating segment represent,
in the aggregate, approximately 43.6%, 43.2% and 49.2%, respectively, of our NET Services operating segment revenue
for the years ended December 31, 2013, 2012 and 2011. The top five payers related to our Human Services operating
segment represent, in the aggregate, approximately 38.0%, 38.5% and 38.4%, respectively, of our Human Services
operating segment revenue for the years ended December 31, 2013, 2012 and 2011. The loss of, reduction in amounts
generated by, or changes in methods or regulations governing payments for our services under these contracts could have a
material adverse impact on our revenue and results of operations.
Our contracts are in many instances short-term in nature, and can also be terminated prior to expiration, without cause
and without penalty to the payers. There can be no assurance that they will survive until the end of their stated terms, or
that upon their expiration these contracts will be renewed or extended. Disruptions to our contracts could have a
material adverse impact on our results of operations.
Most of our Human Services contracts contain base periods of only one year. While some of them also contain
options for renewal, usually successive six month or one year terms, payers are not required to extend their contracts into
these option periods. In addition, a significant number of our Human Services contracts not only allow the payer to
terminate the contract immediately for cause (such as for our failure to meet our contract obligations) but also permit the
payer to terminate the contract at any time prior to its stated expiration date. In most cases the payer may terminate the
Human Services or NET Services contracts without cause, at will and without penalty to the payer, either immediately or
upon the expiration of a short notice period in the event government appropriations supporting the programs serviced by the
contract are reduced or eliminated. The failure of payers to renew or extend significant contracts or their early termination
of significant contracts could adversely affect our financial performance. We cannot anticipate if, when or to what extent a
payer might terminate its contract with us prior to its expiration or fail to renew or extend its contract with us.
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Each of our contracts is subject to audit and modification by the payers with whom we contract, at their sole discretion.
Our business depends on our ability to successfully perform under various government funded contracts. Under the
terms of these contracts, payers can review our performance, as well as our records and general business practices at any
time, and may, in their discretion:
• suspend or prevent us from receiving new contracts or extending existing contracts because of violations or
suspected violations of procurement laws or regulations;
• terminate or modify our existing contracts;
• reduce the amount we are paid under our existing contracts; and/or
• audit and object to our contract related fees.
If payers have significant audit findings, or if they make material modifications to our contracts, it could have a
material adverse impact on our results of operations.
A loss of our status as a licensed provider in any jurisdiction could result in the termination of a number of our
contracts, which could negatively impact our revenues.
Our status as a licensed provider of health services is subject to periodic renewal, review and examination by federal,
state and local agencies. If we lost our status as a licensed provider in any jurisdiction, the contracts under which we
provide services in that jurisdiction could be subject to termination. Moreover, such an event could constitute a violation of
provisions of our contracts in other jurisdictions, resulting in further contract terminations.
If we fail to satisfy our contractual obligations, we could be liable for damages and financial penalties, and it could
harm our ability to keep our existing contracts or obtain new contracts.
Our failure to comply with our contract obligations could, in addition to providing grounds for immediate termination
of the contract for cause, negatively impact our financial performance and damage our reputation, which, in turn, could
have a material adverse effect on our ability to maintain current contracts or obtain new ones. Our failure to meet
contractual obligations could also result in substantial actual and consequential financial damages. The termination of a
contract for cause could, for instance, subject us to liabilities for excess costs incurred by a payer in obtaining similar
services from another source. In addition, our contracts require us to indemnify payers for our failure to meet standards of
care, and some of them contain liquidated damages provisions and financial penalties that we must pay if we breach these
contracts.
If we fail to estimate accurately the cost of performing certain contracts, we may experience reduced or negative
margins.
Under our fee-for-service contracts, we receive fees based on our interactions with government sponsored clients. To
earn a profit on these contracts, we must accurately estimate costs incurred in providing services. Our risk on these
contracts is that our client population is not large enough to cover our fixed costs, such as rent and overhead. Our fee-for-
service contracts are not reimbursed on a cost basis and therefore, if we fail to estimate our costs accurately, we may
experience reduced margins, or even losses on these contracts.
Additionally, approximately 83.4%, 83.3% and 87.6% of our non-emergency transportation services revenue during
2013, 2012 and 2011, respectively, was generated under capitated contracts with the remainder generated through fee-for
service and fixed cost contracts. Under most of our capitated contracts, we assume the responsibility of managing the needs
of a specific geographic population by contracting out transportation services to local van, cab and ambulance companies
on a per ride or per mile basis. We use a “pricing model” to determine applicable contract rates, which take into account
factors, such as estimated utilization, state specific data, previous experience in the state and/or with similar services,
estimated volume and availability of mass transit. The amount of the fixed per member, per month fee is determined in the
bidding process, but predicated on actual historical transportation data for the subject geographic region (provided by the
payer), actuarial work performed in-house as well as by third party actuarial firms and actuarial analyses provided by the
payer. If the utilization of our services is more than we estimated, the contract may be less profitable than anticipated, or
may not be profitable at all.
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We record revenue from cost-based service contracts based on a combination of direct costs, indirect overhead
allocations, and stated contractual margins on those costs. We may be required to subsequently refund a portion of the
excess funds, if any.
Our cost-based service contracts require us to allow for contingencies such as budgeted costs not incurred, excess cost
per service over the allowable contract rate and/or an insufficient number of encounters. In cases where funds paid to us
exceed the allowable costs to provide services under the contracts, we may be required to pay back the excess funds. While
we believe we have adequately reserved for potential refund amounts, the final settlement of certain contract
reimbursements can sometimes occur at a significantly later date than the period services were provided. It is possible that
we are unaware of certain potential refunds until they occur which could have a material adverse impact on our operating
results. Approximately 20.3%, 18.6% and 19.3% of our Human Services segment revenues or approximately 6.4%, 6.0%
and 7.4% of our consolidated revenues for the years ended December 31, 2013, 2012 and 2011, respectively, were derived
from cost-based service contracts.
Our results of operations will continue to fluctuate due to seasonality.
Our quarterly operating results and operating cash flows normally fluctuate as a result of seasonal variations in our
business. In our Human Services operating segment, lower client demand for our home and community based services
during the holiday and summer seasons generally results in lower revenue during those periods; however, our expenses
related to the Human Services operating segment do not vary significantly with these changes. As a result, our Human
Services operating segment typically experiences lower operating margins during the holiday and summer seasons. Our
NET Services operating segment also experiences fluctuations in demand for our non-emergency transportation services
during the summer, winter and holiday seasons. Due to higher demand in the summer months and lower demand in the
winter and holiday seasons, coupled with a fixed revenue stream based on a per member per month based structure, our
NET Services operating segment typically experiences lower operating margins in the summer season and higher operating
margins in the winter and holiday seasons. We expect quarterly fluctuations in operating results and operating cash flows to
continue as a result of the seasonal demand for our home and community based services and non-emergency transportation
services. As we enter new markets and expand our business, we could be subject to additional seasonal variations.
Our reported financial results could suffer if there is an impairment of goodwill or other intangible assets.
Goodwill may be impaired if the estimated fair value of one or more of our reporting units is less than the carrying
value of the respective reporting unit. Because we have grown in part through acquisitions, goodwill and other intangible
assets represent a significant portion of our assets. We perform an analysis on our goodwill balances to test for impairment
on an annual basis. Similarly, interim impairment tests may also be required in advance of our annual impairment test if
events occur or circumstances change that would more likely than not reduce the fair value, including goodwill, of one or
more of our reporting units below the reporting unit’s carrying value. Such circumstances could include but are not limited
to: (1) loss of significant contracts, (2) a significant adverse change in legal factors or in the climate of our business,
(3) unanticipated competition, (4) an adverse action or assessment by a regulator, or (5) a significant decline in our stock
price. If events occur or circumstances change, we may be required to record an impairment adjustment to our goodwill or
other intangible assets which could have a material adverse impact on our results of operations and financial position.
We may incur costs before receiving related revenues, which could result in cash shortfalls.
When we are awarded a contract to provide services, we may incur expenses before we receive any contract
payments. These expenses include leasing office space, purchasing office equipment and hiring personnel. As a result, in
certain large contracts where the government does not fund program start-up costs, we may be required to invest significant
sums of money before receiving related contract payments. In addition, payments due to us from payers may be delayed
due to billing cycles or as a result of failures to approve government budgets in a timely manner. Moreover, especially
under fee-for-service arrangements, any resulting cash shortfall could be exacerbated if we fail to either invoice the payer
or to collect our fee in a timely manner. This could have a material adverse impact on our ongoing operations and our
financial position.
22
Our use of a reinsurance program to cover certain claims for losses suffered and costs or expenses incurred could
negatively impact our business.
We are reinsured with regard to a substantial portion of our automobile, general liability, professional liability and
workers’ compensation insurance. We also reinsure the general liability, professional liability, workers’ compensation
insurance, automobile liability and automobile physical damage of various members of the network of subcontracted
transportation providers and independent third parties over various policy years under reinsurance programs through our
two wholly-owned captive insurance subsidiaries. Although, effective February 15, 2011, we did not renew our reinsurance
agreement and will not assume liabilities for policies that cover the general liability, automobile liability, and automobile
physical damage coverage of our independent third party transportation providers after that date, we will continue to
administer existing policies for the foreseeable future and resolve remaining and future claims related to these policies. In
the event that actual reinsured losses increase unexpectedly or exceed actuarially determined estimated reinsured losses
under the program, the aggregate of such losses could materially increase our liability and adversely affect our financial
condition, liquidity, cash flows and results of operations. In addition, as the availability to us of certain traditional insurance
coverage diminishes or increases in cost, we will continue to evaluate the levels and types of insurance we include in our
self-insurance program. Any increase to this program increases our risk exposure and therefore increases the risk of a
possible material adverse effect on our financial condition, liquidity, cash flows and results of operations.
Any acquisition that we undertake could be difficult to integrate, disrupt our business, dilute stockholder value or have a
material adverse impact on our operating results.
We have made, and anticipate that we will continue making, strategic acquisitions as part of our growth strategy. We
have made a number of acquisitions since our inception. The success of these and other acquisitions depends in part on our
ability to integrate acquired companies into our business operations. There can be no assurance that the companies acquired
will continue to generate income at the historical levels on which we based our acquisition decisions, that we will be able to
maintain or renew the acquired companies’ contracts, that we will be able to realize operating and economic efficiencies
upon integration of acquired companies, or that the acquisitions will not adversely affect our results of operations or
financial condition.
We continually review opportunities to acquire other businesses that would complement our current services, expand
our markets or otherwise offer prospects for growth. In connection with our acquisition strategy, we could issue stock that
would dilute existing stockholders’ percentage ownership, or we could incur or assume substantial debt or contingent
liabilities. Acquisitions involve numerous risks, including, but not limited to, the following:
• challenges assimilating the acquired operations;
• unanticipated costs and known and unknown legal or financial liabilities associated with an acquisition;
• diversion of management’s attention from our core businesses;
• adverse effects on existing business relationships with customers;
• entering markets in which we have limited or no experience;
• potential loss of key employees of purchased organizations;
• the incurrence of excessive leverage in financing an acquisition;
• failure to maintain and renew contracts of the acquired business;
• unanticipated operating, accounting or management difficulties in connection with an acquisition; and
• dilution to our earnings per share.
We cannot assure you that we will be successful in overcoming problems encountered in connection with any
acquisition and our inability to do so could disrupt our operations and adversely affect our business.
23
Fluctuations in gasoline prices could result in higher unit cost paid to our subcontracted network as well as higher
utilization of our non-emergency transportation services which could negatively impact our operating margins.
Fluctuating gasoline prices could result in more clients utilizing our non-emergency transportation services as they
may be unable to economically sustain transportation of their own. This could result in increased costs and levels of service
required under our capitated contracts, and could result in a loss of profitability in the segment. Rising gasoline prices could
result in lower operating margins as we may not be able to pass on the costs charged by our transportation providers with
whom we contract. Fluctuations in gasoline prices could adversely affect our operating results.
International Risks
Our international operations expose us to various risks that could have a negative impact on our operations or financial
results.
We operate in Canada through our wholly-owned subsidiary, WCG International Consultants Ltd., or WCG, and as a
result, we are subject to the risks inherent in conducting business across national boundaries, any one of which could
adversely impact our business. In addition to currency fluctuations, these risks include, among other things:
• economic downturns;
• changes in or interpretations of local law, governmental policy or regulation;
• restrictions on the transfer of funds in to, or out of the country;
• varying tax systems;
• delays from doing business with governmental agencies;
• nationalization of foreign assets; and
• government protectionism.
One or more of the foregoing factors could have a material adverse impact on our operations domestically or
internationally, financial results or financial position.
We may be exposed to liabilities under the Foreign Corrupt Practices Act and similar laws, and any determination that
we violated any of these laws could have an adverse effect on our business.
Our operations outside the United States are subject to the U.S. and foreign anti-corruption laws and regulations, such
as the Foreign Corrupt Practices Act, or FCPA. Generally, the FCPA prohibits us from providing anything of value to
foreign officials for the purposes of influencing official decisions or obtaining or retaining business or otherwise obtaining
favorable treatment, and requires companies to maintain adequate record-keeping and internal accounting practices to
accurately reflect the transactions of the company. We have established policies and procedures designed to assist us and
our personnel to comply with applicable U.S. and international laws and regulations. However, there can be no assurance
that our policies and procedures will effectively prevent us from violating these regulations in every transaction in which
we may engage, and such a violation could adversely affect our reputation, business, financial condition and results of
operations.
Increased competition in British Columbia, Canada due to the service delivery system reorganization in 2012 could
hinder our ability to gain new business and negatively impact our revenues related to our international operations.
As part of the service delivery system reorganization that took place in British Columbia during 2012, all of the
contracts for services in this market expired and new contracts were put up for bid. The new contracts combined federal
and provincial funding streams and services which were previously contracted separately. As a result, WCG is experiencing
an increase in competition as providers who contract for federal dollars have entered the market in which WCG operates.
To date, due primarily to an increased level of competition and a decrease in the number of services funded in British
Columbia, WCG has been unable to regain the level of business it experienced prior to the reorganization of the service
delivery system. While WCG continues to pursue various business opportunities, there is no assurance that it will be able to
achieve the operating level it did prior to 2012. Increased competition in this market may result in pricing pressures, loss of
24
or failure to gain market share, any of which could have a negative impact on our international operations and financial
results.
We operate and are in a taxable income position in multiple tax jurisdictions, and face the risk of double taxation if one
jurisdiction does not acquiesce to the tax claims of another jurisdiction.
We currently operate in the United States and Canada and are subject to income taxes in those countries and the
specific states and/or provinces where we operate. In the event one taxing jurisdiction disagrees with another taxing
jurisdiction, we could experience temporary or permanent double taxation and increased professional fees to resolve
taxation matters.
Item 1B.
Unresolved Staff Comments.
None.
Item 2.
Properties.
We lease our approximately 11,000 square foot corporate office building in Tucson, Arizona under a five year lease,
with two additional three year renewal options. The lease is currently in its fourth year. The monthly base rental payment
under this lease as of December 31, 2013 in the amount of approximately $18,000 is subject to an annual Consumer Price
Index adjustment increase over the initial term of the lease. We also lease office space for other administrative services in
Tucson. The lease terms vary and are in line with market rates. In connection with the performance of our contracts within
our Human Services segment, we lease approximately 350 offices for management and administrative functions. In
connection with the performance of our contracts within our NET Services segment, we lease 35 offices for management
and administrative functions. The lease terms vary and are generally at market rates.
We acquired a 5,760 square foot office building in Pottsville, Pennsylvania in connection with the acquisition of
Providence Community Services, Inc. (formerly known as Pottsville Behavioral Counseling Group, Inc.), which is free of
any mortgage. Additionally, with the acquisition of ReDCo, we acquired approximately 40 buildings in Pennsylvania
which are free from any mortgages.
In 2010, we purchased land and a 46,188 square foot four-story shell building adjacent to our corporate office for
cash. We utilize the building for certain information technology operations, and sublease or have sold other space within
the building. We believe that our properties are adequate for our current business needs, and believe that we can obtain
adequate space, if needed, to meet our foreseeable business needs.
Item 3.
Legal Proceedings.
Although we believe we are not currently a party to any material litigation, we may from time to time become
involved in litigation relating to claims arising from our ordinary course of business. These claims, even if not meritorious,
could result in the expenditure of significant financial and managerial resources.
Item 4.
Mine Safety Disclosures
Not applicable.
25
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Market for our common stock
Our common stock, $0.001 par value per share, our only class of common equity, has been quoted on NASDAQ
under the symbol “PRSC” since August 19, 2003. Prior to that time there was no public market for our common stock. As
of March 11, 2014, there were five holders of record of our common stock. The following table sets forth the high and low
sales prices per share of our common stock for the period indicated, as reported on NASDAQ Global Select Market:
2013
Fourth Quarter ......................................................... $
Third Quarter ........................................................... $
Second Quarter ........................................................ $
First Quarter ............................................................. $
2012
Fourth Quarter ......................................................... $
Third Quarter ........................................................... $
Second Quarter ........................................................ $
First Quarter ............................................................. $
High
Low
30.50 $
31.31 $
29.52 $
20.09 $
16.99 $
13.95 $
15.78 $
15.94 $
24.34
26.41
16.58
15.86
9.70
9.56
12.70
12.85
Stock Performance Graph
The following graph shows a comparison of the cumulative total return for our Common Stock, Nasdaq Health Index
and Russell 2000 Index assuming an investment of $100 in each on December 31, 2008.
26
Dividends
We have not paid any cash dividends on our common stock and do not plan to pay dividends on our common stock in
the foreseeable future. In addition, our ability to pay dividends is prohibited by the terms of our credit agreement. The
payment of future cash dividends, if any, will be reviewed periodically by the Board and will depend upon, among other
things, our financial condition, funds from operations, the level of our capital and development expenditures, any
restrictions imposed by present or future debt instruments and changes in federal tax policies, if any.
Issuer Purchases of Equity Securities
Total
Number of
Shares of
Common Stock
Purchased as
Part of
Publicly
Announced
Program (2)
Maximum
Number of
Shares of
Common Stock
that May Yet
Be Purchased
Under the
Program (2)
Total Number
of Shares of
Common Stock
Purchased (1)
Average Price
Paid per
Share
Period
Fourth quarter:
October 1, 2013 to October 31, 2013 ..................................
November 1, 2013 to November 30, 2013 ..........................
December 1, 2013 to December 31, 2013 ...........................
Total ....................................................................................
-
-
3,666 $
3,666 $
25.44
25.44
-
-
-
-
243,900
243,900
243,900
243,900
(1) The shares repurchased were acquired from employees in connection with the settlement of income tax and related
benefit withholding obligations arising from vesting in restricted stock grants.
(2) Our board of directors approved a stock repurchase program in February 2007 for up to one million shares of our
common stock. As of December 31, 2013, we have spent approximately $14.4 million to purchase 756,100 shares of
our common stock on the open market under this program.
Equity Compensation Plan Information
The following table provides certain information as of December 31, 2013 with respect to our equity based
compensation plans.
(a)
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
(b)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(c)
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a))
Plan category
Equity compensation plans approved by security
holders(1)(2) ......................................................................
874,252 $
19.76
1,549,786
Equity compensation plans not approved by security
holders ...............................................................................
Total .......................................................................................
—
874,252 $
—
19.76
—
1,549,786
(1) Columns (a) and (b) include 874,252 shares issuable upon exercise of outstanding stock options.
(2) The number of shares shown in column (c) represents the number of shares available for issuance pursuant to stock
options and other stock-based awards that could be granted in the future under the 2006 Long-Term Incentive Plan, as
amended. No additional stock options or other stock-based awards may be granted under the 1997 Stock Option and
Incentive Plan and 2003 Stock Option Plan.
27
Item 6.
Selected Financial Data.
The following table sets forth selected consolidated financial data, other financial data and other operating data. The
selected consolidated financial data for the years ended December 31, 2013, 2012 and 2011 and as of December 31, 2013
and 2012 are derived from our audited consolidated financial statements included elsewhere in this report. The selected
consolidated financial data for the years ended December 31, 2010 and 2009 and as of December 31, 2011, 2010 and 2009
are derived from our audited consolidated financial statements that are not included in this report. This information should
be read in conjunction with our consolidated financial statements and the related notes, and Item 7 “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” all of which are included elsewhere in this
report.
2013
(1)(2)(3)
2012
(1)(4)
Year Ended December 31,
2011
(5)(6)(7)
(dollars and shares in thousands)
2010
(5)
Statement of operations data:
Revenues:
Non-emergency transportation services ................. $
Human services ......................................................
Total revenues ................................................................
Operating expenses:
Cost of non-emergency transportation services ......
Client service expense ............................................
General and administrative expense .......................
Depreciation and amortization ...............................
Asset impairment charges ......................................
Total operating expenses ................................................
Operating income ...........................................................
Non-operating (income) expenses
Interest expense, net ...............................................
Loss on extinguishment of debt .............................
(Gain) on bargain purchase ....................................
Income before income taxes...........................................
Provision for income taxes .............................................
Net income ..................................................................... $
Net earnings per share data:
770,246 $
352,436
1,122,682
750,658 $
355,231
1,105,889
581,541 $
361,439
942,980
537,776 $
341,921
879,697
710,428
309,623
48,633
14,872
492
1,084,048
38,634
706,692
304,084
53,383
15,023
2,506
1,081,688
24,201
6,894
525
-
31,215
11,777
19,438 $
7,508
-
-
16,693
8,211
8,482 $
539,417
304,407
48,861
13,656
-
906,341
36,639
10,002
2,463
(2,711)
26,885
9,945
16,940 $
474,129
289,152
46,461
12,652
-
822,394
57,303
16,011
-
-
41,292
17,665
23,627 $
2009
460,275
340,738
801,013
415,300
275,126
44,010
12,852
-
747,288
53,725
20,432
-
-
33,293
12,167
21,126
Diluted ................................................................... $
1.41 $
0.64 $
1.27 $
1.78 $
1.60
Weighted average shares outstanding:
Diluted ...................................................................
13,810
13,355
13,322
14,965
13,211
Other data (8) (unaudited):
States served:
NET Services .....................................................
Human Services .................................................
Locations:
NET Services .....................................................
Human Services .................................................
Employees:
NET Services .....................................................
Human Services .................................................
Contracts:
NET Services .....................................................
Human Services .................................................
Clients:
40
24
35
347
2,253
6,294
83
504
38
27
36
358
1,990
6,403
84
556
34
33
33
359
38
32
34
273
1,476
6,120
1,430
5,553
76
633
66
638
39
32
36
266
1,349
5,666
65
669
NET Services (9) ................................................ 15,842,051 15,084,571 11,318,902
60,956
Human Services .................................................
56,320
51,584
8,232,202
58,088
7,697,125
62,213
28
2013 (1)(2)
2012 (1)
As of December 31,
2011 (7)
(dollars in thousands)
2010
2009
Balance sheet data:
Cash and cash equivalents ..................................... $
Total assets ............................................................
Long-term obligations, including current portion .
Other liabilities ......................................................
Total stockholders' equity .....................................
98,995 $
424,758
123,500
150,621
150,637
55,863 $
391,737
130,000
143,050
118,687
43,184 $
379,053
150,493
119,537
109,023
61,261 $
386,933
182,304
115,880
88,749
51,157
383,107
204,213
116,556
62,338
(1) As a result of changes in British Columbia described above, we initiated intangible asset impairment valuations of our
Canadian business and, based on the results, we recorded impairment charges totaling approximately $2.5 million
related to our intangible assets other than goodwill for the year ended December 31, 2012. During 2013 the not-for-
profit entities managed by Rio Grande Management Company, L.L.C. (“Rio”), our wholly-owned subsidiary, were
notified of the termination of funding for certain of their services. Due to this change in funding, the not-for-profit
entities Rio serves will not be able to maintain the level of business they historically experienced, which is expected to
result in the decrease or elimination of services provided by Rio. Based on these factors, we recorded a goodwill
impairment charge of approximately $0.5 million for the year ended December 31, 2013.
(2) On August 2, 2013, we executed a new credit facility and paid all amounts due under the existing credit facility with
proceeds from the new credit facility. The new credit agreement provides us with a senior secured credit facility in
aggregate principal amount of $225.0 million, comprised of a $60.0 million term loan facility and a $165.0 million
revolving credit facility. In conjunction with the termination of the previous credit facility, we recorded a loss on
extinguishment of debt in 2013 of approximately $0.5 million.
(3) We incurred expense (net of benefit of forfeiture of stock based compensation) of approximately $1.3 million in 2013
for severance payments related to two of our executive officers and a key employee.
(4) We incurred expense (net of benefit of forfeiture of stock based compensation) of approximately $1.3 million in 2012
for payments related to the retirement of two of our executive officers in 2012.
(5) As a result of our acquisition of ReDCo on June 1, 2011, we began consolidating the financial results of this entity,
which resulted in a decrease in management fees of approximately $1.1 million for 2011 as compared to 2010.
Additionally, this acquired entity contributed $20.3 million of home and community based service revenue during
2011.
(6) One acquisition was completed in the fiscal year ended December 31, 2011, which affected the comparability of the
information reflected in the selected financial data. See the year-to-year analysis included in Item 7 “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” of this report for more information.
(7) On March 11, 2011, we executed a new credit facility and paid all amounts due under the existing credit facility with
cash in the amount of $12.3 million and proceeds from the new credit facility. The new credit agreement provides us
with a senior secured credit facility in aggregate principal amount of $140.0 million, comprised of a $100.0 million
term loan facility and a $40.0 million revolving credit facility. In conjunction with the termination of the previous
credit facility, we recorded a loss on extinguishment of debt in 2011 of approximately $2.5 million.
(8) “States served,” “Locations,” “Employees” and “Contracts” data are as of the end of the period for owned entities.
“Clients” data represents the number of clients served during the last month of the period presented for owned entities.
“States served” excludes the District of Columbia and Canada.
(9) Non-emergency transportation services clients represent the number of individuals eligible to receive non-emergency
transportation services.
29
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in
conjunction with Item 6, “Selected Financial Data” and our consolidated financial statements and related notes included
in Item 8 of this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties
and assumptions. Certain risks, uncertainties and other factors, including but not limited to those set forth in Item 1A,
entitled, “Risk Factors” and elsewhere in this report may cause actual results to differ materially from those projected in
the forward-looking statements.
Overview of our business
We provide government sponsored human services directly and through not-for-profit organizations whose operations
we manage under contract, and we arrange for and manage non-emergency transportation services. As a result of, and in
response to, the large and growing population of eligible beneficiaries of government sponsored human services and non-
emergency transportation services, increasing pressure on governments to control costs and increasing acceptance of
privatized human services, we have grown both organically and through strategic acquisitions.
In November 2012, our Chief Executive Officer and Chief Financial Officer retired, and we retained our Lead
Director to serve as Interim Chief Executive Officer and hired a new Chief Financial Officer. In May 2013, our Interim
Chief Executive Officer was appointed as Chief Executive Officer. Our executives continue to focus on improving
operating efficiencies, organic and acquisitive growth, and developing performance management systems designed to
enhance and leverage our core competencies. Our core competencies include our enduring customer relationships,
geographic reach, breadth of services and experience, management of populations that consist primarily of covered lives
and provider networks, contract bidding infrastructure, managed care contracting experience and technology platform
development. By enhancing and leveraging these core competencies, we believe we can benefit from emerging trends in
healthcare such as healthcare reform and integrated healthcare, which includes providing services to individuals who are
eligible for both Medicaid and Medicare benefits. Further, by managing more populations eligible to receive our services,
and outsourcing transportation management, we believe we can reduce the cost of care.
While we believe we are well positioned to benefit from healthcare reform legislation and to offer our services to a
growing population of individuals eligible to receive our services, there can be no assurances that programs under which
we provide our services will receive continued or increased funding. Additionally, there can be no assurance of when the
reform legislation will be fully implemented or when, and if, we will see any positive impact.
We also believe we are positioned to potentially benefit from recent trends that favor our in-home provision of human
services; however, budgetary pressures still exist that could reduce funding for the services we provide. Medicaid budgets
are fluid and dramatic changes in the financing or structure of Medicaid could have a negative impact on our business. We
believe our business model allows us to make adjustments to help mitigate state budget pressures that are impacted by
federal spending.
As of December 31, 2013, we were providing human services directly to over 56,000 unique clients, and had
approximately 15.8 million individuals eligible to receive services under our non-emergency transportation services
contracts. We provided services to these clients from approximately 382 locations in 43 states and the District of Columbia
in the United States and three provinces in Canada.
30
How we grow our business and evaluate our performance
Our business has grown internally through organic expansion into new markets, increases in the number of clients
served under contracts that we or the entities we manage are awarded, and through strategic acquisitions.
We typically pursue organic expansion into markets that are contiguous to our existing markets or where we believe
we can quickly establish a significant presence. When we expand organically into a market, we typically have no clients or
perform no management services in the market and are required to incur start-up costs including the costs of space, required
permits and initial personnel. These costs are expensed as incurred and our new offices can be expected to incur losses for a
period of time until we adequately grow our revenue from clients.
We continue to selectively identify and pursue strategic acquisitions in markets where we see opportunities but where
we lack the contacts and/or personnel to make a successful organic entry. Unlike organic expansion which involves start-up
costs that may dilute earnings, expansion through acquisitions has generally been accretive to our earnings. However, we
bear financing risk, and where debt is used, the risk of leverage by expanding through acquisitions. We also must integrate
the acquired business into our operations which could disrupt our business and we may not be able to realize operating and
economic synergies upon integration. Finally, our acquisitions may involve purchase prices in excess of the fair value of
tangible assets and cash or receivables. This excess purchase price is allocated to intangible assets, including goodwill, and
is subject to periodic evaluation and impairment or other write downs that are charges against our earnings. There are no
assurances, however, that we will complete acquisitions in the future or that any completed acquisitions will prove
profitable for us.
In all our markets we focus on several key performance indicators in managing our business. Specifically, we focus
on growth in the number of clients served, as that particular metric is the key driver of our revenue growth. We also focus
on the number of employees and the amount of outsourced transportation cost as these items are our most important
variable costs and the key to the management of our operating margins. Going forward we will focus on our core business
to make it more efficient and effective by leveraging our technology platforms and expanding our shared services
capability.
How we earn our revenue
We operate in two segments, Human Services and Non-Emergency Transportation Services (“NET Services”).
Human Services
Our revenue is derived from our provider contracts with state and local government agencies and government
intermediaries, HMOs, commercial insurers, and from our management contracts with not-for-profit social services
organizations. The government entities that pay for our services include welfare, child welfare and justice departments,
public schools and state Medicaid programs. Under a majority of the contracts where we provide human services directly,
we are paid an hourly fee. In other such arrangements, we receive a set monthly amount or we are paid amounts equal to
the costs we incur to provide agreed upon services. Additionally, we contract to manage the operations of not-for-profit
social services organizations and receive a management fee that is either based upon a percentage of the revenue of the
managed entity or a predetermined fee. These revenues are presented in our consolidated statements of income as human
services revenue.
NET Services
Where we provide non-emergency transportation management services, we contract with state Medicaid and local
agencies, regional and medical hospital systems or private managed care organizations. Most of our contracts for non-
emergency transportation management services are capitated, where we are paid on a per member, per month basis for each
eligible member. We do not direct bill for services under our capitated contracts as our revenue is based on covered lives.
Our school transportation contracts are with local governments and are paid on a per trip basis or per bus, per day basis.
These revenues are presented in our consolidated statements of income as non-emergency transportation services revenue.
31
Critical accounting policies and estimates
General
In preparing our financial statements in accordance with accounting principles generally accepted in the United
States, or GAAP, we are required to make estimates and judgments that affect the amounts reflected in our financial
statements. We base our estimates on historical experience and on various other assumptions we believe to be reasonable
under the circumstances. However, actual results may differ from these estimates under different assumptions or
conditions.
Critical accounting policies are those policies most important to the portrayal of our financial condition and results of
operations. These policies require our most difficult, subjective or complex judgments, often employing the use of
estimates about the effect of matters inherently uncertain. Our most critical accounting policies pertain to revenue
recognition, accounts receivable and allowance for doubtful accounts, accounting for business combinations, goodwill and
other intangible assets, accrued transportation costs, loss reserves for certain reinsurance and self-funded insurance
programs, stock-based compensation and income taxes.
Revenue recognition
Human Services segment
Fee-for-service contracts. Revenue related to services provided under fee-for-service contracts is recognized at the
time services are rendered and collection is determined to be probable. Such services are provided at established billing
rates. Fee-for-service contracts represented approximately 72.0%, 72.5% and 71.1% of our Human Services segment
revenue for 2013, 2012 and 2011, respectively.
As services are rendered, contract-specific documentation is prepared describing each service, time spent, and billing
code to determine and support the value of each service provided and billed. The timing and amount of collection are
dependent upon compliance with the billing requirements specified by each payer. Failure to comply with these
requirements could delay the collection of amounts due to us under a contract or result in adjustments to amounts billed.
The performance of our contracts is subject to the condition that sufficient funds are appropriated, authorized and
allocated by each state, city or other local government. If sufficient appropriations, authorizations and allocations are not
provided by the respective state, city or other local government, we are at risk for uncollectible amounts or immediate
termination or renegotiation of the financial terms of our contracts.
Cost-based service contracts. Revenues from our cost-based service contracts are recorded based on a combination of
allowable direct costs, indirect overhead allocations, and stated allowable margins on those incurred costs. These revenues
are compared to annual contract budget limits and, depending on reporting requirements, allowances may be recorded for
certain contingencies such as projected costs not incurred or excess cost per service over the allowable contract rate. We
annually submit projected costs for the coming year, which assist the contracting payers in establishing the annual contract
amount to be paid for services provided under the contracts. After the payers’ fiscal year end, we submit cost reports which
are used by the payers to determine the need for any payment adjustments. Completion of the cost report review process
may range from one month to several years. In cases where funds paid to us exceed the allowable costs to provide services
under contract, we may be required to repay amounts previously received.
Our cost reports are generally audited by payers annually. We periodically review our provisional billing rates and
allocation of costs and provide for estimated payment adjustments. We believe that adequate provisions have been made in
our consolidated financial statements for any material adjustments that might result from the outcome of any cost report
audits. Differences between the amounts provided and the settlement amounts are recorded in our consolidated statement of
income in the year of settlement. Such settlements have historically not been material. Cost-based service contracts
represented approximately 20.3%, 18.6% and 19.3% of our Human Services operating segment revenue for 2013, 2012 and
2011, respectively.
Annual block purchase contract. Our annual block purchase contract requires us to provide or arrange for behavioral
health services to eligible populations of beneficiaries as defined in the contract. We must provide a complete range of
behavioral health clinical, case management, therapeutic and administrative services. We are obligated to provide services
only to those clients with a demonstrated medical necessity. Our annual funding allocation amount may be increased when
our patient service encounters exceed the contract amount; however, such increases are subject to government
32
appropriation. There is no contractual limit to the number of eligible beneficiaries that may be assigned to us, or a specified
limit to the level of services that may be provided to these beneficiaries if the services are deemed to be medically
necessary. Therefore, we are at-risk if the costs of providing necessary services exceed the associated reimbursement.
The terms of the contract may be reviewed prospectively and amended as necessary to ensure adequate funding of our
contractual obligations; however, there is no assurance that amendments will be approved or that funding will be adequate.
Our revenues under the annual block purchase contract for 2013, 2012 and 2011 represented approximately 5.4%, 5.4%
and 6.1%, respectively, of our Human Services operating segment revenues for each year.
Management agreements. We maintain management agreements with a number of not-for-profit social services
organizations whereby we provide certain management services. In exchange for our services, we receive a management
fee that is either based on a percentage of the revenues of these organizations or a predetermined fee. We recognize
management fees revenue as such amounts are earned, as defined by each respective management agreement, and
collection of such amount is considered reasonably assured. Management fees earned under our management agreements
represented approximately 2.3%, 3.5% and 3.5% of our Human Services operating segment revenue in 2013, 2012 and
2011, respectively.
The costs associated with rendering these management services are primarily shown as general and administrative
expense in the consolidated statements of income.
NET Services segment
Capitation contracts. The majority of our non-emergency transportation services revenue is generated under capitated
contracts where we assume the responsibility of meeting the covered transportation requirements of a specific geographic
population for a fixed amount per period. Revenues under capitation contracts with our payers are based on per-member
monthly fees for an estimated number of participants in the payer’s program.
Fee-for-service contracts. Revenues earned under fee-for-service contracts are recognized when the service is
provided. Revenue under these types of contracts is based upon contractually established billing rates, less allowance for
contractual adjustments. Estimates of contractual adjustments are based upon payment terms specified in the related
agreements.
Flat fee contracts. Revenues earned under flat fee contracts are recognized ratably over the covered service period.
Revenues under these types of contracts are based upon contractually established monthly flat fees that do not fluctuate
with any changes in the membership population that can receive our services.
Deferred Revenue
At times we may receive funding for certain services in advance of services being rendered. These amounts are
reflected in the accompanying consolidated balance sheets as deferred revenue until the services are rendered.
Accounts receivable and allowance for doubtful accounts
Clients are referred to us through governmental programs and we only provide services at the direction of a payer
under a contractual arrangement. These circumstances have historically minimized any uncollectible amounts for services
rendered. However, we recognize that not all amounts recorded as accounts receivable will ultimately be collected.
We record all accounts receivable amounts at their contracted amount, less an allowance for doubtful accounts. We
maintain an allowance for doubtful accounts at an amount we estimate to be sufficient to cover the risk that an account will
not be collected. We regularly evaluate our accounts receivable, especially receivables that are past due, and reassess our
allowance for doubtful accounts based on specific client collection issues. In circumstances where we are aware of a
specific payer’s inability to meet its financial obligation, we record a specific addition to our allowance for doubtful
accounts to reduce the net recognized receivable to the amount we reasonably expect to collect.
Our write-off experience for 2013, 2012 and 2011 was less than 1.0% of revenue.
33
Accounting for business combinations, goodwill and other intangible assets
When we consummate an acquisition we separately value all acquired identifiable intangible assets apart from
goodwill in accordance with Accounting Standards Codification, or ASC, Topic 805 - Business Combinations. We analyze
the carrying value of goodwill at the end of each fiscal year. When analyzing goodwill for impairment we first assess
qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test
described below. If we determine, based on a qualitative assessment, that it is more likely than not that the fair value of a
reporting unit is less than its carrying amount, then we would calculate the fair value of the reporting unit and perform the
two-step quantitative goodwill impairment test. In connection with our year-end asset impairment test, we reconcile the
aggregate fair value of our reporting units to our market capitalization including a reasonable control premium. As part of
this annual impairment test, we also compare the fair value of each reporting unit with its carrying value, including
goodwill. If the carrying amount of a reporting unit exceeds its fair value, there is an indication of impairment. If an
indication of impairment is identified, the impairment loss, if any, is measured by comparing the implied fair value of the
reporting unit’s goodwill with its carrying value. In calculating the implied fair value of the reporting unit goodwill, the fair
value of the reporting unit is allocated to all of the other assets and liabilities of that unit based on their fair values. The
excess of the fair value of a reporting unit over the amount assigned to its other identifiable assets and liabilities is the
implied fair value of goodwill. An impairment loss would be recognized when the carrying value of goodwill exceeds its
implied fair value.
Similarly conducted interim impairment tests may also be required in advance of our annual impairment test if events
occur or circumstances change that would more likely than not reduce the fair value, including goodwill, of one or more of
our reporting units below the reporting unit’s carrying value. Such circumstances could include but are not limited to:
(1) loss of significant contracts, (2) a significant adverse change in legal factors or in the climate of our business,
(3) unanticipated competition, (4) an adverse action or assessment by a regulator, or (5) a significant decline in our stock
price.
In determining whether or not we had goodwill impairment to report for the years ended December 31, 2013, 2012
and 2011, we considered both a market-based valuation approach and an income-based valuation approach when estimating
the fair values of our reporting units with goodwill balances as of such dates. The valuation methodology applied in 2013
was consistent with our methodology in 2012 and 2011. Under the market approach, the fair value of the reporting unit is
determined using one or more methods based on current values in the market for similar businesses. Under the income
approach, the fair value of the reporting unit is based on the cash flow streams expected to be generated by the reporting
unit over an appropriate period and then discounting the cash flows to present value using an appropriate discount rate. The
income approach is dependent on a number of significant management assumptions, including estimates of future revenue
and expenses, growth rates and discount rates. Inherent in such fair value determinations are certain judgments and
estimates relating to future cash flows, including our interpretation of current economic indicators and market valuations,
and assumptions about our strategic plans with regard to our operations. To the extent additional information arises, market
conditions change or our strategies change, it is possible that our conclusion regarding whether existing goodwill is
impaired could change and result in a material adverse effect on our consolidated financial position or results of operations.
Based on our annual asset impairment test completed as of December 31, 2013, 2012 and 2011, we determined that
none of our goodwill was impaired as of such dates. However, we recorded a goodwill impairment charge of approximately
$0.5 million as of June 30, 2013, which is discussed below under “Year ended December 31, 2013 compared to Year ended
December 21, 2012- Operating Expenses-Impairment Charge”. The assumptions used to estimate fair value were based on
estimates of future revenue and expenses incorporated in our current operating plans, growth rates and discounts rates, our
interpretation of current economic indicators and market valuations. Significant assumptions and estimates included in our
current operating plans were associated with revenue growth, profitability, and related cash flows. The discount rate used to
estimate fair value was risk adjusted in consideration of the economic conditions of the reporting units. We also considered
assumptions that market participants may use. By their nature, these projections and assumptions are uncertain. Potential
events and circumstances that could have an adverse effect on our assumptions include the lack of sufficient funds allocated
by our state and local government payers to compensate us for the level of services we currently provide or the potential
increased level of service we may be required to provide in the future due to the impact of the current economic downturn,
and loss of a significant contract.
34
As of December 31, 2013, the fair values of our reporting units subject to quantitative testing substantially exceeded
their carrying values.
In connection with our acquisitions, we calculate the fair value of any management contracts, customer relationships,
restrictive covenants, software licenses and developed technology. We assess whether any relevant factors limit the period
over which acquired assets are expected to contribute directly or indirectly to future cash flows for amortization purposes
and determine an appropriate useful life for acquired customer relationships based on the expected period of time we will
provide services to the payer. While we use discounted cash flows to value intangible assets, we have elected to use the
straight-line method of amortization to determine amortization expense. If applicable, we assess the recoverability of the
unamortized balance of our long-lived assets based on undiscounted expected future cash flows. If the review indicates that
the carrying value is not fully recoverable, the excess of the carrying value over the fair value of any long-lived asset is
recognized as an impairment loss.
Based on our annual asset impairment analysis as of December 31, 2013 and 2012, we determined that there was no
impairment of intangible assets, other than the intangible assets impairment of approximately $2.5 million recorded in the
third quarter of 2012, which is discussed below under “Year ended December 31, 2013 compared to year ended December
31, 2012 – Operating Expenses – Asset Impairment Charge.”.
Accrued transportation costs
Transportation costs are estimated and accrued in the month the services are rendered by contracted transportation
providers, and are determined using gross reservations for transportation services less cancellations, and average costs per
transportation service by customer contract. Average costs per contract are determined by historical cost trends. Actual
costs relating to a specific accounting period are monitored and compared to estimated accruals. Adjustments to those
accruals are made based on reconciliations with actual costs incurred.
Loss reserves for certain reinsurance and self-funded insurance programs
We reinsure a substantial portion of our automobile, general and professional liability and workers’ compensation
costs under reinsurance programs through our wholly-owned subsidiary Social Services Providers Captive Insurance
Company (“SPCIC”). SPCIC is a licensed captive insurance company domiciled in the State of Arizona. SPCIC maintains
reserves for obligations related to our reinsurance programs for our automobile, general and professional liability and
workers’ compensation coverage.
As of December 31, 2013 and 2012, SPCIC had reserves of approximately $10.6 million and $8.8 million,
respectively, for the automobile, general and professional liability and workers’ compensation programs.
In addition, we own Provado Insurance Services, Inc. (“Provado”), a licensed captive insurance company domiciled
in the State of South Carolina. Provado historically provided reinsurance for policies written by a third party insurer for
general liability, automobile liability, and automobile physical damage coverage to various members of the network of
subcontracted transportation providers and independent third parties within our NET Services operating segment. Effective
February 15, 2011, Provado has not renewed its reinsurance agreement and will not assume additional liabilities for
policies commencing thereafter. It continues to administer existing policies for the foreseeable future and to resolve
remaining and future claims related to these policies.
Provado maintains reserves for obligations related to the reinsurance programs for general liability, automobile
liability, and automobile physical damage coverage. As of December 31, 2013 and 2012, Provado recorded reserves of
approximately $1.9 million and $4.4 million, respectively.
35
We utilize analyses prepared by third party administrators and independent actuaries based on historical claims
information with respect to the general and professional liability coverage, workers’ compensation coverage, automobile
liability, and automobile physical damage to determine the amount of required reserves.
We also maintain a self-funded health insurance program provided to our employees. With respect to this program,
we consider historical and projected medical utilization data when estimating our health insurance program liability and
related expense as well as using services of a third party administrator. As of December 31, 2013 and 2012, we had
approximately $1.9 million and $2.1 million, respectively, in reserve for our self-funded health insurance programs.
We regularly analyze our reserves for incurred but not reported claims, and for reported but not paid claims related to
our reinsurance and self-funded insurance programs. We believe our reserves are adequate. However, significant judgment
is involved in assessing these reserves such as assessing historical paid claims, average lags between the claims’ incurred
date, reported dates and paid dates, and the frequency and severity of claims. There may be differences between actual
settlement amounts and recorded reserves and any resulting adjustments are included in expense once a probable amount is
known. There were no significant adjustments recorded in the periods covered by this report. Any significant increase in
the number of claims or costs associated with claims made under these programs above our reserves could have a material
adverse effect on our financial results.
Stock-based compensation
We follow the fair value recognition provisions of ASC Topic 718 - Compensation-Stock Compensation (“ASC
718”), which requires companies to measure and recognize compensation expense for all share based payments at fair
value. With respect to stock option awards, the fair value is estimated on the date of grant using the Black-Scholes option-
pricing formula and amortized over the option’s vesting periods. The Black-Scholes option-pricing formula requires us to
make assumptions for the expected dividend yield, stock price volatility, life of options and risk-free interest rate.
We follow the short-cut method prescribed by ASC 718 to calculate our pool of excess tax benefits available to
absorb tax deficiencies recognized subsequent to the adoption of ASC 718 (“APIC pool”). There was no effect on our
financial results for 2013, 2012 or 2011 related to the application of the short-cut method to determine our APIC pool
balance.
Under ASC 718, the benefits of tax deductions in excess of the estimated tax benefit of compensation costs
recognized in the statement of income for those options are classified as financing cash flows. In 2013 we had net excess
tax benefits resulting from the exercise of stock options of approximately $0.4 million (net of approximately $0.7 million in
tax shortfalls resulting from the exercise of stock options). In 2012 and 2011, we had a net tax shortfall resulting from the
exercise and cancellation of stock options of approximately $0.2 million and $0.1 million (net of approximately $0.1
million and $17 thousand in excess tax benefits resulting from the exercise of stock options), respectively. The gross excess
tax benefits resulting from the exercise of stock options are reflected as cash flows from financing activities for 2013, 2012
and 2011 in our consolidated statements of cash flows. Our 2006 Long-Term Incentive Plan, as amended, or 2006 Plan,
allows us the flexibility to issue up to 4,400,000 shares of our common stock pursuant to awards of stock options, stock
appreciation rights, restricted stock, unrestricted stock, stock units including restricted stock units and performance awards
to employees, directors, consultants, advisors and others who are in a position to make contributions to our success and to
encourage such persons to take into account our long-term interests and the interests of our stockholders through ownership
of our common stock or securities with value tied to our common stock.
Income Taxes
Deferred income taxes are determined by the liability method in accordance with ASC Topic 740 - Income Taxes.
Under this method, deferred tax assets and liabilities are determined based on differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and are measured using
the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We record a valuation
allowance which includes amounts for state net operating loss and tax credit carryforwards for which we have concluded
that it is more likely than not that these state net operating loss and tax credit carryforwards will not be realized in the
ordinary course of operations. We recognize interest and penalties related to income taxes as a component of income tax
expense.
36
Results of operations
Segment reporting. Our financial operating results are organized and reviewed by our chief operating decision
maker along our service lines in two reportable segments, Human Services and NET Services. We operate these reportable
segments as separate divisions and differentiate the segments based on the nature of the services they offer. The following
describes each of our segments.
Human Services
Human Services includes home and community based counseling, foster care and not-for-profit management services.
Our operating entities within Human Services provide services primarily to individuals and families. All of our operating
entities within Human Services follow similar operating procedures and methods in managing their operations, and each
operating entity works within a similar regulatory environment, primarily under Medicaid regulations. We manage our
operating activities within Human Services by actual to budget comparisons within each operating entity rather than by
comparison between entities.
Our chief operating decision maker regularly reviews financial and non-financial information for each individual
entity within Human Services. While financial performance in comparison to budget is evaluated on an entity-by-entity
basis, our operating entities comprising Human Services are aggregated into one reporting segment for financial reporting
purposes because we believe that the operating entities exhibit similar long-term financial performance. We believe the
economic characteristics of our operating entities within Human Services meet the criteria for aggregation into a single
reporting segment under ASC Topic 280-Segment Reporting.
NET Services
NET Services involves managing the delivery of non-emergency transportation services. We operate NET Services as
a separate division with operational management and service offerings distinct from our Human Services operating
segment. Gross margin performance of individual contracts is consolidated under the associated operating entity and direct
general and administrative expenses are allocated to the operating entity.
37
Consolidated Results
The following table sets forth the percentage of consolidated total revenues represented by items in our consolidated
statements of income for the periods presented:
Revenues:
Non-emergency transportation services ........................
Human services.............................................................
Total revenues ..............................................................
68.6%
31.4
100.0
67.9%
32.1
100.0
61.7%
38.3
100.0
2013
Year Ended December 31,
2012
2011
Operating expenses:
Cost of non-emergency transportation services ............
Client service expense ..................................................
General and administrative expense .............................
Depreciation and amortization ......................................
Asset impairment charge ..............................................
Total operating expenses ..................................................
Operating income .............................................................
Non-operating expense:
Interest expense, net .....................................................
Loss on extinguishment of debt ....................................
Gain on bargain purchase .............................................
Income before income taxes .............................................
Provision for income taxes ...............................................
Net income .......................................................................
Overview of trends of our results of operations for 2013
63.3
27.6
4.3
1.3
-
96.5
3.5
0.6
0.1
-
2.8
1.1
1.7%
63.9
27.5
4.8
1.4
0.2
97.8
2.2
0.7
-
-
1.5
0.7
0.8%
57.2
32.3
5.2
1.4
-
96.1
3.9
1.0
0.3
(0.3)
2.9
1.1
1.8%
Our Human Services revenues for 2013 as compared to 2012 were unfavorably impacted primarily by the termination
of, and changes to, certain management service agreements and waivers granted under the No Child Left Behind Act, or
NCLB. In addition, revenue from our Canadian operations declined for 2013 as compared to 2012 due to the impact of a
reorganization of the service delivery system in British Columbia, which began in early 2012, and continued increased
competition in this market. The implementation of new programs in certain of our markets partially offset decreases in
these revenues for 2013 as compared to 2012. Payroll and related expenses (included in client service expense and general
and administrative expense) also decreased in 2013 from 2012 by approximately $3.0 million, primarily due to personnel
expenses which were eliminated as a result of contract terminations and changes.
Our NET Services revenues for 2013 as compared to 2012 were favorably impacted by the expansion of business in
our Georgia, Texas, New York and South Carolina markets, rate adjustments and continued expansion of our California
ambulance commercial and managed care lines of business. The additional revenues from new business were partially
offset by the transition of the Connecticut contract from a full risk to an administrative services only contract effective
February 1, 2013, and the termination of our Wisconsin Medicaid contract effective July 31, 2013. The results of operations
for 2013 as compared to 2012 included an increase in revenue of 2.6% due to new business, while the cost of transportation
increased by 0.5% during this period, contributing to improved margins for 2013.
We believe the industry trend away from the more expensive out-of-home service providers in favor of home and
community based delivery systems like ours will continue. We believe that our effective, low cost home and community
based service delivery system is becoming more attractive to certain payers that have historically only contracted with not-
for-profit human services organizations. We also believe that the movement toward continued outsourcing of healthcare
related non-emergency transportation management by governmental agencies and managed care organizations is a positive
trend for the Company. Further, we believe we are well positioned to benefit from emerging trends in healthcare,
particularly the development of integrated models of healthcare delivery and financing, and increased focus on logistics
management as an important factor in improving patient access to preventative and health management services.
38
Year ended December 31, 2013 compared to year ended December 31, 2012
Revenues
Non-emergency transportation services. Non-emergency transportation services revenues were as follows (in
thousands):
Year Ended December 31,
2012
2013
Dollar
change
Percent
change
$
770,246
$
750,658
$
19,588
2.6%
NET Services revenues were favorably impacted in 2013 by:
●
●
●
●
●
●
●
full year results from the expansion of two additional regions in South Carolina in February 2012;
full year results from the expansion of two additional regions in Georgia in April and July 2012;
full year results from the addition of our Dallas, Texas Medicaid contract in April 2012;
the multi-phased implementation of the New York City administrative services contract which began in May
2012 and was completed in the first quarter of 2013;
implementation of various MCO contracts in Louisiana, Hawaii and Kansas;
continued expansion of our California ambulance commercial and managed care lines of business; and
rate adjustments matching historical utilization in a number of our contracts, as well as new rates for several
renewed and awarded contracts.
These factors noted above were partially offset by a decrease in revenue resulting from the elimination and transition
of the Connecticut “at-risk” contract to a new “administrative services only” contract implemented in February 2013, as
well as the elimination of both the State and Southeast Region Medicaid contracts in Wisconsin, and the contract in
Arkansas.
A significant portion of this revenue was generated under capitated contracts where we assumed the responsibility of
meeting the covered transportation requirements of beneficiaries residing in a specific geographic region for fixed payment
amounts per beneficiary. Due to the fixed revenue stream and variable expense structure of our NET Services operating
segment, expenses related to this segment vary with seasonal fluctuations. We expect our operating results will
continuously fluctuate on a quarterly basis.
Human services. Human services revenues are comprised of the following (in thousands):
Home and community based services ................................... $
Foster care services ...............................................................
Management fees ..................................................................
2013
305,616 $
38,490
8,330
2012
309,300 $
33,534
12,397
Year Ended December 31,
Dollar
change
Percent
change
(3,684)
4,956
(4,067)
-1.2%
14.8%
-32.8%
Total human services revenues .......................................... $
352,436 $
355,231 $
(2,795)
-0.8%
Home and community based services. Contract terminations in Florida and Canada, as well as the impact of waivers
granted under the NCLB, led to a decrease in home and community based services revenues for 2013 as compared to 2012.
Decreases in revenue also occurred due to reforms in managed care and a decrease in services provided in certain regions
due to other contract losses and inclement weather. The decrease in revenue was partially offset by revenues derived from
our new workforce development program in Wisconsin that began during 2013, as well as the impact of rate increases in
certain programs during 2013 and the implementation of other new programs in various markets.
39
Foster care services. Our foster care services revenues increased in 2013 from 2012 primarily as a result of expanding
services into rural areas in Tennessee and a new contract in Texas. We expect the Texas contract to be fully implemented in
2014.
Management fees. The termination of, and changes to, certain management service agreements resulted in decreased
management fees in 2013 as compared to 2012. We expect management fees to continue to decrease in 2014 and become a
nominal part of our business.
Operating expenses
NET Services
Cost of non-emergency transportation services. Non-emergency transportation services expenses included the
following for 2013 and 2012 (in thousands):
Year Ended December 31,
2013
2012
Dollar
change
Percent
change
Payroll and related costs ............................................... $
Purchased services .......................................................
Other operating expenses .............................................
Stock-based compensation ...........................................
Total cost of non-emergency transportation services $
92,549 $
591,538
25,261
1,080
710,428 $
79,048 $
600,494
25,713
1,437
706,692 $
13,501
(8,956)
(452)
(357)
3,736
17.1%
-1.5%
-1.8%
-24.8%
0.5%
Payroll and related costs. The increase in payroll and related costs of our NET Services segment for 2013 as
compared to 2012 was due to additional staff hired for new contracts and contract expansions in Georgia, Texas, South
Carolina and New York, along with additional staffing needed for expansion of the California ambulance commercial and
managed care lines of business. Payroll and related costs, as a percentage of NET Services revenue, increased to 12.0% for
2013 from 10.5% for 2012, as we have added additional call center staff to ensure our compliance with the more
demanding service authorization process and intake response time requirements of some of our new contracts, as well as
transitioning the Connecticut contract and various New York managed care contracts from full risk contracts to
administrative services only contracts. All of these activities resulted in higher payroll and related costs as a percentage of
consolidated revenue.
Purchased services. We subcontract with third party transportation providers to provide non-emergency
transportation services to our clients. The termination of our Arkansas and Wisconsin contracts, and the transition to an
administrative services only contract in Connecticut, whereby we are only responsible for the authorization process, not the
payment to transportation providers, has led to a decrease in purchased services. However, this decrease was partially offset
by additional purchased service costs for our expanded business in Georgia, Texas, South Carolina and California for 2013
as compared to 2012. As a percentage of NET Services revenue, purchased services decreased to approximately 76.8% for
2013, from 80.0% for 2012.
Other operating expenses. Other operating expenses decreased for 2013 as compared to 2012 due primarily to
efficiencies gained as we optimized most of our call center and management infrastructure, as well as a reduction in new
contract implementation costs. Other operating expenses as a percentage of NET Services revenues were 3.3% for 2013
and 3.4% for 2012.
Stock-based compensation. Stock-based compensation expense was approximately $1.1 million and $1.4 million for
2013 and 2012, respectively. This item was primarily comprised of the amortization of the fair value of stock options and
restricted stock awarded to employees of our NET Services segment under our 2006 Plan, as well as costs related to
performance restricted stock units granted to an executive officer and a key employee.
40
Human Services
Client service expense. Client service expense included the following for the years ended December 31, 2013 and
2012 (in thousands):
Year Ended December 31,
2013
2012
Dollar
change
Percent
change
Payroll and related costs ......................................... $
Purchased services .................................................
Other operating expenses .......................................
Stock-based compensation .....................................
Total client service expense ................................ $
229,452 $
27,748
51,792
631
309,623 $
228,782 $
26,000
48,408
894
304,084 $
670
1,748
3,384
(263)
5,539
0.3%
6.7%
7.0%
-29.4%
1.8%
Payroll and related costs. Our payroll and related costs increased in 2013 from 2012 primarily due to costs associated
with a workforce development contract in Wisconsin that began in 2013, a new foster care program in Texas, 2013 bonus
accruals and additional information technology staff added during 2013. These increases were partially offset by decreases
in payroll in Florida and Canada and in our nationwide tutoring business, primarily as the result of contract terminations
and the impact of waivers granted under the NCLB. Payroll and related costs as a percentage of revenue of our Human
Services segment were 65.1% for 2013 and 64.4% for 2012.
Purchased services. We incur a variety of other support service expenses in the normal course of our domestic
business, including foster parent payments, pharmacy payments and out-of-home placements. In addition, we subcontract
with a network of providers for a portion of the workforce development services we provide throughout British Columbia,
Canada. In 2013, we experienced an increase in foster parent payments of approximately $2.7 million, which corresponds
to the increase in foster care revenue. This increase in purchased services was partially offset by decreased costs resulting
from contract terminations in Canada of approximately $1.7 million as compared to 2012. Purchased services, as a
percentage of our Human Services segment revenues increased to 7.9% for 2013, up from 7.3% for 2012 due to the impact
of foster parent payments relative to the level of related revenue.
Other operating expenses. Other operating expenses increased by approximately $0.7 million for 2013 as compared to
2012 due to an increase in incurred but not reported automobile, general liability and workers’ compensation claims.
Additionally, other operating expenses increased by approximately $1.0 million for client related costs including client
mileage and transportation, primarily related to new program expenses. Program start-up costs for our new Texas contract
have also resulted in an increase in expense year over year. Other operating expenses, as a percentage of revenue of our
Human Services segment, increased to 14.7% for 2013 from 13.6% for 2012.
Stock-based compensation. Stock-based compensation expense was approximately $0.6 million and $0.9 million for
2013 and 2012, respectively. This item was primarily comprised of the amortization of the fair value of stock options and
restricted stock awarded to key employees under our 2006 Plan, as well as costs related to performance restricted stock
units granted to an executive officer.
General and administrative expense. General and administrative expenses were as follows (in thousands):
Year Ended December 31,
2013
2012
Dollar
change
Percent
change
$
48,633 $
53,383 $
(4,750)
-8.9%
The decrease in administrative expenses for 2013 as compared to 2012 was primarily a result of a net decrease in
payroll and related costs of approximately $3.6 million. This net decrease included decreased costs attributable to changes
in management service agreements and decreased severance costs, offset by an increase in accrued bonuses for 2013.
Additionally, charitable contribution expense declined by approximately $1.7 million as compared to 2012. These items
were partially offset by an increase in facilities costs of approximately $0.7 million related to our NET Services segment
growth and the opening of new operating locations. General and administrative expense, as a percentage of revenue,
decreased to 4.3% in 2013 from 4.8% in 2012, primarily due to the decreases in general and administrative expenses
discussed above, as well as a total revenue increase of approximately 1.5% that did not significantly impact general and
administrative expenses.
41
Depreciation and amortization. Depreciation and amortization were as follows (in thousands):
Year Ended December 31,
2013
2012
Dollar
change
Percent
change
$
14,872 $
15,023 $
(151)
-1.0%
As a percentage of revenues, depreciation and amortization was approximately 1.3% and 1.4% for 2013 and 2012,
respectively.
Asset impairment charge. Asset impairment charges were as follows (in thousands):
Year Ended December 31,
2013
2012
Dollar
change
Percent
change
$
492 $
2,506 $
(2,014)
-80.4%
During the second quarter of 2013, the not-for-profit entities managed by Rio Grande Management Company, L.L.C.
(“Rio”), our wholly-owned subsidiary, were notified of the termination of funding for certain of their services. We expected
that, due to this change in funding, the not-for-profit entities Rio serves will not be able to maintain the level of business
they historically experienced, which was expected to result in the decrease or elimination of services provided by Rio.
Based on these factors, in connection with preparing our quarterly financial statements for the period ended June 30, 2013,
we initiated an analysis of the fair value of goodwill and determined that goodwill related to Rio was impaired. Based on
this determination, we recorded a non-cash charge of approximately $0.5 million as of June 30, 2013 to reduce the carrying
value of the related goodwill to zero.
During 2012, WCG experienced a decline in its business due to the impact of a reorganization of the service delivery
system in British Columbia. As part of this reorganization, all of the contracts for services in this market expired and new
contracts were put up for bid. Due to an increased level of competition in British Columbia and a decrease in the number of
services funded, WCG was unable to regain the level of business it experienced prior to the reorganization. The impact of
this system reorganization was not fully realized until the conclusion of the transition to the new system in the third quarter
of 2012 and contributed to a decrease in the financial results of operations of WCG for 2012. Due to these factors, we
initiated an analysis of the fair value of goodwill and other intangible assets, and determined that customer relationships of
WCG which comprise other intangible assets were impaired. Based on this determination, we recorded a non-cash charge
of approximately $2.5 million to reduce the carrying value of customer relationship intangible assets based on their
estimated fair values as of September 30, 2012.
Non-operating (income) expense
Interest expense. Our current and long-term debt obligations have decreased to approximately $123.5 million at
December 31, 2013, from $130.0 million at December 31, 2012. The decrease in our interest expense for 2013 as compared
to 2012 primarily resulted from the decrease in outstanding debt, as well as a decrease in the interest rate from LIBOR plus
2.25% - 3.00% to LIBOR plus 1.75% - 2.50% under our credit facility as a result of the refinancing of our long-term debt
in August 2013.
Loss on extinguishment of debt. Loss on extinguishment of debt of approximately $0.5 million for 2013 resulted from
the write-off of deferred financing fees related to our credit facility that was refinanced in full in August 2013 with
proceeds of our amended and restated credit facility. We accounted for the unamortized deferred financing fees related to
the previous credit facility under ASC 470-50 – Debt Modifications and Extinguishments. As current and previous credit
facilities were loan syndications, and a number of lenders participated in both credit facilities, the Company evaluated the
accounting for financing fees on a lender by lender basis and recorded a charge accordingly.
Interest income. Interest income in each of 2013 and 2012 was approximately $0.1 million and resulted primarily
from interest earned on interest bearing bank and money market accounts.
42
Provision for income taxes
Our effective tax rate for 2013 and 2012 was 37.7% and 49.2%, respectively. Our effective tax rate was higher than
the United States federal statutory rate of 35.0% for 2013 and 2012 due primarily to state taxes as well as various non-
deductible expenses. The 2013 effective tax rate was favorably impacted primarily by disqualifying dispositions of
incentive stock options. The 2012 rate was favorably impacted by the final determination of the tax benefits related to
certain liabilities assumed as a result of a 2011 acquisition, but was unfavorably impacted by lower projected income
before income taxes, which was primarily due to the $2.5 million intangible impairment charge recorded in the quarter
ended September 30, 2012.
Adjusted EBITDA
After adjusting for the items noted in the table below, Adjusted EBITDA was $55.3 million for 2013 as compared to
$43.6 million for 2012.
EBITDA and Adjusted EBITDA are non-GAAP measurements. We utilize these non-GAAP measurements as a
means to measure overall operating performance and to better compare current operating results with other companies
within our industry. Details of the excluded items and a reconciliation of the non-GAAP financial measures to the most
comparable GAAP financial measure are presented in the table below. The non-GAAP measures do not replace the
presentation of our GAAP financial results. We have provided this supplemental non-GAAP information because we
believe it provides meaningful comparisons of the results of our operations for the periods presented. The non-GAAP
measures are not in accordance with, or an alternative for, GAAP and may be different from non-GAAP measures used by
some other companies.
(in thousands)
Year ended December 31,
2012
2013
Net income ....................................................................................................... $
19,438 $
Interest expense, net ..........................................................................................
Provision for income taxes ................................................................................
Depreciation and amortization ..........................................................................
6,894
11,777
14,872
EBITDA ...........................................................................................................
52,981
Asset impairment charge (a) .............................................................................
Payments related to retirement of executive officers, net (b) ............................
Strategic alternatives costs (c) ...........................................................................
Loss on extinguishment of debt (d) ...................................................................
492
1,277
-
525
8,482
7,508
8,211
15,023
39,224
2,506
1,293
593
-
Adjusted EBITDA ........................................................................................... $
55,275 $
43,616
a) Due to asset impairment charges taken in 2013 related to Rio and in 2012 related to WCG.
b) Represents payments related to the retirement or termination of certain executives and a key employee, net of benefit of
forfeiture of stock based compensation upon their departure.
c) Represents costs incurred related to our review of strategic alternatives arising from unsolicited proposals to take our
company private. We terminated this review in June 2012 upon determining that a continued focus on our operations
was the best alternative to maximize shareholder value.
d) Represents a loss on extinguishment of debt resulting from the write-off of deferred financing fees related to our credit
facility that was refinanced in full in August 2013.
43
Year ended December 31, 2012 compared to year ended December 31, 2011
Revenues
Non-emergency transportation services. Non-emergency transportation services revenues were as follows (in
thousands):
Year Ended December 31,
2012
2011
Dollar change
Percent change
$
750,658 $
581,541 $
169,117
29.1%
NET Services revenue was favorably impacted by the following:
• a new contract in Wisconsin effective July 1, 2011;
• re-contracting of the Missouri program in November 2011;
• geographical expansion and positive rate adjustment of our contracts in New Jersey;
• expansion of our regional Connecticut contract to a statewide contract;
• re-award of the two additional South Carolina regions in February 2012;
• the award of two additional regions in Georgia;
• a new contract in Texas which began in April 2012;
• multiple phases of a state administered New York City contract which began in May 2012;
• implementation of a Wisconsin contract effective September 1, 2012; and
• continued expansion of our California ambulance commercial and managed care lines of business.
Human services. Human services revenues are comprised of the following (in thousands):
Year Ended December 31,
2012
2011
Dollar
change
Percent
change
Home and community based services ................. $
Foster care services .............................................
Management fees ................................................
Total human services revenues ........................ $
309,300 $
33,534
12,397
355,231 $
314,556 $
34,204 $
12,679 $
361,439 $
(5,256)
(670)
(282)
(6,208)
-1.7%
-2.0%
-2.2%
-1.7%
Home and community based services. Contract price reductions in Arizona, contract terminations in Michigan,
Texas, Virginia and Canada, the impact of waivers granted under NCLB and reforms in managed care in certain regions led
to a decrease in home and community based services revenue for 2012 as compared to 2011. The decrease in revenue was
partially offset by the acquisition of ReDCo in June 2011, which contributed approximately $15.1 million to home and
community based services revenue for 2012 as compared to 2011. Further offsetting the decrease in revenue from 2012 to
2011 was the impact of increased census in certain locations as well as new programs being implemented in various
markets.
44
Foster care services. Our foster care services revenue decreased from 2011 to 2012 primarily as a result of a new per
diem rate structure implemented in Indiana in January 2012, which reduced payments for foster care services in that state as
well as a decrease in foster care services provided in Arizona, Oregon and Nevada due to reduced payer authorizations for
these services. This decrease, however, was partially offset by increased foster care services provided in Tennessee as we
continue to build our foster care program in that state.
Management fees. Fees for management services provided to certain not-for-profit organizations under management
services agreements decreased in 2012 as compared to 2011 primarily due to our acquisition of ReDCo, with whom we
previously had a management services agreement. The acquisition of ReDCo resulted in a reduction of management fees of
approximately $0.8 million in 2012.
Operating expenses
NET Services
Cost of non-emergency transportation services. Cost of non-emergency transportation services expense included the
following for 2012 and 2011 (in thousands):
Year Ended December 31,
2012
2011
Dollar
change
Percent
change
Payroll and related costs .................................. $
Purchased services ..........................................
Other operating expenses ................................
Stock-based compensation ..............................
Total cost of non-emergency transportation
79,048 $
600,494
25,713
1,437
58,289 $
455,888
24,043
1,197
20,759
144,606
1,670
240
services .................................................... $
706,692 $
539,417 $
167,275
35.6%
31.7%
6.9%
20.1%
31.0%
Payroll and related costs. The increase in payroll and related costs of our NET Services operating segment for 2012
as compared to 2011 was due to additional staff hired to service a new statewide Wisconsin contract effective July 1, 2011,
as well as the expansion of our existing business in New Jersey, along with additional staffing needed for expansion of the
California ambulance commercial and managed care lines of business. In addition, we re-entered the State of Missouri on
October 31, 2011 and hired staff for program implementations in Connecticut, Georgia, New York City, South Carolina,
Texas and Wisconsin commencing at various times from February 2012 to September 2012. Payroll and related costs, as a
percentage of NET Services revenue, increased to 10.5% for 2012 from 10.0% for 2011 as additional staff is needed during
the first three months of most contracts and or until volume and calls stabilize. In addition, some of these new contracts,
such as Texas are more labor intensive than some of our other historical programs.
Purchased services. We subcontract with third party transportation providers to provide non-emergency
transportation services to our clients. For 2012, we experienced higher utilization than in 2011 primarily due to relatively
warmer weather during the winter months resulting in fewer cancellations of scheduled trips. Additionally, since 2011, we
have added a statewide contract in Wisconsin, completed the operations expansion into all counties in New Jersey as well
as adding all of New Jersey’s managed care lives to the population we serve. Furthermore, we began a state-wide contract
in Missouri, expanded in Connecticut, Georgia and South Carolina, and implemented new contracts in New York and
Texas. These factors resulted in an increase in purchased transportation costs for 2012 as compared to 2011. As a
percentage of NET Services revenue, purchased services increased to approximately 80.0% for 2012 from approximately
78.4% for 2011 as a result of competitively bid contracts as well as higher utilization within existing and expanded
contracts.
Other operating expenses. Other operating expenses increased for 2012 as compared to 2011 due primarily to contract
start-up and implementation related expenses such as member communications, telecommunications, software
maintenance, business taxes and training. These increases were partially offset by a decrease in claims expense related to
Provado Insurance Services, Inc. (a wholly-owned subsidiary), or Provado, which did not renew its reinsurance agreement
or assume liabilities for insurance policies after February 15, 2011, as well as, a decrease in consulting services. Other
operating expenses as a percentage of revenue decreased to 3.4% for 2012 from 4.1% for 2011 as a result of these factors.
45
Stock-based compensation. Stock-based compensation expense primarily consisted of approximately $1.4 million and
$1.1 million for 2012 and 2011, respectively, which represents the amortization of the fair value of stock options and
restricted stock awarded to employees of our NET Services operating segment since January 1, 2009 under our 2006 Plan.
In addition, stock-based compensation expense included costs related to performance restricted stock units granted to an
executive officer.
Human Services
Client service expense. Client service expense included the following for the years ended December 31, 2012 and
2011 (in thousands):
Year Ended December 31,
2012
2011
Dollar
change
Percent
change
Payroll and related costs .................................. $
Purchased services ..........................................
Other operating expenses ................................
Stock-based compensation ..............................
Total client service expense ......................... $
228,782 $
26,000
48,408
894
304,084 $
222,129 $
32,880
48,588
810
304,407 $
6,653
(6,880 )
(180 )
84
(323 )
3.0%
-20.9%
-0.4%
10.4%
-0.1%
Payroll and related costs. Our payroll and related costs increased from 2011 to 2012 because we added over 600 new
employees in connection with the acquisition of ReDCo, which resulted in an increase in payroll and related costs of
approximately $12.6 million for 2012 as compared to 2011. In addition, we experienced increased healthcare claims
activity under our self-funded employee health plan, which resulted in increased expense of approximately $1.4 million for
2012 as compared to 2011. These increases were partially offset by a net decrease in payroll in Michigan, Texas, Virginia
and Canada as a result of contract terminations in these markets. As a percentage of revenue of our Human Services
segment, payroll and related costs increased to 64.4% for 2012 from 61.5% for 2011 primarily due to the impact of higher
payroll and related costs of ReDCo relative to its revenue contribution and increased healthcare claims activity under our
self-funded employee health plan.
Purchased services. We subcontract with a network of providers for a portion of the workforce development services
we provide throughout British Columbia. In addition, we incur a variety of other support service expenses in the normal
course of business including foster parent payments, pharmacy payments and out-of-home placements. In 2012 we
experienced decreased costs resulting from contract terminations in Canada of approximately $4.5 million, decreased cost
of other support services of approximately $1.0 million, and decreased foster parent payments of approximately $1.3
million, as compared to 2011. Purchased services, as a percentage of our Human Services segment revenue, decreased to
7.3% for 2012 from 9.1% for 2011 due to the fact that we incurred only nominal additional purchased services expense as a
result of the inclusion of ReDCo relative to the revenue contributed by this acquired business.
Other operating expenses. The acquisition of ReDCo added approximately $1.7 million to other operating expenses
for 2012 as compared to 2011. In addition, expense related to our wholly-owned captive insurance subsidiary for workers
compensation and general and professional liability claims incurred but not reported increased for 2012 as compared to
2011 due to a change in the estimated cost of these claims as determined by actuarial analysis. The increase in other
operating expenses was partially offset by decreased costs associated with our Michigan, Texas and Canada operations due
to contract terminations. As a result, other operating expenses, as a percentage of revenue of our Human Service segment,
increased to 13.6% for 2012 from 13.4% for 2011.
Stock-based compensation. Stock-based compensation expense primarily consisted of approximately $0.8 million and
$0.7 million for 2012 and 2011, respectively, which represents the amortization of the fair value of stock options and
restricted stock awarded to key employees since January 1, 2009 under our 2006 Plan. In addition, stock-based
compensation expense included costs related to performance restricted stock units granted to an executive officer.
46
General and administrative expense. General and administrative expenses were as follows (in thousands):
Year Ended December 31,
2012
2011
Dollar
change
Percent
change
$
53,383 $
48,861 $
4,522
9.3%
The increase in corporate administrative expenses for 2012 as compared to 2011 was primarily a result of an increase
of approximately $2.5 million in rent and related charges, of which approximately $0.9 million related to the ReDCo
acquisition. Additionally, corporate administrative expenses for 2012 as compared to 2011 increased due to payments
related to the retirement of two executive officers in November 2012 of approximately $2.2 million and rent expense
related to unused office space of approximately $0.4 million. Partially offsetting the increase in corporate administrative
expenses for 2012 as compared to 2011 was a decrease in stock compensation expense of approximately $0.6 million due
to the forfeiture of stock based compensation related to the retirement of two executive officers in 2012, net of accelerated
vesting of restricted stock grants due to the death of a company director. Corporate administrative costs also included
expenses of approximately $0.6 million related to third party professional fees associated with the consideration of strategic
alternatives, which resulted in increased expense for 2012 as compared to 2011. As a percentage of revenue, general and
administrative expense decreased to 4.8% for 2012 from 5.2% for 2011 due to revenue growth outpacing the growth in
corporate administrative expenses.
Depreciation and amortization. Depreciation and amortization were as follows (in thousands):
Year Ended December 31,
2012
2011
Dollar
change
Percent
change
$
15,023 $
13,656 $
1,367
10.0%
As a percentage of revenues, depreciation and amortization was approximately 1.4% for 2012 and 2011.
Asset impairment charge
During 2012, WCG experienced a decline in its business due to the impact of a reorganization of the service delivery
system in British Columbia. As part of this reorganization, all of the contracts for services in this market expired and new
contracts were put up for bid. Due to an increased level of competition in British Columbia and a decrease in the number of
services funded, WCG was unable to regain the level of business it experienced prior to the reorganization. The impact of
this system reorganization was not fully realized until the conclusion of the transition to the new system in the third quarter
of 2012 and contributed to a decrease in the financial results of operations of WCG for 2012. Based on these factors, we
initiated an analysis of the fair value of goodwill and other intangible assets and determined that customer relationships
which comprise other intangible assets were impaired at September 30, 2012. Based on this determination, we recorded a
non-cash charge of approximately $2.5 million to reduce the carrying value of customer relationships based on their
estimated fair values.
Non-operating (income) expense
Interest expense. Our current and long-term debt obligations have decreased to $130.0 million at December 31, 2012
from approximately $150.5 million at December 31, 2011, which was a significant factor contributing to the decrease in
our interest expense for 2012 as compared to 2011. Additionally, in March 2011, our interest rate under our credit facility
decreased from LIBOR plus 6.5% to LIBOR plus 2.75% due to the refinancing of our long-term debt.
Loss on extinguishment of debt. Loss on extinguishment of debt for 2011 of approximately $2.5 million resulted from
the write-off of deferred financing fees related to our credit facility that was refinanced in full in March 2011. We
accounted for the unamortized deferred financing fees related to the previous credit facility under ASC 470-50 – Debt
Modifications and Extinguishments. As current and previous credit facilities were loan syndications, and a number of
lenders participated in both credit facilities, the Company evaluated the accounting for financing fees on a lender by lender
basis, which resulted in a loss on extinguishment of debt of $2.5 million.
47
Gain on bargain purchase. On June 1, 2011, we acquired all of the equity interest of ReDCo. The fair value of the net
assets acquired of approximately $11.3 million exceeded the purchase price of the business of approximately $8.6 million.
Accordingly, the acquisition was accounted for as a bargain purchase and, as a result, we recognized a gain of
approximately $2.7 million associated with the acquisition.
Interest income. Interest income for 2012 and 2011 was approximately $0.1 million and $0.2 million, respectively,
and resulted primarily from interest earned on interest bearing bank and money market accounts.
Provision for income taxes
Our effective tax rate from continuing operations for 2012 and 2011 was 49.2% and 37.0%, respectively. Our
effective tax rate was higher than the United States federal statutory rate of 35.0% for 2011 and 2012 due primarily to state
taxes as well as non-deductible stock option expense. Additionally, the tax rate for 2011 was favorably impacted by the
gain on bargain purchase, recorded net of deferred taxes of approximately $1.4 million, which was not subject to income
taxation. Further, the effective tax rate for 2012 was favorably impacted by the final determination of the tax benefits
related to certain liabilities assumed as a result of a 2011 acquisition and unfavorably impacted by lower income before
income taxes, which was partially due to the $2.5 million asset impairment charge recorded in the quarter ended September
30, 2012.
Adjusted EBITDA
After adjusting for the items noted in the table below, Adjusted EBITDA was $43.6 million for 2012 as compared to
$50.3 million for 2011.
48
EBITDA and Adjusted EBITDA are non-GAAP measurements. We utilize these non-GAAP measurements as a
means to measure overall operating performance and to better compare current operating results with other companies
within our industry. Details of the excluded items and a reconciliation of the non-GAAP financial measures to the most
comparable GAAP financial measure are presented in the table below. The non-GAAP measures do not replace the
presentation of our GAAP financial results. We have provided this supplemental non-GAAP information because we
believe it provides meaningful comparisons of the results of our operations for the periods presented. The non-GAAP
measures are not in accordance with, or an alternative for, GAAP and may be different from non-GAAP measures used by
some other companies.
(in thousands)
Year ended December 31,
2011
2012
Net income ....................................................................................................... $
8,482 $
Interest expense, net ..........................................................................................
Provision for income taxes ................................................................................
Depreciation and amortization ..........................................................................
7,508
8,211
15,023
EBITDA ...........................................................................................................
39,224
Asset impairment charge (a) .............................................................................
Payments related to retirement of executive officers, net (b) ............................
Strategic alternatives costs (c) ...........................................................................
Loss on extinguishment of debt (d) ...................................................................
Gain on bargain purchase (e) ............................................................................
2,506
1,293
593
-
-
16,940
10,002
9,945
13,656
50,543
-
-
-
2,463
(2,711)
Adjusted EBITDA ........................................................................................... $
43,616 $
50,295
a) Due to the impact of a reorganization of the service delivery system in British Columbia, Canada during 2012 that
required WCG to rebid all of its contracts, we recorded an asset impairment charge totaling approximately $2.5 million
related to WCG’s intangible assets for 2012.
b) Represents payments related to the retirement of the Company’s former CEO and CFO in 2012, net of benefit of
forfeiture of stock based compensation upon their departure.
c) Represents costs incurred related to our review of strategic alternatives arising from unsolicited proposals to take our
company private. We terminated this review in June 2012 upon determining that a continued focus on our operations
was the best alternative to maximize shareholder value.
d) Represents a loss on extinguishment of debt resulting from the write-off of deferred financing fees related to our credit
facility that was refinanced in full in March 2011.
e) Represents a gain associated with our acquisition of ReDCo in 2011 where the fair value of the acquired entity’s net
assets exceeded the purchase price of the entity.
Seasonality
Our quarterly operating results and operating cash flows normally fluctuate as a result of seasonal variations in our
business. In our Human Services operating segment, lower client demand for our home and community based services
during the holiday and summer seasons generally results in lower revenue during those periods. However, our operating
expenses related to the Human Services operating segment do not vary significantly with these changes. As a result, our
Human Services operating segment typically experiences lower operating margins during the holiday and summer seasons.
Our NET Services operating segment also experiences fluctuations in demand for our non-emergency transportation
services during the summer, winter and holiday seasons. Due to higher demand in the summer months and lower demand in
the winter and holiday seasons, coupled with a primarily fixed revenue stream based on a per member, per month payment
structure, our NET Services operating segment normally experiences lower operating margins in the summer season and
higher operating margins in the winter and holiday seasons.
49
Liquidity and capital resources
Short-term liquidity requirements consist primarily of recurring operating expenses and debt service requirements.
We expect to meet these requirements through available cash on hand, the generation of cash from our operating segments
and from our revolving credit facility.
Cash flow from operations was our primary source of cash in 2013. Our balance of cash and cash equivalents was
approximately $99.0 million and $55.9 million at December 31, 2013 and 2012, respectively. Approximately $4.6 million
of cash was held by WCG at December 31, 2013, and is not available to fund domestic operations unless the funds are
repatriated. The repatriation of funds would be subject to certain taxes and fees that are prohibitive, and as such, we do not
currently intend to repatriate funds held internationally. We had restricted cash of approximately $15.7 million and $12.7
million at December 31, 2013 and 2012, respectively, related to contractual obligations and activities of our captive
insurance subsidiaries and other subsidiaries. At December 31, 2013 and 2012, our total debt was approximately $123.5
million and $130.0 million, respectively.
We may access capital markets to raise equity financing for various business reasons, including required debt
payments and acquisitions. The timing, term, size, and pricing of any such financing will depend on investor interest and
market conditions, and there can be no assurance that we will be able to obtain any such financing. In addition, with respect
to required debt payments, our credit agreement requires us, subject to certain exceptions as set forth in the credit
agreement, to prepay the outstanding loans in an aggregate amount equal to 100% of the net cash proceeds received from
certain asset dispositions, debt issuances, insurance and casualty awards and other extraordinary receipts.
Cash flows
Operating activities. We generated net cash flows from operating activities of approximately $55.2 million for 2013.
These cash flows included net income of approximately $19.4 million, and net non-cash items including depreciation,
amortization, amortization of deferred financing costs, loss on extinguishment of debt, provision for doubtful accounts,
stock-based compensation, deferred income taxes, asset impairment charge and other items of approximately $19.1 million.
The balance of the cash provided by operating activities is primarily due to the net effect of changes in other working
capital items, including the following significant items:
● approximately $18.9 million due to the increase in accounts payable and accrued expenses primarily attributable
to the timing of payments related to non-emergency transportation contract reimbursements; and
● approximately $6.4 million related to the decrease in accrued purchased transportation primarily due to the
termination of the two Wisconsin NET Services contracts effective July 31, 2013 and the transition to an
administrative services only contract in Connecticut.
Investing activities. Net cash used in investing activities totaled approximately $13.8 million for 2013. Approximately
$10.2 million was used to purchase property and equipment to support the growth of our operations. Additionally,
approximately $2.8 million of this amount related to an increase in restricted cash, which was primarily due to the annual
insurance policy renewals and the opening of a trust account for our wholly-owned captive insurance subsidiary.
Financing activities. Net cash provided by financing activities totaled approximately $2.1 million for 2013. Under the
amended and restated credit facility we entered into in August 2013, we borrowed $60.0 million under a term loan and
$16.0 million from our revolving credit facility, and repaid approximately $82.5 million of existing long-term debt. We
also paid financing fees associated with the refinancing of our long-term debt, of which approximately $0.3 million were
expensed and approximately $1.8 million were deferred and are being amortized over the life of the credit facility. Cash
provided by financing activities also included $11.2 million of cash received from employee stock option exercises and the
related excess tax benefits.
Obligations and commitments
Convertible senior subordinated notes. On November 13, 2007, we issued $70.0 million in aggregate principal
amount of 6.5% Convertible Senior Subordinated Notes (“Senior Notes”), under the amended note purchase agreement
dated November 9, 2007 to the purchasers named therein in connection with the acquisition of Charter LCI Corporation,
including its subsidiaries, collectively referred to as LogistiCare. Approximately $47.5 million of the Senior Notes
remained outstanding as of December 31, 2013 and are due in 2014. The proceeds of $70.0 million were used to partially
50
fund the cash portion of the purchase price paid by us to acquire LogistiCare. The Senior Notes are general unsecured
obligations subordinated in right of payment to any existing or future senior debt.
In connection with our issuance of the Senior Notes, we entered into an Indenture between us, as issuer, and The
Bank of New York Trust Company, N.A., as trustee, or the Indenture.
We pay interest at a rate of 6.5% per annum on the Senior Notes in cash semiannually in arrears on May 15 and
November 15 of each year. The Senior Notes will mature on May 15, 2014.
The Senior Notes are convertible, under certain circumstances, into our common stock at a conversion rate, subject to
adjustment as provided for in the Indenture, of 23.982 shares per $1,000 principal amount of Senior Notes. This conversion
rate is equivalent to an initial conversion price of approximately $41.698 per share. On and after the occurrence of a
fundamental change (as defined below), the Senior Notes will be convertible at any time prior to the close of business on
the business day before the stated maturity date of the Senior Notes. In the event of a fundamental change as described in
the Indenture, each holder of the Senior Notes shall have the right to require us to repurchase the Senior Notes for cash. A
fundamental change includes among other things: (i) the acquisition in a transaction or series of transactions of 50% or
more of the total voting power of all shares of our capital stock; (ii) a merger or consolidation of our company with or into
another entity, merger of another entity into our company, or the sale, transfer or lease of all or substantially all of our
assets to another entity (other than to one or more of our wholly-owned subsidiaries), other than any such transaction
(A) pursuant to which holders of 50% or more of the total voting power of our capital stock entitled to vote in the election
of directors immediately prior to such transaction have or are entitled to receive, directly or indirectly, at least 50% or more
of the total voting power of the capital stock entitled to vote in the election of directors of the continuing or surviving
corporation immediately after such transaction or (B) which is effected solely to change the jurisdiction of incorporation of
our company and results in a reclassification, conversion or exchange of outstanding shares of our common stock into
solely shares of common stock; (iii) if, during any consecutive two-year period, individuals who at the beginning of that
two-year period constituted our board of directors, together with any new directors whose election to our board of directors
or whose nomination for election by our stockholders, was approved by a vote of a majority of the directors then still in
office who were either directors at the beginning of such period or whose election or nomination for election was
previously approved, cease for any reason to constitute a majority of our board of directors then in office; (iv) if a
resolution approving a plan of liquidation or dissolution of our company is approved by our board of directors or our
stockholders; and (v) upon the occurrence of a termination of trading as defined in the Indenture.
The Indenture contains customary terms and provisions that provide that upon certain events of default, including,
without limitation, the failure to pay amounts due under the Senior Notes when due, the failure to perform or observe any
term, covenant or agreement under the Indenture, or certain defaults under other agreements or instruments, occurring and
continuing, either the trustee or the holders of not less than 25% in aggregate principal amount of the Senior Notes then
outstanding may declare the principal of the Senior Notes and any accrued and unpaid interest through the date of such
declaration immediately due and payable. Upon any such declaration, such principal, premium, if any, and interest shall
become due and payable immediately. In the case of certain events of bankruptcy or insolvency relating to us or any
significant subsidiary of our company, the principal amount of the Senior Notes together with any accrued interest through
the occurrence of such event shall automatically become and be immediately due and payable without any declaration or
other act of the Trustee or the holders of the Senior Notes.
During 2012, we repurchased approximately $2.5 million principal amount of the Senior Notes with cash.
Credit facility. On August 2, 2013, we entered into an Amended and Restated Credit Agreement with Bank of
America, N.A., as administrative agent, swing line lender and letter of credit issuer, SunTrust Bank, as syndication agent,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and SunTrust Robinson Humphrey, Inc., as joint lead arrangers and
joint book managers and other lenders party thereto. The Amended and Restated Credit Agreement provides us with a
senior secured credit facility, or the New Senior Credit Facility, in aggregate principal amount of $225.0 million, comprised
of a $60.0 million term loan facility and a $165.0 million revolving credit facility. The New Senior Credit Facility includes
sublimits for swingline loans and letters of credit in amounts of up to $10.0 million and $25.0 million, respectively. On
August 2, 2013, we borrowed the entire amount available under the term loan facility and $16.0 million under our
revolving credit facility and used the proceeds thereof to refinance certain of our existing indebtedness. Prospectively, the
proceeds of the New Senior Credit Facility may be used to (i) fund ongoing working capital requirements; (ii) make capital
expenditures; (iii) repay the Senior Notes; and (iv) other general corporate purposes.
51
Under the New Senior Credit Facility we have an option to request an increase in the amount of the revolving credit
facility and/or the term loan facility from time to time (on substantially the same terms as apply to the existing facilities) in
an aggregate amount of up to $75.0 million with either additional commitments from lenders under the Amended and
Restated Credit Agreement at such time or new commitments from financial institutions acceptable to the administrative
agent in its reasonable discretion, so long as no default or event of default exists at the time of any such increase. We may
not be able to access additional funds under this increase option as no lender is obligated to participate in any such increase
under the New Senior Credit Facility.
The New Senior Credit Facility matures on August 2, 2018. We may prepay the New Senior Credit Facility in whole
or in part, at any time without premium or penalty, subject to reimbursement of the lenders’ breakage and redeployment
costs in connection with prepayments of LIBOR loans. The unutilized portion of the commitments under the New Senior
Credit Facility may be irrevocably reduced or terminated by us at any time without penalty.
Interest on the outstanding principal amount of the loans accrues, at our election, at a per annum rate equal to the
London Interbank Offering Rate, or LIBOR, plus an applicable margin or the base rate plus an applicable margin. The
applicable margin ranges from 1.75% to 2.50% in the case of LIBOR loans and 0.75% to 1.50% in the case of the base rate
loans, in each case, based on our consolidated leverage ratio as defined in the Amended and Restated Credit Agreement.
Interest on the loans is payable quarterly in arrears. The interest rate applied to our term loan at December 31, 2013 was
2.42%. In addition, we are obligated to pay a quarterly commitment fee based on a percentage of the unused portion of each
lender’s commitment under the revolving credit facility and quarterly letter of credit fees based on a percentage of the
maximum amount available to be drawn under each outstanding letter of credit. The commitment fee and letter of credit fee
ranges from 0.25% to 0.50% and 1.75% to 2.50%, respectively, in each case, based on our consolidated leverage ratio.
The term loan facility under the New Senior Credit Facility is subject to quarterly amortization payments,
commencing on December 31, 2014, so that the following percentages of the term loan outstanding on the closing date plus
the principal amount of any term loans funded pursuant to the increase option are repaid as follows: 5.0% between
December 31, 2014 and September 30, 2015, 7.5% between December 31, 2015 and September 30, 2016, 10.0% between
December 31, 2016 and September 30, 2017, 11.25% between December 31, 2017 and June 30, 2018 and the remaining
balance at maturity. The New Senior Credit Facility also requires us (subject to certain exceptions as set forth in the
Amended and Restated Credit Agreement) to prepay the outstanding loans in an aggregate amount equal to 100% of the net
cash proceeds received from certain asset dispositions, debt issuances, insurance and casualty awards and other
extraordinary receipts.
The Amended and Restated Credit Agreement contains customary affirmative and negative covenants and events of
default. The negative covenants include restrictions on our ability to, among other things, incur additional indebtedness,
create liens, make investments, give guarantees, pay dividends, sell assets and merge and consolidate. We are subject to
financial covenants, including consolidated net leverage and consolidated fixed charge covenants. We were in compliance
with all covenants as of December 31, 2013.
We had $16.0 million of borrowings outstanding under the revolving credit facility as of December 31, 2013. $25.0
million of the revolving credit facility is available to collateralize certain letters of credit. As of December 31, 2013, there
were six letters of credit in the amount of approximately $6.7 million collateralized under the revolving credit facility. At
December 31, 2013, our available credit under the revolving credit facility was $142.3 million.
Our obligations under the New Senior Credit Facility are guaranteed by all of our present and future domestic
subsidiaries, excluding certain domestic subsidiaries, which include our insurance captives and not-for-profit subsidiaries.
Our obligations under, and each guarantor’s obligations under its guaranty of, the New Senior Credit Facility are secured
by a first priority lien on substantially all of our respective assets, including a pledge of 100% of the issued and outstanding
stock of our domestic subsidiaries and 65% of the issued and outstanding stock of our first tier foreign subsidiaries.
We incurred fees of approximately $2.1 million to refinance our long-term debt. We have accounted for fees related
to the refinancing of our long-term debt, as well as unamortized deferred financing fees related to the Senior Credit
Facility, under ASC 470-50 – Debt Modifications and Extinguishments. As both credit facilities were loan syndications,
and a number of lenders participated in both credit facilities, we evaluated the accounting for financing fees on a lender by
lender basis. Of the total amount of deferred financing fees related to the Senior Credit Facility, approximately $0.8 million
will continue to be deferred and amortized and approximately $0.5 million was expensed in the quarter ending September
30, 2013. Of the $2.1 million of fees incurred to refinance the long-term debt, approximately $1.8 million will be deferred
and amortized and approximately $0.3 million was expensed in the quarter ending September 30, 2013.
52
Contingent obligations. Under The Providence Service Corporation Deferred Compensation Plan, as amended, or
Deferred Compensation Plan, eligible employees and independent contractors of a participating employer (as defined in the
Deferred Compensation Plan) may defer all or a portion of their base salary, service bonus, performance-based
compensation earned in a period of 12 months or more, commissions and, in the case of independent contractors,
compensation reportable on Form 1099. The Deferred Compensation Plan is unfunded and benefits are paid from our
general assets. We also maintain a 409(A) Deferred Compensation Rabbi Trust Plan for highly compensated employees of
our NET Services operating segment. Benefits are paid from our general assets under this plan.
Reinsurance and Self-Funded Insurance Programs
Reinsurance
We reinsure a substantial portion of our automobile, general and professional liability and workers’ compensation
costs under reinsurance programs through Social Services Providers Captive Insurance Company (“SPCIC”), a wholly
owned subsidiary of the Company. Historically, we also provided reinsurance for policies written by a third party insurer
for general liability, automobile liability, and automobile physical damage coverage to certain members of the network of
subcontracted transportation providers and independent third parties under our NET Services operating segment through
Provado. While Provado did not renew its insurance agreement in February 2011 and no longer assumes liabilities for new
policies, it will continue to administer existing policies for the foreseeable future and resolve remaining and future claims
related to those policies. Provado is a licensed captive insurance company domiciled in the State of South Carolina. The
decision to reinsure our risks and provide a self-funded health insurance program to our employees was made based on
current conditions in the insurance marketplace that have led to increasingly higher levels of self-insurance retentions,
increasing number of coverage limitations, and fluctuating insurance premium rates.
SPCIC:
SPCIC, which is a licensed captive insurance company domiciled in the State of Arizona, reinsures third-party
insurers for general and professional liability exposures for the first dollar of each and every loss up to $1.0 million per loss
and $5.0 million in the aggregate. At December 31, 2013, the cumulative reserve for expected losses since inception in
2005 of this reinsurance program was approximately $2.4 million. The excess premium over our expected losses may be
used to fund SPCIC’s operating expenses, fund any deficit arising in automobile and workers’ compensation liability
coverage, provide for surplus reserves, and fund any other risk management activities.
SPCIC reinsures a third-party insurer for worker’s compensation insurance for the first dollar of each and every loss
up to $0.5 million per occurrence with an $11.0 million annual policy aggregate limit. The cumulative reserve for expected
losses since inception in 2005 of this reinsurance program at December 31, 2013 was approximately $8.0 million.
SPCIC also reinsures a third-party insurer for automobile liability exposures for approximately $250 thousand per
claim. The cumulative reserve for expected losses since inception in 2013 of this reinsurance program at December 31,
2013 was approximately $0.3 million.
Based on an independent actuarial report, our expected losses related to workers’ compensation, automobile and
general and professional liability in excess of our liability under our associated reinsurance programs at December 31, 2013
was approximately $3.5 million. We recorded a corresponding receivable from third-party insurers and liability at
December 31, 2013 for these expected losses, which would be paid by third-party insurers to the extent losses are incurred.
We have an umbrella liability insurance policy providing additional coverage in the amount of $25.0 million in the
aggregate in excess of the policy limits of the general and professional liability insurance policy and automobile liability
insurance policy.
53
SPCIC had restricted cash of approximately $13.9 million and $10.7 million at December 31, 2013 and 2012,
respectively, which was restricted to secure the reinsured claims losses of SPCIC under the automobile, general and
professional liability and workers’ compensation reinsurance programs. The full extent of claims may not be fully
determined for years. Therefore, the estimates of potential obligations are based on recommendations of an independent
actuary using historical data, industry data, and our claims experience. Although we believe that the amounts accrued for
losses incurred but not reported under the terms of our reinsurance programs are sufficient, any significant increase in the
number of claims or costs associated with these claims made under these programs could have a material adverse effect on
our financial results.
Provado:
Under a reinsurance agreement with a third party insurer, Provado reinsures the third party insurer for the first $250
thousand of each loss for each line of coverage, subject to an annual aggregate equal to 107.7% of gross written premium,
and certain claims in excess of $250 thousand to an additional aggregate limit of $1.1 million. The cumulative reserve for
expected losses of this reinsurance program at December 31, 2013 was approximately $1.9 million. As noted above,
effective February 15, 2011, Provado did not renew its reinsurance agreement and will not assume liabilities for policies
after that date. It will continue to administer existing policies for the foreseeable future and resolve remaining and future
claims related to these policies.
The liabilities for expected losses and loss adjustment expenses are based primarily on individual case estimates for
losses reported by claimants. An estimate is provided for losses and loss adjustment expenses incurred but not reported on
the basis of our claims experience and claims experience of the industry. These estimates are reviewed at least annually by
independent consulting actuaries. As experience develops and new information becomes known, the estimates are adjusted.
Providence Liability Insurance Coverages
The decision to reinsure our risks and provide a self-funded health insurance program to our employees was made
based on current conditions in the insurance marketplace that have led to increasingly higher levels of self-insurance
retentions, increasing number of coverage limitations, and fluctuating insurance premium rates. Certain changes are made
periodically to our insurance coverage which we believe balances our costs and risks in an appropriate manner. While we
are insured for the types of claims discussed above, damages exceeding our insurance limits or outside our insurance
coverage, such as a claim for fraud or punitive damages, could adversely affect our cash flow and financial condition.
Health Insurance
We offer our employees an option to participate in a self-funded health insurance program. As of December 31, 2013,
health claims were self-funded with a stop-loss umbrella policy with a third party insurer to limit the maximum potential
liability for individual claims to $250 thousand per person and for a maximum potential claim liability based on member
enrollment.
Health insurance claims are paid as they are submitted to the plan administrator. We maintain accruals for claims that
have been incurred but not yet reported to the plan administrator, and therefore, have not been paid. The incurred but not
reported reserve is based on an established cap and current payment trends of health insurance claims. The liability for the
self-funded health plan of approximately $1.9 million and $2.1 million as of December 31, 2013 and 2012, respectively,
was recorded in “Reinsurance liability reserve” in our consolidated balance sheets.
We charge our employees a portion of the costs of our self-funded group health insurance programs. We determine
this charge at the beginning of each plan year based upon historical and projected medical utilization data. Any difference
between our projections and our actual experience is borne by us. We estimate potential obligations for liabilities under this
program to reserve what we believe to be a sufficient amount to cover liabilities based on our past experience. Any
significant increase in the number of claims or costs associated with claims made under this program above what we
reserve could have a material adverse effect on our financial results.
54
Contractual cash obligations.
The following is a summary of our future contractual cash obligations as of December 31, 2013:
Contractual cash obligations (000's)
Debt ................................................................. $
Interest (1) .......................................................
Purchased services commitments ....................
Operating Leases .............................................
Total ................................................................ $
Total
123,500 $
9,972
487
55,906
189,865 $
At December 31, 2013
1-3
Years
Less than
1 Year
3-5
Years
48,250 $
3,601
404
15,662
67,917 $
8,250 $
3,715
83
20,800
32,848 $
67,000 $
2,656
-
10,578
80,234 $
After 5
Years
-
-
-
8,866
8,866
(1) Future interest payments have been calculated at the current rates as of December 31, 2013.
Stock repurchase program
In 2012, we spent approximately $3.5 million to repurchase 293,600 shares of our common stock in the open market
under a stock repurchase program approved by our board of directors on February 1, 2007. Under this stock repurchase
program we may repurchase up to one million shares of our common stock from time to time on the open market or in
privately negotiated transactions, depending on market conditions and our capital requirements. Since inception, we have
spent approximately $14.4 million to purchase 756,100 shares of our common stock on the open market. We did not
purchase shares of our common stock during the period 2008 through 2011 or during 2013 under this plan.
Off-balance sheet arrangements
As of December 31, 2013 and 2012, we did not have any relationships with unconsolidated entities or financial
partnerships, such as entities referred to as structured finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
New Accounting Pronouncements
In February 2013, the FASB issued ASU 2013-02-Comprehensive Income (Topic 220): Reporting of Amounts
Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”). ASU 2013-02 is intended to improve the
reporting of reclassifications out of accumulated other comprehensive income. Accordingly, an entity is required to report
the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net
income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other
amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an
entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those
amounts. The amendments in this ASU supersede the presentation requirements for reclassifications out of accumulated
other comprehensive income in ASU 2011-05 and ASU 2011-12. ASU 2013-02 is effective for reporting periods beginning
after December 15, 2012. We adopted ASU 2013-02 effective January 1, 2013. The adoption of ASU 2013-02 did not have
an effect on the presentation of our consolidated financial statements.
Forward-Looking Statements
Certain statements contained in this report on Form 10-K, such as any statements about our confidence or strategies or
our expectations about revenues, liabilities, results of operations, cash flows, ability to fund operations, profitability, ability
to meet financial covenants, contracts or market opportunities, constitute forward-looking statements within the meaning of
section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. These forward-looking
statements are based on our current expectations, assumptions, estimates and projections about our business and our
industry. You can identify forward-looking statements by the use of words such as “may,” “should,” “will,” “could,”
“estimates,” “predicts,” “potential,” “continue,” “anticipates,” “believes,” “plans,” “expects,” “future,” and “intends” and
similar expressions which are intended to identify forward-looking statements.
55
The forward-looking statements contained herein are not guarantees of our future performance and are subject to a
number of known and unknown risks, uncertainties and other factors, some of which are beyond our control and difficult to
predict and could cause our actual results or achievements to differ materially from those expressed, implied or forecasted
in the forward-looking statements. These risks and uncertainties include, but are not limited to the risks described under
Part I Item 1A of this report.
All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their
entirety by the cautionary statements contained above and throughout this report. You are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date the statement was made. We do not intend to
update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
Foreign currency translation
We conduct business in Canada through our wholly-owned subsidiary WCG, and as such, our cash flows and
earnings are subject to fluctuations from changes in foreign currency exchange rates. We believe that the impact of
currency fluctuations does not represent a significant risk to us given the size and scope of our current international
operations. Therefore, we do not hedge against the possible impact of this risk. A 10% adverse change in the foreign
currency exchange rate would not have a significant impact on our consolidated results of operations or financial position.
Interest rate and market risk
As of December 31, 2013, we had borrowings under our term loan of $60.0 million and borrowings under our
revolving line of credit of $16.0 million. Borrowings under the Credit Agreement accrued interest at LIBOR plus
2.25% per annum as of December 31, 2013. An increase of 1% in the LIBOR rate would cause an increase in interest
expense of up to $3.2 million over the remaining term of the Amended and Restated Credit Agreement, which expires in
2018.
We have convertible senior subordinated notes of $47.5 million outstanding at December 31, 2013 in connection with
an acquisition completed in 2007. These notes bear a fixed interest rate of 6.5%.
We assess the significance of interest rate market risk on a periodic basis and may implement strategies to manage
such risk as we deem appropriate.
56
Item 8.
Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Management’s Report on Internal Control Over Financial Reporting ............................................................................... 58
Reports of Independent Registered Public Accounting Firm ............................................................................................. 59
Consolidated Balance Sheets at December 31, 2013 and 2012 .......................................................................................... 61
For the years ended December 31, 2013, 2012 and 2011:
Consolidated Statements of Income ................................................................................................................................... 62
Consolidated Statements of Comprehensive Income ......................................................................................................... 63
Consolidated Statements of Stockholders’ Equity ............................................................................................................. 64
Consolidated Statements of Cash Flows ............................................................................................................................ 65
Notes to Consolidated Financial Statements ...................................................................................................................... 67
57
Management’s Report on Internal Control Over Financial Reporting
Our management has the responsibility for establishing and maintaining adequate internal control over financial
reporting for the registrant, as such term is defined in the Securities Exchange Act of 1934 Rule 13a-15(f). Under the
supervision and with the participation of our principal executive officer and principal financial officer, we conducted an
assessment, as of December 31, 2013, of the effectiveness of our internal control over financial reporting based on the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control–
Integrated Framework (1992).
We designed our internal control over financial reporting to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to financial statement preparation and
presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Based on our assessment, we concluded our internal control over financial reporting is effective as of December 31,
2013.
KPMG LLP, an independent registered public accounting firm, which audited our consolidated financial statements
included in this report on Form 10-K has issued an audit report on the effectiveness of our internal control over financial
reporting. KPMG LLP’s audit report is also included in this report on Form 10-K.
58
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
The Providence Service Corporation:
We have audited The Providence Service Corporation and subsidiaries’ (the Company) internal control over financial
reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, The Providence Service Corporation and subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated
Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of The Providence Service Corporation and subsidiaries as of December 31, 2013
and 2012, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows
for each of the years in the three-year period ended December 31, 2013, and the related financial statement schedule, and
our report dated March 14, 2014 expressed an unqualified opinion on those consolidated financial statements.
Phoenix, Arizona
March 14, 2014
/s/ KPMG LLP
59
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
The Providence Service Corporation:
We have audited the accompanying consolidated balance sheets of The Providence Service Corporation and subsidiaries
(the Company) as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive
income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2013. In
connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule
contained in Item 15(a)(2). These consolidated financial statements and financial statement schedule are the responsibility
of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of The Providence Service Corporation and subsidiaries as of December 31, 2013 and 2012, and the results of their
operations and their cash flows for each of the years in the three-year period ended December 31, 2013, in conformity with
U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the Company’s internal control over financial reporting as of December 31, 2013, based on criteria established in
Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated March 14, 2014 expressed an unqualified opinion on the effectiveness of the
Company’s internal control over financial reporting.
Phoenix, Arizona
March 14, 2014
/s/ KPMG LLP
60
The Providence Service Corporation
Consolidated Balance Sheets
(in thousands except share and per share data)
Assets
Current assets:
Cash and cash equivalents ......................................................................................... $
Accounts receivable, net of allowance of $4.2 million in 2013 and $3.7 million in
2012 .......................................................................................................................
Management fee receivable .......................................................................................
Other receivables .......................................................................................................
Prepaid expenses and other .......................................................................................
Restricted cash ..........................................................................................................
Deferred tax assets ....................................................................................................
Total current assets ...........................................................................................................
Property and equipment, net .............................................................................................
Goodwill ...........................................................................................................................
Intangible assets, net ........................................................................................................
Other assets ......................................................................................................................
Restricted cash, less current portion .................................................................................
Total assets ....................................................................................................................... $
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term obligations .................................................................. $
Accounts payable ......................................................................................................
Accrued expenses ......................................................................................................
Accrued transportation costs .....................................................................................
Deferred revenue .......................................................................................................
Reinsurance liability reserve .....................................................................................
Total current liabilities .....................................................................................................
Long-term obligations, less current portion .....................................................................
Other long-term liabilities ................................................................................................
Deferred tax liabilities ......................................................................................................
Total liabilities .................................................................................................................
Commitments and contingencies (Notes 13 and 16)
Stockholders' equity
Common stock: authorized 40,000,000 shares; $0.001 par value; 14,477,312 and
13,785,947 issued and outstanding (including treasury shares).............................
Additional paid-in capital ..........................................................................................
Accumulated deficit ..................................................................................................
Accumulated other comprehensive loss, net of tax ...................................................
Treasury shares, at cost, 956,442 and 928,478 shares ...............................................
Total Providence stockholders' equity ..........................................................................
Non-controlling interest ............................................................................................
Total stockholders' equity ................................................................................................
Total liabilities and stockholders' equity .......................................................................... $
December 31,
2013
2012
98,995 $
55,863
88,315
1,821
4,786
11,831
3,772
2,152
211,672
32,709
113,263
43,476
11,681
11,957
424,758 $
48,250 $
3,904
52,484
54,962
3,687
10,778
174,065
75,250
15,359
9,447
274,121
14
194,363
(33,641 )
(1,419 )
(15,641 )
143,676
6,961
150,637
424,758 $
98,628
2,662
4,105
12,622
1,787
532
176,199
30,380
113,915
49,651
10,639
10,953
391,737
14,000
4,569
32,976
61,316
7,055
12,713
132,629
116,000
13,527
10,894
273,050
14
180,778
(53,079)
(893)
(15,094)
111,726
6,961
118,687
391,737
See accompanying notes to the consolidated financial statements
61
The Providence Service Corporation
Consolidated Statements of Income
(in thousands except share and per share data)
Year ended December 31,
2012
2013
2011
Revenues:
Non-emergency transportation services .......................................
Human services ............................................................................
Total revenues .....................................................................................
770,246
352,436
1,122,682
750,658
355,231
1,105,889
Operating expenses:
Cost of non-emergency transportation services ...........................
Client service expense ..................................................................
General and administrative expense .............................................
Depreciation and amortization .....................................................
Asset impairment charge ..............................................................
Total operating expenses .....................................................................
Operating income ................................................................................
710,428
309,623
48,633
14,872
492
1,084,048
38,634
706,692
304,084
53,383
15,023
2,506
1,081,688
24,201
Other (income) expense:
Interest expense ............................................................................
Loss on extinguishment of debt ...................................................
Gain on bargain purchase .............................................................
Interest income .............................................................................
Income before income taxes ................................................................
Provision for income taxes ..................................................................
Net income .......................................................................................... $
7,035
525
-
(141)
31,215
11,777
19,438 $
7,640
-
-
(132 )
16,693
8,211
8,482 $
581,541
361,439
942,980
539,417
304,407
48,861
13,656
-
906,341
36,639
10,206
2,463
(2,711)
(204)
26,885
9,945
16,940
Earnings per common share:
Basic ............................................................................................. $
Diluted ......................................................................................... $
1.44 $
1.41 $
0.64 $
0.64 $
1.28
1.27
Weighted-average number of common shares outstanding:
Basic .............................................................................................
Diluted .........................................................................................
13,499,885
13,809,874
13,225,448
13,354,613
13,242,702
13,321,609
See accompanying notes to the consolidated financial statements
62
The Providence Service Corporation
Consolidated Statements of Comprehensive Income
(in thousands)
Year ended December 31,
2012
2013
2011
Net income .......................................................................................... $
Other comprehensive income (loss):
Foreign currency translation adjustments ........................................
Other comprehensive income (loss) ....................................................
Comprehensive income ....................................................................... $
19,438 $
8,482 $
16,940
(526)
(526)
18,912 $
235
235
8,717 $
(247)
(247)
16,693
See accompanying notes to the consolidated financial statements
63
The Providence Service Corporation
Consolidated Statements of Stockholders' Equity
(in thousands except share data)
Common Stock
Shares
Amount Capital
Deficit
Additional
Paid-In Accumulated
Accumulated
Other
Comprehensive
Income
(Loss)
Treasury Stock
Shares Amount
Non-
Controlling
Interest
Total
Balance at December 31, 2010 ............ 13,580,385 $
-
Stock-based compensation ...............
Exercise of employee stock
options, including net tax
shortfall of $100 ...........................
Restricted stock issued .....................
Foreign currency translation
7,872
33,694
adjustments ..................................
Net income........................................
-
-
Balance at December 31, 2011 ............ 13,621,951
-
Stock-based compensation ...............
Exercise of employee stock
options, including net tax
shortfall of $215 ...........................
Restricted stock issued .....................
Stock repurchase ...............................
Foreign currency translation
90,915
73,081
-
adjustments ..................................
Net income........................................
-
-
Balance at December 31, 2012 ............ 13,785,947
-
Stock-based compensation ...............
Exercise of employee stock
14 $ 172,541 $
3,675
-
(78,501) $
-
-
-
-
-
14
-
-
-
-
-
-
14
-
(44)
-
-
-
176,172
3,873
733
-
-
-
-
-
16,940
(61,561)
-
-
-
-
-
-
180,778
3,079
-
8,482
(53,079)
-
(881) 619,768 $(11,384) $
-
-
-
6,961 $ 88,750
3,675
-
-
-
- 3,808
-
(51)
-
-
(44)
(51)
-
-
(247)
-
-
-
(1,128) 623,576 (11,435)
-
-
-
-
(247)
- 16,940
6,961 109,023
3,873
-
-
-
-
- 11,302
(169)
- 293,600 (3,490)
-
-
-
733
(169)
(3,490)
-
-
235
-
-
-
(893) 928,478 (15,094)
-
-
-
-
-
235
8,482
6,961 118,687
3,079
-
options, including net tax benefit
of $437 .........................................
Restricted stock issued .....................
Foreign currency translation
592,126
99,239
-
-
10,506
-
-
-
-
- 27,964
-
(547)
- 10,506
(547)
-
adjustments ..................................
Net income........................................
-
-
Balance at December 31, 2013 ............ 14,477,312 $
-
-
-
-
14 $ 194,363 $
-
19,438
(33,641) $
(526)
-
-
-
(1,419) 956,442 $(15,641) $
-
-
-
(526)
- 19,438
6,961 $150,637
See accompanying notes to the consolidated financial statements
64
The Providence Service Corporation
Consolidated Statements of Cash Flows
(in thousands)
Operating activities
Net income .......................................................................................... $
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation ................................................................................
Amortization ................................................................................
Provision for doubtful accounts ...................................................
Stock based compensation ...........................................................
Deferred income taxes .................................................................
Amortization of deferred financing costs .....................................
Loss on extinguishment of debt ...................................................
Excess tax benefit upon exercise of stock options .......................
Asset impairment charge ..............................................................
Gain on bargain purchase .............................................................
Other non-cash charges ................................................................
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable ..............................................................
Management fee receivable ..................................................
Other receivables ..................................................................
Restricted cash ......................................................................
Prepaid expenses and other ...................................................
Reinsurance liability reserve .................................................
Accounts payable and accrued expenses ...............................
Accrued transportation costs .................................................
Deferred revenue ...................................................................
Other long-term liabilities .....................................................
Net cash provided by operating activities ...........................................
Investing activities
Purchase of property and equipment ...................................................
Net increase (decrease) in short-term investments ..............................
Acquisitions, net of cash acquired .......................................................
Restricted cash for reinsured claims losses .........................................
Net cash used in investing activities ....................................................
Financing activities
Repurchase of common stock, for treasury .........................................
Proceeds from common stock issued pursuant to stock option
exercise ............................................................................................
Excess tax benefit upon exercise of stock options ..............................
Proceeds from long-term debt .............................................................
Repayment of long-term debt ..............................................................
Debt financing costs ............................................................................
Capital lease payments ........................................................................
Net cash provided by (used in) financing activities ............................
Effect of exchange rate changes on cash .............................................
Net change in cash ..............................................................................
Cash at beginning of period ................................................................
Cash at end of period ........................................................................... $
Year ended December 31,
2012
2013
2011
19,438 $
8,482 $
16,940
7,738
7,134
3,245
3,079
(3,282)
960
525
(1,120)
492
-
364
7,186
659
540
(141)
(856)
(19)
18,863
(6,354)
(3,366)
152
55,237
(10,183)
177
(989)
(2,848)
(13,843)
7,537
7,486
2,305
3,873
(816 )
1,138
-
(91 )
2,506
-
158
(16,589 )
875
(319 )
163
256
1,034
2,412
13,660
4,862
3,556
42,488
(9,522 )
444
(190 )
2,633
(6,635 )
5,921
7,735
3,131
3,675
(530)
1,695
2,463
(17)
-
(2,711)
645
(9,019)
2,302
2,334
(80)
(680)
(431)
(5,342)
5,788
(3,179)
398
31,038
(11,306)
(113)
(4,889)
1,692
(14,616)
(547)
(3,658 )
(51)
10,069
1,120
76,000
(82,500)
(2,082)
(9)
2,051
(313)
43,132
55,863
98,995 $
949
91
-
(20,493 )
(65 )
(23 )
(23,199 )
25
12,679
43,184
55,863 $
56
17
115,000
(146,811)
(2,651)
(15)
(34,455)
(44)
(18,077)
61,261
43,184
See accompanying notes to the consolidated financial statements
65
The Providence Service Corporation
Supplemental Cash Flow Information
(in thousands)
Supplemental cash flow information
Year ended December 31,
2012
2013
2011
Cash paid for interest .......................................................................... $
Cash paid for income taxes ................................................................. $
5,839 $
13,395 $
6,505 $
8,877 $
8,605
11,294
Acquisitions:
Purchase price .................................................................................. $
Less:
Cash acquired ...............................................................................
Acquisitions, net of cash acquired ....................................................... $
989 $
-
989 $
190 $
8,573
-
190 $
(3,684)
4,889
See accompanying notes to the consolidated financial statements
66
The Providence Service Corporation
Notes to Consolidated Financial Statements
December 31, 2013
(in thousands except share and per share data)
1. Basis of Presentation, Description of Business, Significant Accounting Policies and Critical Accounting
Estimates
Basis of Presentation
The Providence Service Corporation (the “Company”) follows accounting standards set by the Financial Accounting
Standards Board (“FASB”). The FASB establishes accounting principles generally accepted in the United States
(“GAAP”). Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants, which the Company is required to follow.
References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification (“ASC”),
which serves as a single source of authoritative non-SEC accounting and reporting standards to be applied by
nongovernmental entities. All amounts are presented in US dollars, unless otherwise noted. In order to conform to the
current year presentation, prior year amounts have been reclassified to show human services revenues as one line item.
Additionally, prior year other receivables and prepaid expenses and other have been reclassified for comparable
presentation purposes.
Description of Business
The Company is a government outsourcing privatization organization. The Company operates in two segments,
Human Services and Non-Emergency Transportation Services (“NET Services”). During the third quarter of 2013, the
Company changed the name of its Social Services segment to the Human Services segment. The name change was made as
part of a rebranding effort to reflect the future strategy of the Human Services business and to better describe the broad
spectrum of services it provides. As of December 31, 2013, the Company operated in 43 states and the District of Columbia
in the United States and in three provinces in Canada.
The Human Services operating segment responds to governmental privatization initiatives in adult and juvenile
justice, corrections, social services, welfare systems, education and workforce development by providing home and
community-based counseling services and foster care services to at-risk families and children. These services are purchased
primarily by state, county and city levels of government, and are delivered under block purchase, cost-based and fee-for-
service arrangements. The Company also contracts with not-for-profit organizations to provide management services for a
fee.
The NET Services operating segment contracts for the provision of non-emergency transportation management
services to Medicaid and Medicare beneficiaries. The entities that pay for non-emergency medical transportation
management services primarily include state Medicaid programs, health maintenance organizations and commercial
insurers. Most of the Company’s non-emergency medical transportation management services are delivered under fixed-
payment capitated contracts where the Company assumes the responsibility of meeting the covered transportation
requirements of beneficiaries residing in a specific geographic region.
Seasonality
The Company’s quarterly operating results and operating cash flows normally fluctuate as a result of seasonal
variations in its business. In the Company’s Human Services operating segment, lower client demand for its home and
community based services during the holiday and summer seasons generally results in lower revenue during those periods.
However, the Company’s operating expenses related to the Human Services operating segment do not vary significantly
with these changes. As a result, the Company’s Human Services operating segment typically experiences lower operating
margins during the holiday and summer seasons. The Company’s NET Services operating segment also experiences
fluctuations in demand for its non-emergency transportation services during the summer, winter and holiday seasons. Due
to higher demand in the summer months and lower demand in the winter and holiday seasons, coupled with a primarily
fixed revenue stream based on a per member, per month payment structure, the Company’s NET Services operating
67
segment normally experiences lower operating margins in the summer season and higher operating margins in the winter
and holiday seasons.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all of its subsidiaries, including its
foreign wholly-owned subsidiary WCG International Ltd. (“WCG”). All intercompany accounts and transactions have been
eliminated in consolidation.
Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid investments with an initial maturity of three
months or less. Investments in cash equivalents are carried at cost, which approximates fair value. The Company places its
temporary cash investments with high credit quality financial institutions. At times such investments may be in excess of
the Federal Deposit Insurance Corporation (FDIC) and the Canada Deposit Insurance Corporation (CDIC) insurance limits.
At December 31, 2013 and 2012, approximately $4,607 and $4,135, respectively, of cash was held by WCG and may
not be freely transferable without unfavorable tax consequences between the Company and WCG.
Restricted Cash
The Company had approximately $15,729 and $12,740 of restricted cash at December 31, 2013 and 2012 as follows:
December 31,
2013
2012
Collateral for letters of credit - Contractual obligations ...................................... $
Contractual obligations .......................................................................................
Subtotal restricted cash for contractual obligations .........................................
Collateral for letters of credit - Reinsured claims losses .....................................
Escrow/Trust - Reinsured claims losses ..............................................................
Subtotal restricted cash for reinsured claims losses .........................................
Total restricted cash ............................................................................................
243 $
839
1,082
3,033
11,614
14,647
15,729
Less current portion .............................................................................................
3,772
$
11,957 $
243
698
941
5,634
6,165
11,799
12,740
1,787
10,953
Of the restricted cash amount at December 31, 2013 and 2012:
● $243 in both periods served as collateral for irrevocable standby letters of credit that provide financial assurance
that the Company will fulfill certain contractual obligations;
● approximately $839 and $698, respectively, was held to fund the Company’s obligations under arrangements with
various governmental agencies through the Company’s correctional services business (“Correctional Services”);
● approximately $3,033 and $5,634, respectively, served as collateral for irrevocable standby letters of credit to
secure any reinsured claims losses under the Company’s reinsurance program;
● of the remaining $11,614 and $6,165:
68
o approximately $3,070 and $5,069, respectively, was restricted and held in trust for historical reinsurance
claims losses under the Company’s general and professional liability reinsurance program;
o approximately $732 and $1,096, respectively, was restricted under our historical auto liability program; and
o approximately $7,812 was restricted and held in a trust at December 31, 2013 for reinsurance claims losses
under the Company’s workers’ compensation, general and professional liability and auto liability reinsurance
programs.
At December 31, 2013, approximately $10,882, $3,276, $482 and $250 of the restricted cash was held in custody by
Wells Fargo, Bank of Tucson, Fifth Third Bank and Bank of America, respectively. The cash is restricted as to withdrawal
or use and is currently invested in certificates of deposit or short-term marketable securities. Approximately $839 was also
restricted as to withdrawal or use and is currently held in various non-interest bearing bank accounts related to Correctional
Services.
Short-Term Investments
As part of its cash management program, the Company from time to time maintains short-term investments. These
investments have a term to earliest maturity of less than one year and are comprised of certificates of deposit. These
investments are carried at cost, which approximates market value, and are classified as “Prepaid expenses and other” in the
consolidated balance sheets.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable, management fee receivable
and accounts payable approximate their fair value because of the relatively short-term maturity of these instruments. The
fair value of the Company’s long-term obligations is estimated based on interest rates for the same or similar debt offered
to the Company having the same or similar remaining maturities and collateral requirements. The carrying amount of the
long-term obligations approximates its fair value.
Accounts Receivable and Allowance for Doubtful Accounts
The Company records all accounts receivable amounts at their contracted amount, less an allowance for doubtful
accounts. The Company maintains an allowance for doubtful accounts at an amount it estimates to be sufficient to cover the
risk that an account will not be collected. The Company regularly evaluates its accounts receivable, especially receivables
that are past due, and reassesses its allowance for doubtful accounts based on specific client collection issues. In
circumstances where the Company is aware of a specific payer’s inability to meet its financial obligation, the Company
records a specific allowance for doubtful accounts to reduce the net recognized receivable to the amount the Company
reasonably expects to collect.
The Company’s write-off experience for each of the years ended December 31, 2013, 2012 and 2011 was less than
1% of the Company’s revenue. The Company’s provision for doubtful accounts expense for the years ended December 31,
2013, 2012 and 2011 was $3,245, $2,305 and $3,131, respectively.
Property and Equipment
Property and equipment are stated at historical cost, net of accumulated depreciation, or at fair value if the assets were
initially recorded as the result of a business combination. Depreciation is calculated using the straight-line method over the
estimated useful life of the assets. Maintenance and repairs are expensed as incurred. Gains and losses resulting from the
disposition of an asset are reflected in operating expense.
69
Impairment of Long-Lived Assets
Goodwill
The Company analyzes the carrying value of goodwill at the end of each fiscal year, and more frequently if events
occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying
value. Such circumstances could include, but are not limited to: (1) the loss of significant contracts, (2) a significant
adverse change in legal factors or in business climate, (3) unanticipated competition, (4) an adverse action or assessment by
a regulator, or (5) a significant decline in the Company’s stock price. When analyzing goodwill for impairment the
Company first assesses qualitative factors to determine whether it is necessary to perform the two-step quantitative
goodwill impairment test described below. If the Company determines, based on a qualitative assessment, that it is more
likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company would calculate the
fair value of the reporting unit and perform a two-step quantitative goodwill impairment test. In connection with its analysis
of the carrying value of goodwill, the Company reconciles the aggregate fair value of its reporting units to the Company’s
market capitalization including a control premium that is reasonable within the context of industry data on premiums paid.
When determining whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the
goodwill is assigned to the reporting unit’s carrying amount, including goodwill. If the carrying amount of a reporting unit
exceeds its fair value, then the Company must proceed to a second step, and the amount of the impairment loss must be
measured. The impairment loss would be calculated by comparing the implied fair value of reporting unit goodwill to its
carrying amount. In calculating the implied fair value of the reporting unit goodwill, the fair value of the reporting unit is
allocated to all of the other assets and liabilities of that unit based on their fair values. The excess of the fair value of a
reporting unit over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An
impairment loss would be recognized when the carrying amount of goodwill exceeds its implied fair value.
Intangible assets subject to amortization
The Company separately values all acquired and internally developed identifiable intangible assets apart from
goodwill. The Company has historically allocated a portion of the purchase consideration to customer relationships,
developed technology, management contracts and restrictive covenants acquired through business combinations based on
the expected direct or indirect contribution to future cash flows on a discounted cash flow basis over the useful life of the
assets.
The Company assesses whether any relevant factors limit the period over which acquired assets are expected to
contribute directly or indirectly to future cash flows for amortization purposes. With respect to acquired management
contracts, the useful life is limited by the stated terms of the agreements. The Company determines an appropriate
estimated useful life for acquired customer relationships based on the expected period of time it will provide services to the
customer.
While the Company uses discounted cash flows to value the acquisition of intangible assets, the Company has elected
to use the straight-line method of amortization to determine amortization expense each period. If applicable, the Company
assesses the recoverability of the unamortized balance of its long-lived assets based on undiscounted expected future cash
flows. Should this analysis indicate that the carrying value is not fully recoverable, the excess of the carrying value over the
fair value of any intangible asset is recognized as an impairment loss.
Accrued Transportation Costs
Transportation costs are estimated and accrued in the month the services are rendered by contracted transportation
providers, and are determined using gross reservations for transportation services less cancellations, and average costs per
transportation service by customer contract. Average costs per contract are determined by historical cost trends. Actual
costs relating to a specific accounting period are monitored and compared to estimated accruals. Adjustments to those
accruals are made based on reconciliations with actual costs incurred. Accrued transportation costs were $54,962 and
$61,316 at December 31, 2013 and 2012, respectively.
70
Deferred Financing Costs
The Company capitalizes direct expenses incurred in connection with its credit facilities and other borrowings, and
amortizes such expenses over the life of the respective credit facility or other borrowing. The Company incurred
approximately $1,801 in deferred financing costs in connection with the amended and restated credit facility it entered into
in August 2013 (“New Credit Facility”). The Company also retains certain deferred financing costs of approximately $849
related to its prior credit facility (“Old Credit Facility”), as certain lenders who participated in the Old Credit Facility also
participate in the New Credit Facility. In addition, the Company incurred approximately $2,297 in deferred financing costs
in connection with its senior subordinated notes issued in November 2007. Deferred financing costs for the senior
subordinated notes are amortized to interest expense on a straight-line basis and deferred financing costs for the New Credit
Facility and the Old Credit Facility are amortized to interest expense based upon the effective interest method over the life
of the credit facilities. Deferred financing costs, net of amortization, totaling approximately $2,509 and $2,166 at December
31, 2013 and 2012, respectively, are included in “Other assets” in the consolidated balance sheets.
Revenue Recognition
Human Services segment
Fee-for-service contracts. Revenues related to services provided under fee-for-service contracts are recognized at
the time services are rendered and collection is determined to be probable. Such services are provided at established
contractual rates. As services are rendered, contract-specific documentation is prepared describing each service, time spent,
and billing code to determine and support the value of each service provided and billed. The timing and amount of
collection are dependent upon compliance with the billing requirements specified by each payer. Failure to comply with
these requirements could delay the collection of amounts due to the Company under a contract or result in adjustments to
amounts billed.
The performance of the Company’s contracts is subject to the condition that sufficient funds are appropriated,
authorized and allocated by each state, city or other local government. If sufficient appropriations, authorizations and
allocations are not provided by the respective state, city or other local government, the Company is at risk for uncollectible
amounts or immediate termination or renegotiation of the financial terms of its contracts.
Cost-based service contracts. Revenues from the Company’s cost-based service contracts are recorded based on a
combination of allowable direct costs, indirect overhead allocations, and stated allowable margins on those incurred costs.
These revenues are compared to annual contract budget limits and, depending on reporting requirements, allowances may
be recorded for certain contingencies such as projected costs not incurred or excess cost per service over the allowable
contract rate. The Company annually submits projected costs for the coming year, which assist the contracting payers in
establishing the annual contract amount to be paid for services provided under the contracts. After each payer’s fiscal year
end, the Company submits cost reports which are used by the payer to determine the need for any payment adjustments.
Completion of the cost report review process may range from one month to several years. In cases where funds paid to the
Company exceed the allowable costs to provide services under contract, the Company may be required to repay amounts
previously received.
The Company’s cost reports are generally audited by payers annually. The Company periodically reviews its
provisional billing rates and allocation of costs and provides for estimated payment adjustments. The Company believes
that adequate provisions have been made in its consolidated financial statements for any material adjustments that might
result from the outcome of any cost report audits. Differences between the amounts provided and the settlement amounts
are recorded in the Company’s consolidated statement of income in the year of settlement. Such settlements have
historically not been material.
Annual block purchase contract. The Company’s annual block purchase contract requires it to provide or arrange
for behavioral health services to eligible populations of beneficiaries. The Company must provide a range of behavioral
health clinical, case management, therapeutic and administrative services. The Company is obligated to provide services
only to those clients with a demonstrated medical necessity. Annual funding allocation amounts may be increased when the
Company’s patient service encounters exceed the contract amount; however, such increases are subject to government
appropriation. There is no contractual limit to the number of eligible beneficiaries that may be assigned to the Company, or
a specified limit to the level of services that may be provided to these beneficiaries if the services are deemed to be
medically necessary. Therefore, the Company is at-risk if the costs of providing necessary services exceed the associated
reimbursement.
71
The terms of the contract may be reviewed prospectively and amended as necessary to ensure adequate funding of the
Company’s contractual obligations, however, there is no assurance that amendments will be approved.
Management agreements. The Company maintains management agreements with a number of not-for-profit social
services organizations whereby it provides certain management services. In exchange for the Company’s services, the
Company receives a management fee that is either based on a percentage of the revenues of these organizations or a
predetermined fee. The Company recognizes management fees revenue as such amounts are earned, as defined by each
respective management agreement, and collection of such amount is considered reasonably assured.
The costs associated with rendering these management services are primarily shown as general and administrative
expense in the consolidated statements of income.
NET Services segment
Capitation contracts. The majority of the Company’s non-emergency transportation services revenue is generated
under capitated contracts where the Company assumes the responsibility of meeting the covered transportation
requirements of a specific geographic population for a fixed amount per period. Revenues under capitation contracts with
the Company’s payers are based on per member monthly fees for the estimated number of participants in the payer’s
program.
Fee-for-service contracts. Revenues earned under fee-for-service contracts are recognized ratably over the covered
service period. Revenues under these types of contracts are based upon contractually established billing rates, less
allowance for contractual adjustments. Estimates of contractual adjustments are based upon payment terms specified in the
related agreements.
Flat fee contracts. Revenues earned under flat fee contracts are recognized when the service is provided. Revenues
under these types of contracts are based upon contractually established monthly flat fees that do not fluctuate with any
changes in the population that can receive our services.
Deferred Revenue
At times the Company may receive funding for certain services in advance of services being rendered. These amounts
are reflected in the consolidated balance sheets as deferred revenue until the services are rendered.
Non-Controlling Interest
In connection with the Company’s acquisition of WCG in August 2007, PSC of Canada Exchange Corp. (“PSC”), a
subsidiary established by the Company to facilitate the purchase of all of the equity interest in WCG, issued 287,576
exchangeable shares (“Exchangeable Shares”) as part of the purchase price consideration. The Exchangeable Shares were
valued at approximately $7,751 in accordance with the provisions of the purchase agreement ($7,649 for accounting
purposes). The Exchangeable Shares are exchangeable at each shareholder’s option, for no additional consideration, into
shares of the Company’s common stock on a one-for-one basis. Of the 287,576 Exchangeable Shares originally issued,
25,882 had been exchanged for Company common stock as of December 31, 2013.
The Exchangeable Shares are non-participating such that they are not entitled to any allocation of income or loss of
PSC. The Exchangeable Shares represent ownership in PSC and are accounted for as “Non-controlling interest” included in
stockholders’ equity in the consolidated balance sheets in the amount of approximately $6,961 at December 31, 2013 and
2012.
72
The Exchangeable Shares and the 25,882 shares of the Company’s common stock issued upon the exchange of the
same number of Exchangeable Shares noted above are subject to a Settlement and Indemnification Agreement dated
November 17, 2009 (“Indemnification Agreement”) by and between the Company and the sellers of WCG. The
Indemnification Agreement secures the Company’s claims for indemnification and associated rights and remedies provided
by the Share Purchase Agreement (under which the Company acquired all of the equity interest in WCG on August 1,
2007) arising from actions taken by British Columbia to strictly enforce a contractually imposed revenue cap on a per client
basis and contractually mandated pass-throughs subsequent to August 1, 2007. The actions taken by British Columbia
resulted in an approximate $3,000 Canadian Dollar (“CAD”) dispute and termination of one of its six provincial contracts
with WCG, which the Company is disputing. Under the Indemnification Agreement, the sellers have agreed to transfer their
rights to the Exchangeable Shares and 25,882 shares of the Company’s common stock issued upon the exchange of the
same number of Exchangeable Shares to the Company to indemnify the Company against any losses suffered by the
Company as the result of an unfavorable ruling upon the conclusion of all appeals related to arbitration. Alternatively, at
their option, the sellers may pay cash in lieu of stock in satisfaction of their obligation under the Indemnification
Agreement provided payment is made before or concurrently with the execution of any settlement with British Columbia.
Effective April 14, 2010, an arbitrator issued an award with respect to the dispute between WCG and British
Columbia. Under the arbitration award, essentially all amounts disputed shall be paid to WCG (except for approximately
CAD $13 which will be subject to the terms of the Indemnification Agreement) plus interest. The award affirmed the
termination of one of the six provincial contracts that had been terminated effective October 31, 2008. During the second
quarter of 2010, British Columbia filed a petition for leave to appeal the arbitration award, and on October 11, 2011, the
leave to appeal was granted to British Columbia.
In 2012, WCG received cash totaling approximately $3,394 from British Columbia related to the arbitral award.
However, in the event British Columbia prevails in its arguments during the appeal process, British Columbia will seek
immediate repayment of the amount of the arbitral award owing at that time from WCG. Upon receipt of the cash discussed
above, the Company recorded approximately $3,394 to cash and other long-term liabilities in 2012. No changes in the
status of the appeal occurred and no additional payments were made during 2013.
Stock-Based Compensation
The Company follows the fair value recognition provisions of ASC Topic 718 - Compensation-Stock Compensation
(“ASC 718”), which requires companies to measure and recognize compensation expense for all share based payments at
fair value.
Income Taxes
Deferred income taxes are determined by the liability method in accordance with ASC Topic 740 - Income Taxes
(“ASC 740”). Under this method, deferred tax assets and liabilities are determined based on differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes
and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
The Company records a valuation allowance which includes amounts for state net operating loss and tax credit
carryforwards, as more fully described in Note 15 below, for which the Company has concluded that it is more likely than
not that these state net operating loss and tax credit carryforwards will not be realized in the ordinary course of operations.
The Company recognizes interest and penalties related to income taxes as a component of income tax expense.
Loss Reserves for Certain Reinsurance and Self-funded Insurance Programs
The Company reinsures a substantial portion of its automobile, general and professional liability and workers’
compensation costs under reinsurance programs through the Company’s wholly-owned subsidiary Social Services
Providers Captive Insurance Company (“SPCIC”). SPCIC is a licensed captive insurance company domiciled in the State
of Arizona. SPCIC maintains reserves for obligations related to the Company’s reinsurance programs for its automobile,
general and professional liability and workers’ compensation coverage.
SPCIC reinsures third-party insurers for general and professional liability exposures for the first dollar of each and
every loss up to $1,000 per loss and $5,000 in the aggregate. SPCIC also reinsures third-party insurers for automobile
liability exposures for $250 per claim. Additionally, SPCIC reinsures a third-party insurer for worker’s compensation
insurance for the first dollar of each and every loss up to $500 per occurrence with an $11,000 annual policy aggregate
limit. As of December 31, 2013 and 2012, the Company had reserves of approximately $10,635 and $8,800, respectively,
for the automobile, general and professional liability and workers’ compensation programs (net of expected losses in excess
73
of the Company’s liability which would be paid by third-party insurers to the extent losses are incurred). The reserves are
classified as “Reinsurance liability reserve” and “Other long-term liabilities” in the consolidated balance sheets.
Based on an independent actuarial report, the Company’s expected losses related to workers’ compensation,
automobile and general and professional liability in excess of its liability under its associated reinsurance programs at
December 31, 2013 and 2012 was approximately $3,540 and $3,209, respectively. The Company recorded a corresponding
receivable from third-party insurers and liability at December 31, 2013 and 2012 for these expected losses, which would be
paid by third-party insurers to the extent losses are incurred.
In addition, the Company’s wholly-owned subsidiary, Provado Insurance Services, Inc. (“Provado”), is a licensed
captive insurance company domiciled in the State of South Carolina. Provado has historically provided reinsurance for
policies written by a third party insurer for general liability, automobile liability, and automobile physical damage coverage
to various members of the network of subcontracted transportation providers and independent third parties within the
Company’s NET Services operating segment. Effective February 15, 2011, Provado did not renew its reinsurance
agreement and will not assume liabilities for policies after that date. It will continue to administer existing policies for the
foreseeable future and resolve remaining and future claims related to these policies.
Under a reinsurance agreement with a third party insurer, Provado reinsures the third party insurer for the first $250
of each loss for each line of coverage, subject to an annual aggregate equal to 107.7% of gross written premium, and certain
claims in excess of $250 to an additional aggregate limit of $1,100. Provado maintains reserves for obligations related to
the reinsurance programs for general liability, automobile liability, and automobile physical damage coverage. As of
December 31, 2013 and 2012, Provado recorded reserves of approximately $1,880 and $4,423, respectively. The reserves
are classified as “Reinsurance liability reserve” in the consolidated balance sheets.
The Company utilizes analyses prepared by third party administrators and independent actuaries based on historical
claims information with respect to the general and professional liability coverage, workers’ compensation coverage,
automobile liability, automobile physical damage, and health insurance coverage to determine the amount of required
reserves.
The Company also maintains a self-funded health insurance program with a stop-loss umbrella policy with a third
party insurer to limit the maximum potential liability for individual claims to $250 per person and for a maximum potential
claim liability based on member enrollment. With respect to this program, the Company considers historical and projected
medical utilization data when estimating its health insurance program liability and related expense. As of December 31,
2013 and 2012, the Company had approximately $1,870 and $2,077, respectively, in reserve for its self-funded health
insurance programs. The reserves are classified as “Reinsurance liability reserve” in the consolidated balance sheets.
The Company regularly analyzes its reserves for incurred but not reported claims, and for reported but not paid claims
related to its reinsurance and self-funded insurance programs. The Company believes its reserves are adequate. However,
significant judgment is involved in assessing these reserves such as assessing historical paid claims, average lags between
the claims’ incurred date, reported dates and paid dates, and the frequency and severity of claims. There may be differences
between actual settlement amounts and recorded reserves and any resulting adjustments are included in expense once a
probable amount is known. There were no significant adjustments recorded in the periods covered by this report.
Critical Accounting Estimates
The Company has made a number of estimates relating to the reporting of assets and liabilities, revenues and
expenses and the disclosure of contingent assets and liabilities to prepare the consolidated financial statements in
conformity with GAAP. The Company based its estimates on historical experience and on various other assumptions the
Company believes to be reasonable under the circumstances. However, actual results may differ from these estimates under
different assumptions or conditions. Some of the more significant estimates impact revenue recognition, accounts
receivable and allowance for doubtful accounts, accounting for business combinations, goodwill and other intangible
assets, accrued transportation costs, loss reserves for reinsurance and self-funded insurance programs, stock-based
compensation and income taxes.
74
New and Pending Accounting Pronouncements
New Accounting Pronouncements
In February 2013, the FASB issued ASU 2013-02-Comprehensive Income (Topic 220): Reporting of Amounts
Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”). ASU 2013-02 is intended to improve the
reporting of reclassifications out of accumulated other comprehensive income. Accordingly, an entity is required to report
the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net
income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other
amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an
entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those
amounts. The amendments in this ASU supersede the presentation requirements for reclassifications out of accumulated
other comprehensive income in ASU 2011-05 and ASU 2011-12. ASU 2013-02 is effective for reporting periods beginning
after December 15, 2012. The Company adopted ASU 2013-02 effective January 1, 2013. The adoption of ASU 2013-02
did not have an effect on the consolidated financial statements.
2. Concentration of Credit Risk
Contracts with governmental agencies and other entities that contract with governmental agencies accounted for
approximately 80.0%, 81.1% and 81.5% of the Company’s revenue for the years ended December 31, 2013, 2012 and
2011, respectively. The contracts are subject to possible statutory and regulatory changes, rate adjustments, administrative
rulings, rate freezes and funding reductions. Reductions in amounts paid under these contracts for the Company’s services
or changes in methods or regulations governing payments for the Company’s services could materially adversely affect its
revenue and profitability.
3. Prepaid Expenses and Other
Prepaid expenses and other were comprised of the following:
Prepaid insurance ............................................................................................. $
Prepaid rent ......................................................................................................
Prepaid taxes ....................................................................................................
Prepaid bus tokens and passes ..........................................................................
Prepaid maintenance agreements and copier leases .........................................
Interest receivable - certificates of deposit .......................................................
Prepaid payroll .................................................................................................
Other.................................................................................................................
December 31,
2013
2012
4,409 $
1,685
1,426
1,367
862
503
105
1,474
3,739
1,067
1,358
1,224
723
679
2,494
1,338
Total prepaid expenses and other ..................................................................... $
11,831 $
12,622
75
4. Property and Equipment
Property and equipment consisted of the following:
Land ........................................................................
Building ...................................................................
Computer and telecom equipment ...........................
Software ..................................................................
Leasehold improvements .........................................
Furniture and fixtures ..............................................
Automobiles ............................................................
Construction in progress..........................................
Less accumulated depreciation ................................
Estimated
Useful
Life (years)
--
39
3 - 5
3
Lease Term
7
5
--
$
$
December 31,
2013
2012
1,911 $
11,629
25,138
12,333
6,528
3,963
2,732
1,816
66,050
33,341
32,709 $
1,477
9,515
22,517
11,337
5,795
3,799
2,113
2,716
59,269
28,889
30,380
Depreciation expense was approximately $7,738, $7,537 and $5,921 for the years ended December 31, 2013, 2012
and 2011, respectively.
5. Goodwill and Intangibles
Goodwill
Changes in goodwill were as follows:
Balances at December 31, 2011
Goodwill .......................................................................................... $
Accumulated impairment losses ......................................................
Psych Support Inc. acquisition ............................................................
WCG foreign currency translation adjustment ....................................
Balances at December 31, 2012
Goodwill ..........................................................................................
Accumulated impairment losses ......................................................
WCG foreign currency translation adjustment ....................................
Impairment charge ..............................................................................
Balances at December 31, 2013
Goodwill ..........................................................................................
Accumulated impairment losses ......................................................
$
Human
Services
NET
Services
Consolidated
Total
79,223 $
(60,701)
18,522
191,215 $
(96,000)
95,215
270,438
(156,701)
113,737
125
53
79,401
(60,701)
18,700
(160)
(492)
79,241
(61,193)
18,048 $
-
-
125
53
191,215
(96,000)
95,215
270,616
(156,701)
113,915
-
-
(160)
(492)
191,215
(96,000)
95,215 $
270,456
(157,193)
113,263
During the quarter ended June 30, 2013, the not-for-profit entities managed by Rio Grande Management Company,
L.L.C. (“Rio”), a wholly-owned subsidiary of the Company, were notified of the termination of funding for certain of their
services. Management expected that due to this change in funding, the not-for-profit entities would not be able to maintain
their historical level of business, which was expected to result in the decrease, or elimination of, services provided by Rio
to these entities. The Company determined that these factors were indicators that an interim goodwill impairment test was
required under ASC 350. As a result, the Company estimated the fair value of the goodwill it acquired in connection with
the Rio acquisition to be zero at June 30, 2013, and at that time, the Company recorded a non-cash charge of approximately
$492 in its Human Services operating segment to eliminate the carrying value of goodwill acquired in connection with its
76
acquisition of Rio. This charge is included in “Asset impairment charge” in the consolidated statements of income for the
year ended December 31, 2013.
The Company determined in connection with its annual asset impairment analysis that goodwill was not further
impaired as of December 31, 2013.
During first nine months of 2012, WCG experienced a decline in its business due to the impact of a reorganization of
the service delivery system in British Columbia, which began in early 2012. As part of this reorganization, all of the
contracts for services in this market expired and new contracts were put up for bid. Due to an increased level of competition
in British Columbia and a decrease in the number of services funded, WCG was unable to regain the level of business it
experienced prior to the reorganization. The impact of this service delivery system reorganization was not fully realized
until the conclusion of the transition to the new system in the third quarter of 2012 and contributed to a decrease in the
financial results of operations of WCG for 2012. The Company determined that these factors were indicators that an
interim asset impairment analysis was required under ASC 350. As a result, the Company estimated the fair value of the
goodwill it acquired in connection with the WCG acquisition based on a weighted-average of a market-based valuation
approach and an income-based valuation approach at September 30, 2012. The Company determined that goodwill related
to the acquisition of WCG was not impaired at that time. However, as described below, intangible assets related to WCG
were impaired.
The total amount of goodwill that was deductible for income tax purposes for acquisitions as of December 31, 2013
and 2012 was approximately $36,870 and $35,930, respectively.
Intangible Assets
Intangible assets are comprised of acquired customer relationships, developed technology, management contracts and
restrictive covenants. The Company valued customer relationships and the management contracts acquired based upon
expected future cash flows resulting from the underlying contracts with state and local agencies to provide human services
in the case of customer relationships, and management and administrative services provided to the managed entity with
respect to acquired management contracts.
Intangible assets consisted of the following:
December 31,
2013
2012
Estimated
Useful
Life (Yrs)
10
15
10
3
6
5
14.1*
$
$
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
Accumulated
Amortization
11,422 $
73,990
1,417
989
-
-
87,818 $
(9,975) $
(33,319)
(1,027)
(21)
-
-
(44,342) $
12,008 $
74,130
1,417
-
6,000
35
93,590 $
(9,347)
(28,609)
(886)
-
(5,067)
(30)
(43,939)
Management contracts .............................
Customer relationships .............................
Customer relationships .............................
Customer relationships .............................
Developed technology ..............................
Restrictive covenants ...............................
Total .........................................................
* Weighted-average amortization period at December 31, 2013.
77
No significant residual value is estimated for these intangible assets. Amortization expense was approximately
$7,134, $7,486 and $7,735 for the years ended December 31, 2013, 2012 and 2011, respectively. The total amortization
expense is estimated to be as follows for the next five years and thereafter, based on completed acquisitions as of
December 31, 2013:
$
Year
2014
2015
2016
2017
2018
Thereafter
Total
$
Amount
6,309
5,715
5,232
4,817
4,817
16,586
43,476
The Company performed an interim asset impairment analysis, in connection with its goodwill impairment analysis,
as of September 30, 2012. The Company determined that the value of the customer relationships acquired in connection
with its acquisition of WCG was impaired as of September 30, 2012. Consequently, the Company recorded a non-cash
charge of approximately $2,506 in its Human Services operating segment to reduce the carrying value of customer
relationships based on their revised estimated fair values. In estimating the fair values of these intangible assets, the
Company based its estimates on a projected discounted cash flow basis. This charge is included in “Asset impairment
charge” in the consolidated statements of income for the year ended December 31, 2012.
In connection with its annual asset impairment analysis conducted as of December 31, 2013 and 2012, the Company
determined that no additional impairment charges were required to fairly state the value of these assets.
6. Accrued Expenses
Accrued expenses consisted of the following:
Accrued compensation ............................................................................................ $
NET Services contract adjustments .........................................................................
Other........................................................................................................................
$
22,940 $
12,445
17,099
52,484 $
18,438
3,119
11,419
32,976
December 31,
2013
2012
78
7. Long-Term Obligations
The Company’s long-term obligations were as follows:
December 31,
2013
December 31,
2012
6.5% convertible senior subordinated notes, interest payable semi-annually beginning
May 2008 with principal due May 2014 (the "Notes") ................................................. $
47,500 $
47,500
$100,000 term loan, LIBOR plus 3.00% with principal and interest payable at least
once every three months that was terminated in August 2013 ......................................
-
82,500
$165,000 revolving loan, LIBOR plus 1.75% - 2.50% (effective rate of 2.42% at
December 31, 2013) through August 2018 with interest payable at least once every
three months .................................................................................................................
$60,000 term loan, LIBOR plus 1.75% - 2.50%, with principal payable quarterly
beginning December 31, 2014 and interest payable at least once every three months,
through August 2018 ....................................................................................................
Less current portion ..........................................................................................................
$
16,000
-
60,000
123,500
48,250
75,250 $
-
130,000
14,000
116,000
The carrying amount of the long-term obligations approximated its fair value at December 31, 2013 and 2012. The
fair value of the Company’s long-term obligations was estimated based on interest rates for the same or similar debt offered
to the Company having same or similar remaining maturities and collateral requirements.
Annual maturities of long-term obligations as of December 31, 2013 are as follows:
Year
2014
2015
2016
2017
2018
$
Amount
48,250
3,375
4,875
6,750
60,250
Total
$
123,500
Convertible senior subordinated notes
On November 13, 2007, the Company issued $70,000 in aggregate principal amount of 6.5% Convertible Senior
Subordinated Notes due 2014 (the “Senior Notes”), under the amended note purchase agreement dated November 9, 2007
to the purchasers named therein. The proceeds of $70,000 were initially placed into escrow and were released on
December 7, 2007 to partially fund the cash portion of the purchase price of Charter LCI Corporation, including its
subsidiaries, collectively referred to as LogistiCare. The Senior Notes are general unsecured obligations subordinated in
right of payment to any existing or future senior debt.
In connection with the Company’s issuance of the Senior Notes, the Company entered into an Indenture between the
Company, as issuer, and The Bank of New York Trust Company, N.A., as trustee (the “Indenture”).
79
The Senior Notes are convertible, under certain circumstances, into our common stock at a conversion rate, subject to
adjustment as provided for in the Indenture, of 23.982 shares per $1 principal amount of Senior Notes. This conversion rate
is equivalent to an initial conversion price of approximately $41.698 per share. On and after the occurrence of a
fundamental change (as defined below), the Senior Notes will be convertible at any time prior to the close of business on
the business day before the stated maturity date of the Senior Notes. In the event of a fundamental change as described in
the Indenture, each holder of the Senior Notes shall have the right to require the Company to repurchase the Senior Notes
for cash. A fundamental change includes among other things: (i) the acquisition in a transaction or series of transactions of
50% or more of the total voting power of all shares of the Company’s capital stock; (ii) a merger or consolidation of the
Company with or into another entity, merger of another entity into the Company, or the sale, transfer or lease of all or
substantially all of the Company’s assets to another entity (other than to one or more of the Company’s wholly-owned
subsidiaries), other than any such transaction (A) pursuant to which holders of 50% or more of the total voting power of the
Company’s capital stock entitled to vote in the election of directors immediately prior to such transaction have or are
entitled to receive, directly or indirectly, at least 50% or more of the total voting power of the capital stock entitled to vote
in the election of directors of the continuing or surviving corporation immediately after such transaction or (B) which is
effected solely to change the jurisdiction of incorporation of the Company and results in a reclassification, conversion or
exchange of outstanding shares of the Company’s common stock into solely shares of common stock; (iii) if, during any
consecutive two-year period, individuals who at the beginning of that two-year period constituted the Company’s board of
directors, together with any new directors whose election to the Company’s board of directors or whose nomination for
election by the Company’s stockholders, was approved by a vote of a majority of the directors then still in office who were
either directors at the beginning of such period or whose election or nomination for election was previously approved,
cease for any reason to constitute a majority of the Company’s board of directors then in office; (iv) if a resolution
approving a plan of liquidation or dissolution of the Company is approved by its board of directors or the Company’s
stockholders; and (v) upon the occurrence of a termination of trading as defined in the Indenture.
The Indenture contains customary terms and provisions that provide that upon certain events of default, including,
without limitation, the failure to pay amounts due under the Senior Notes when due, the failure to perform or observe any
term, covenant or agreement under the Indenture, or certain defaults under other agreements or instruments, occurring and
continuing, either the trustee or the holders of not less than 25% in aggregate principal amount of the Senior Notes then
outstanding may declare the principal of the Senior Notes and any accrued and unpaid interest through the date of such
declaration immediately due and payable. Upon any such declaration, such principal, premium, if any, and interest shall
become due and payable immediately. In the case of certain events of bankruptcy or insolvency relating to the Company or
any significant subsidiary of the Company, the principal amount of the Senior Notes together with any accrued interest
through the occurrence of such event shall automatically become and be immediately due and payable without any
declaration or other act of the Trustee or the holders of the Senior Notes.
During the years ended December 31, 2013 and 2012, the Company repurchased approximately $0 and $2,493,
respectively, of the Senior Notes. As of December 31, 2013, $47.5 million of the Senior Notes was outstanding.
Credit facility
On August 2, 2013, the Company entered into an Amended and Restated Credit Agreement with Bank of America,
N.A., as administrative agent, swing line lender and letter of credit issuer, SunTrust Bank, as syndication agent, Merrill
Lynch, Pierce, Fenner & Smith Incorporated and SunTrust Robinson Humphrey, Inc., as joint lead arrangers and joint book
managers and other lenders party thereto. The Amended and Restated Credit Agreement provides the Company with a
senior secured credit facility (“New Senior Credit Facility”), in aggregate principal amount of $225,000, comprised of a
$60,000 term loan facility and a $165,000 revolving credit facility. The New Senior Credit Facility includes sublimits for
swingline loans and letters of credit in amounts of up to $10,000 and $25,000, respectively. On August 2, 2013, the
Company borrowed the entire amount available under the term loan facility and $16,000 under the revolving credit facility
and used the proceeds thereof to refinance certain of the Company’s existing indebtedness. Prospectively, the proceeds of
the New Senior Credit Facility may be used to (i) fund ongoing working capital requirements; (ii) make capital
expenditures; (iii) repay the Senior Notes; and (iv) other general corporate purposes.
Under the New Senior Credit Facility, the Company has an option to request an increase in the amount of the
revolving credit facility and/or the term loan facility from time to time (on substantially the same terms as apply to the
existing facilities) in an aggregate amount of up to $75,000 with either additional commitments from lenders under the
Amended and Restated Credit Agreement at such time or new commitments from financial institutions acceptable to the
administrative agent in its reasonable discretion, so long as no default or event of default exists at the time of any such
increase. The Company may not be able to access additional funds under this increase option as no lender is obligated to
participate in any such increase under the New Senior Credit Facility.
80
The New Senior Credit Facility matures on August 2, 2018. The Company may prepay the New Senior Credit Facility
in whole or in part, at any time without premium or penalty, subject to reimbursement of the lenders’ breakage and
redeployment costs in connection with prepayments of London Interbank Offered Rate (“LIBOR”) loans. The unutilized
portion of the commitments under the New Senior Credit Facility may be irrevocably reduced or terminated by us at any
time without penalty.
Interest on the outstanding principal amount of the loans accrues, at the Company’s election, at a per annum rate
equal to LIBOR, plus an applicable margin or the base rate plus an applicable margin. The applicable margin ranges from
1.75% to 2.50% in the case of LIBOR loans and 0.75% to 1.50% in the case of the base rate loans, in each case based on
the Company’s consolidated leverage ratio as defined in the Amended and Restated Credit Agreement. Interest on the loans
is payable quarterly in arrears. In addition, the Company is obligated to pay a quarterly commitment fee based on a
percentage of the unused portion of each lender’s commitment under the revolving credit facility and quarterly letter of
credit fees based on a percentage of the maximum amount available to be drawn under each outstanding letter of credit. The
commitment fee and letter of credit fee ranges from 0.25% to 0.50% and 1.75% to 2.50%, respectively, in each case, based
on the Company’s consolidated leverage ratio.
The term loan facility is subject to quarterly amortization payments, commencing on December 31, 2014, so that the
following percentages of the term loan outstanding on the closing date plus the principal amount of any term loans funded
pursuant to the increase option are repaid as follows: 5.0% between December 31, 2014 and September 30, 2015, 7.5%
between December 31, 2015 and September 30, 2016, 10.0% between December 31, 2016 and September 30, 2017,
11.25% between December 31, 2017 and June 30, 2018 and the remaining balance at maturity. The New Senior Credit
Facility also requires the Company (subject to certain exceptions as set forth in the Amended and Restated Credit
Agreement) to prepay the outstanding loans in an aggregate amount equal to 100% of the net cash proceeds received from
certain asset dispositions, debt issuances, insurance and casualty awards and other extraordinary receipts.
The Amended and Restated Credit Agreement contains customary affirmative and negative covenants and events of
default. The negative covenants include restrictions on the Company’s ability to, among other things, incur additional
indebtedness, create liens, make investments, give guarantees, pay dividends, sell assets and merge and consolidate. The
Company is subject to financial covenants, including consolidated net leverage and consolidated fixed charge covenants.
The Company’s obligations under the New Senior Credit Facility are guaranteed by all of its present and future
domestic subsidiaries, excluding certain domestic subsidiaries, which include its insurance captives and not-for-profit
subsidiaries. The Company’s, and each guarantor’s, obligations under its guaranty of the New Senior Credit Facility are
secured by a first priority lien on substantially all of the Company’s respective assets, including a pledge of 100% of the
issued and outstanding stock of its domestic subsidiaries and 65% of the issued and outstanding stock of its first tier foreign
subsidiaries.
The Company incurred fees of approximately $2,056 to refinance its long-term debt. The Company accounted for
fees related to the refinancing of its long-term debt, as well as unamortized deferred financing fees related to the prior
senior credit facility, under ASC 470-50 – Debt Modifications and Extinguishments. As both credit facilities were loan
syndications, and a number of lenders participated in both credit facilities, the Company evaluated the accounting for
financing fees on a lender by lender basis. Of the total amount of deferred financing fees related to the prior senior credit
facility, approximately $849 will continue to be deferred and amortized and approximately $525 was expensed during
2013. Of the $2,056 of fees incurred to refinance the long-term debt, approximately $1,801 was deferred and will be
amortized to interest expense and approximately $254 was expensed in 2013.
8. Business Segments
The Company’s operations are organized and reviewed by management along its services lines. The Company
operates in two segments, Human Services and NET Services. Human Services includes government sponsored human
services consisting of home and community based counseling, foster care and not-for-profit management services. NET
Services includes managing the delivery of non-emergency transportation services.
Segment asset disclosures include property and equipment and other intangible assets. The accounting policies of the
Company’s segments are the same as those of the consolidated Company. The Company evaluates performance based on
operating income. Operating income is revenue less operating expenses (including cost of non-emergency transportation
services, client service expense, general and administrative expense, depreciation and amortization, and asset impairment
charge) and is not affected by other income/expense or by income taxes. Other income/expense consists principally of
interest expense, loss on extinguishment of debt, gain on bargain purchase and interest income. In calculating operating
81
income for each segment, general and administrative expenses incurred at the corporate level are allocated to each segment
based upon their relative direct expense levels excluding costs for purchased services. Corporate costs includes corporate
accounting and finance, information technology, external audit, tax compliance, business development, cost reporting
compliance, internal audit, employee training, legal and various other overhead costs. All intercompany transactions have
been eliminated.
The following table sets forth certain financial information attributable to the Company’s business segments for the
years ended December 31, 2013, 2012 and 2011. In addition, none of the segments have significant non-cash items other
than asset impairment charges and depreciation and amortization charges in operating income.
For the year ended December 31, 2013
Human
Services (c)
NET
Services
Corporate
(a)(b)
Consolidated
Total
Revenues ........................................................................ $
Depreciation and amortization .......................................
Operating income ...........................................................
Net interest expense .......................................................
Loss on extinguishment of debt .....................................
Total assets .....................................................................
Capital expenditures (d) .................................................
352,436 $
7,147
640
196
265
140,964
2,538
770,246 $
7,725
37,994
6,698
260
247,666
5,308
- $
-
-
-
-
36,128
3,326
1,122,682
14,872
38,634
6,894
525
424,758
11,172
For the year ended December 31, 2012
Human
Services (c)
NET
Services
Corporate
(a)(b)
Consolidated
Total
Revenues ........................................................................ $
Depreciation and amortization .......................................
Operating income ...........................................................
Net interest expense (income) ........................................
Total assets .....................................................................
Capital expenditures .......................................................
355,231 $
7,408
707
(61)
145,770
2,489
750,658 $
7,615
23,494
7,569
216,698
6,271
- $
-
-
-
29,269
762
1,105,889
15,023
24,201
7,508
391,737
9,522
For the year ended December 31, 2011
Human
Services (c)
NET
Services
Corporate
(a)(b)
Consolidated
Total
Revenues ........................................................................ $
Depreciation and amortization .......................................
Operating income ...........................................................
Net interest expense .......................................................
Gain on bargain purchase ...............................................
Loss on extinguishment of debt .....................................
Total assets .....................................................................
Capital expenditures .......................................................
361,439 $
7,082
11,221
47
2,711
1,857
155,710
3,023
581,541 $
6,574
25,418
9,955
-
606
204,667
4,302
- $
-
-
-
-
-
18,676
3,981
942,980
13,656
36,639
10,002
2,711
2,463
379,053
11,306
(a) Corporate costs have been allocated to the Human Services and NET Services operating segments.
(b) Corporate assets include the following:
2013
December 31,
2012
2011
Cash ................................................. $
Property and equipment ...................
Prepaid expenses ..............................
Other assets ......................................
22,424 $
10,407
2,599
698
18,017 $
8,727
2,128
397
6,921
9,150
2,160
445
(c) Excludes intersegment revenues of approximately $326 for the year ended December 31, 2013, $378 for the year ended
Decmeber 31, 2012 and $530 for the year ended December 31, 2011 that have been eliminated in consolidation.
(d) Includes Human Services' purchase of intangible assets totalling $989 related to immaterial asset acquisitions.
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The following table details the Company’s revenues, net income and long-lived assets by geographic location.
Revenue ................................................................................... $
Net income ..............................................................................
Long-lived assets .....................................................................
1,112,120 $
19,527
186,415
10,562 $
(89)
3,033
1,122,682
19,438
189,448
For the year ended December 31, 2013
United
States (a)
Canada
Consolidated
Total
Revenue ................................................................................... $
Net income ..............................................................................
Long-lived assets .....................................................................
1,091,778 $
11,045
190,415
14,111 $
(2,563)
3,531
1,105,889
8,482
193,946
For the year ended December 31, 2012
United
States (a)
Canada
Consolidated
Total
For the year ended December 31, 2011
United
States (a)
Canada
Consolidated
Total
Revenue ................................................................................... $
Net income ..............................................................................
Long-lived assets .....................................................................
920,341 $
16,924
195,777
22,639 $
16
5,997
942,980
16,940
201,774
(a) The Human Services and NET Services operating segments, on an aggregate basis, derived approximately 9.7%,
9.7% and 12.2% of the Company’s consolidated revenue from the State of Virginia’s Department of Medical
Assistance Services for the years ended December 31, 2013, 2012 and 2011, respectively. Additionally, both
segments, on an aggregate basis, derived approximately 10.5%, 10.3% and 11.0% of the Company’s consolidated
revenue from the State of New Jersey for the years ended December 31, 2013, 2012 and 2011, respectively.
9. Stockholders’ Equity
The Company’s second amended and restated certificate of incorporation provides that the Company’s authorized
capital stock consists of 40,000,000 shares of common stock, $0.001 par value per share, and 10,000,000 shares of
preferred stock, $0.001 par value per share.
At December 31, 2013 and 2012, there were 14,477,312 and 13,785,947 shares of the Company’s common stock
outstanding, respectively, (including 956,442 treasury shares at December 31, 2013 and 928,478 treasury shares at
December 31, 2012) and no shares of preferred stock outstanding.
83
The following table reflects the total number of shares of the Company’s common stock reserved for future issuance
as of December 31, 2013:
Shares of common stock reserved for:
Exercise of stock options and restricted stock awards ........................................................................
Issuance of Performance Restricted Stock Units ................................................................................
Exchangeable shares issued in connection with the acquisition of WCG that are exchangeable into
shares of the Company's common stock .........................................................................................
Convertible senior subordinated notes ................................................................................................
1,033,094
73,532
261,694
1,509,360
Total shares of common stock reserved for future issuance ...................................................................
2,877,680
During the year ended December 31, 2013, the Company granted a total of 63,407 shares of restricted stock to non-
employee directors of its board of directors, executive officers and certain key employees during the year ended December
31, 2013. The awards primarily vest in three equal installments on the first, second and third anniversaries of the date of
grant. The weighted-average fair value of these awards totaled $24.30 per share.
During the year ended December 31, 2013, the Company issued 382,458 shares of its common stock in connection
with the exercise of employee stock options under the 2006 Plan. In addition, during the year ended December 31, 2013,
the Company issued 209,668 shares of its common stock in connection with the exercise of employee stock options under
the Company’s 2003 Stock Option Plan (“2003 Plan”). During 2013, the Company also issued 99,239 shares of its common
stock to non-employee directors, executive officers and key employees upon the vesting of certain restricted stock awards
granted in 2013, 2012, 2011 and 2010 under the Company’s 2006 Plan. In connection with the vesting of these restricted
stock awards, 27,964 shares of the Company’s common stock were surrendered to the Company by the recipients to pay
their associated taxes due to the federal and state taxing authorities during 2013. These shares were placed in treasury.
On February 1, 2007, the Company’s board of directors approved a stock repurchase program for up to one million
shares of its common stock. The Company may purchase shares of its common stock from time to time in the open market
or in privately negotiated transactions, depending on the market conditions and the Company’s capital requirements. In
2012, the Company spent approximately $3,489 to purchase 293,600 shares of its common stock in the open market. As of
December 31, 2013, the Company spent approximately $14,376 to purchase 756,100 shares of its common stock in the
open market since the inception of this stock repurchase program.
Subject to the rights specifically granted to holders of any then outstanding shares of the Company’s preferred stock,
the Company’s common stockholders are entitled to vote together as a class on all matters submitted to a vote of the
Company’s stockholders, and are entitled to any dividends that may be declared by the Company’s board of directors. The
Company’s common stockholders do not have cumulative voting rights. Upon the Company’s dissolution, liquidation or
winding up, holders of the Company’s common stock are entitled to share ratably in the Company’s net assets after
payment or provision for all liabilities and any preferential liquidation rights of the Company’s preferred stock then
outstanding. The Company’s common stockholders do not have preemptive rights to purchase shares of the Company’s
stock. The issued and outstanding shares of the Company’s common stock are not subject to any redemption provisions and
are not convertible into any other shares of the Company’s capital stock. The rights, preferences and privileges of holders
of the Company’s common stock will be subject to those of the holders of any shares of the Company’s preferred stock the
Company may issue in the future.
On December 9, 2008, the Board declared a dividend of one preferred stock purchase right (a “Right”) for each
outstanding share of the Company’s voting common stock, par value $0.001 per share to stockholders of record at the close
of business on December 22, 2008 (the “Record Date”). Each Right entitles the registered holder to purchase from the
Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, $0.001 par value per share (the
“Preferred Stock” or the “Preferred Shares”), at a specified purchase price (the “Purchase Price”), subject to adjustment. On
December 9, 2008, the Company and Computershare Trust Company, N.A., as Rights Agent, entered into a Rights
Agreement which was subsequently amended on October 9, 2009 (the “Initial Rights Agreement”).
84
On December 8, 2011, the Board approved an amendment and restatement of the Initial Rights Agreement which
amends and restates in its entirety the Initial Rights Agreement. On December 9, 2011, the Company and Computershare
Trust Company, N.A., as Rights Agent, executed an Amended and Restated Rights Agreement (the “Amended Rights
Agreement”) to, among other things, extend the Expiration Date (as such term is defined in the Amended Rights
Agreement) for an additional three-year period so that the Rights expire upon the close of business on December 9, 2014,
increase the Purchase Price from $15.00 to $20.00 per one one-hundredth of a Preferred Share, expand the definition of
Acquiring Person (as such term is defined in the Amended Rights Agreement) to include persons acting in concert with the
person or group acquiring the Company’s common stock, expand the definition of Beneficial Ownership (as such term is
defined in the Amended Rights Agreement) to include certain derivative securities relating to the Company’s common
stock and change certain other provisions in order to address various current practices in connection with stockholder rights
agreements.
Initially, the Rights are attached to all outstanding shares of the Company’s common stock and no separate Rights
certificates will be issued until the distribution date (as defined in the Rights Agreement). The Rights are not exercisable
until the distribution date. The Rights will expire on December 9, 2014, unless this date is amended or unless the Rights are
earlier redeemed or exchanged by the Company. In addition, the Rights Agreement also provides that the Rights among
other things: (i) will not become exercisable in connection with a qualified fully financed offer for any or all of the
outstanding shares of the Company’s common stock (as described in the Rights Agreement); (ii) permit each holder of a
Right to receive, upon exercise, shares of the Company’s common stock with a value equal to twice that of the exercise
price of the Right if 20% or more of the Company’s outstanding common stock is acquired by a person or group; and
(iii) in the event that the Company is acquired in a merger or other business combination transaction or 50% or more of its
consolidated assets or earning power are sold after a person or group has acquired 20% or more of the Company’s
outstanding common stock, will allow each holder of a Right to receive, upon the exercise thereof at the then-current
exercise price of the Right, that number of shares of common stock of the acquiring company, which at the time of such
transaction will have a market value of two times the exercise price of the Right.
The number of outstanding Rights and the number of one one-hundredths of a Preferred Share to be issued upon
exercise of each Right are subject to adjustment under certain circumstances. Because of the nature of the Preferred Shares’
dividend, liquidation and voting rights, the value of the one one-hundredth interest in a Preferred Share purchasable upon
exercise of each Right should approximate the value of one share of the Company’s common stock. Until a Right is
exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation,
the right to vote or to receive dividends.
The Rights are designed to assure that all of the Company’s stockholders receive fair and equal treatment in the event
of any proposed takeover of the Company and to guard against partial tender offers, open market accumulations and other
abusive or coercive tactics without paying stockholders a control premium. The Rights will cause substantial dilution to a
person or group (together with all affiliates and associates of such person or group and any person or group of persons
acting in concert therewith (collectively, “Related Persons”)), other than specified exempt persons, that acquires 20% or
more of the Company’s common stock (which includes for this purpose stock referenced in derivative transactions and
securities) on terms not approved by the Board. The Rights are not intended to prevent a takeover of the Company and will
not interfere with any merger or other business combination approved by the Board at any time prior to the first date that a
person or group (together with all Related Persons) becomes an Acquiring Person.
On August 16, 2012, the Company’s stockholders ratified the adoption by the Board of the Amended Rights
Agreement.
10. Stock-Based Compensation Arrangements
The Company provides stock-based compensation under the Company’s 2003 Plan and 2006 Plan to employees, non-
employee directors, consultants and advisors. Upon stockholder approval in May 2006, the 2006 Plan replaced the former
1997 Stock Option and Incentive Plan (“1997 Plan”) and 2003 Plan. While all awards outstanding under the 2003 Plan
remain in effect in accordance with their terms, no additional grants or awards will be made under this plan. The 1997 Plan
has expired and no awards were outstanding under the 1997 Plan as of December 31, 2013.
85
To achieve the purposes of the Company’s stock-based compensation program described above, the 2006 Plan allows
the flexibility to grant or award stock options, stock appreciation rights, restricted stock, unrestricted stock, stock units
including restricted stock units and performance awards to eligible persons.
Stock option awards granted under the 2003 Plan and 2006 Plan were generally ten year options granted at fair market
value on the date of grant with time based vesting over a period determined at the time the options were granted, ranging
from one to four years (which is equal to the requisite service period) prior to the acceleration of vesting noted below. The
Company does not intend to pay dividends on unexercised options. New shares of the Company’s common stock are issued
when the options are exercised.
The following table summarizes the activity under the 1997 Plan, 2003 Plan and 2006 Plan as of December 31, 2013:
Number of shares
of the Company's
common stock
authorized for
issuance
Number of shares
of the Company's
common stock
remaining
available for
future grants
Number of shares of the Company's
common stock subject to
Options
Stock Grants
1997 Plan ........................................
2003 Plan .......................................
2006 Plan ........................................
428,572
1,400,000
4,400,000
-
-
1,549,786
-
270,502
603,750
-
-
232,374
Total ...............................................
6,228,572
1,549,786
874,252
232,374
The Company chose to follow the short-cut method prescribed by ASC 718 to calculate its pool of excess tax benefits
available to absorb tax deficiencies recognized subsequent to the adoption of ASC 718 (“APIC pool”). There was no effect
on the Company’s financial results for 2013, 2012 or 2011 related to the application of the short-cut method to determine
its APIC pool balance.
The Company calculates the fair value of stock options using the Black-Scholes option-pricing formula. Stock-based
compensation expense charged against income for stock options and stock grants awarded during the years ended
December 31, 2013, 2012 and 2011 was based on the grant-date fair value adjusted for estimated forfeitures based on
awards expected to vest in accordance with the provisions of ASC 718. For stock-based compensation awards granted
during 2013, 2012 and 2011, the associated expense is amortized over the vesting period of primarily three years.
Additionally, ASC 718 requires forfeitures to be estimated at the time of grant and revised as necessary in subsequent
periods if the actual forfeitures differ from those estimates.
The following table reflects the amount of stock-based compensation, for stock settled awards, recorded in each
financial statement line item for the years ended December 31, 2013, 2012 and 2011:
Year ended December 31,
2012
2011
2013
Cost of non-emergency transportation services ............................ $
Client service expense ...................................................................
General and administrative expense ..............................................
1,054 $
604
1,421
1,354 $
792
1,727
Total stock-based compensation ................................................... $
3,079 $
3,873 $
1,069
652
1,954
3,675
The amounts above exclude the tax impact of approximately $909, $960 and $774 for the years ended December 31,
2013, 2012 and 2011, respectively.
For the years ended December 31, 2013, 2012 and 2011, the amount of excess tax benefits resulting from the exercise
of stock options was approximately $1,120, $91 and $17, respectively. For the years ended December 31, 2013, 2012 and
2011, the Company had tax shortfalls resulting from the exercise of stock options of approximately $683, $306 and $117,
respectively. The excess tax benefits resulting from the exercise of stock options are reflected as cash flows from financing
activities for the years ended December 31, 2013, 2012 and 2011 in the consolidated statements of cash flows.
86
The following table summarizes the stock option activity for the year ended December 31, 2013:
Year ended December 31, 2013
Number
of Shares
Under
Option
Weighted-
average
Exercise
Price
Weighted-
average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Balance at beginning of period ...................
Granted ................................................
Exercised ..............................................
Forfeited or expired .............................
Outstanding at end of period .......................
Vested or expected to vest at end of period
Exercisable at end of period ........................
1,724,421 $
-
(592,126)
(258,043)
874,252 $
768,945 $
872,009 $
19.48
-
17.01
24.22
19.76
20.64
19.78
4.2 $
4.1 $
4.2 $
5,812
4,515
5,783
The weighted-average grant-date fair value for options granted, total intrinsic value and cash received by the
Company related to options exercised during the years ended December 31, 2013, 2012 and 2011 were as follows:
2013
Year ended December 31,
2012
2011
Weighted-average grant date fair value ............................. Not Applicable $
Options exercised:
Total intrinsic value ....................................................... $
Cash received................................................................. $
4,544 $
10,069 $
6.92 $
10.40
351 $
949 $
47
56
The following table summarizes the activity of the shares and weighted-average grant date fair value of the
Company’s non-vested restricted common stock during the year ended December 31, 2013:
Shares
Weighted-average
grant date
fair value
Non-vested at December 31, 2012 ....................................................................
Granted ..........................................................................................................
Vested ............................................................................................................
Forfeited ........................................................................................................
Non-vested at December 31, 2013 ....................................................................
225,744 $
63,407 $
(99,239 ) $
(31,070 ) $
158,842 $
15.25
24.30
16.01
18.69
17.68
Restricted stock grants were not made prior to the approval of the 2006 Plan on May 25, 2006. The fair value of a
non-vested restricted stock grant is determined based on the closing market price of the Company’s common stock on the
date of grant.
87
As of December 31, 2013, there was approximately $2,428 of unrecognized compensation cost related to non-vested
stock-based compensation arrangements granted under the 2006 Plan. The cost is expected to be recognized over a
weighted-average period of 0.7 years. The total fair value of shares vested was $3,642, $4,076 and $2,750 for the years
ended December 31, 2013, 2012 and 2011, respectively.
There were no stock options awarded during 2013. The fair value of each stock option awarded during the years
ended December 31, 2012 and 2011 was estimated on the date of grant using the Black-Scholes option-pricing formula and
amortized over the option’s vesting periods with the following assumptions:
Expected dividend yield .............................................................
Expected stock price volatility ...................................................
Risk-free interest rate .................................................................
Expected life of options (in years) .............................................
Year ended December 31,
2012
0.0%
82.1%
0.4% -
-
3.3
0.5%
3.6
2011
0.0%
86.8% - 88.1%
1.9% - 2.6%
5.2 - 7.5
The risk-free interest rate was based on the U.S. Treasury security rate in effect as of the date of grant. The expected
lives of options and the expected stock price volatility were based on the Company’s historical data. Implied volatility was
not considered due to the low volume of traded options on the Company’s common stock.
11. Performance Restricted Stock Units
The Company has granted performance restricted stock units (“PRSUs”) to its executive officers that may be settled
in cash or stock as set forth in the table below.
Number of
PRSUs
Granted
Return on Equity
Performance Levels
Date of Grant
March 14, 2011 .............
January 13, 2012 ...........
March 28, 2013 .............
May 7, 2013 ..................
June 7, 2013 ..................
Threshold Target
18%
18%
15%
15%
15%
14%
14%
12%
12%
12%
122,144
113,891
67,276
18,926
17,424
Fiscal Year
Performance
Vesting
2011
Vesting
Graded vesting
2012 - 2014 Cliff vesting
2013 - 2015 December 31, 2015
2013 - 2015 December 31, 2015
2013 - 2015 December 31, 2015
Settlement
Form
Cash
Cash
Stock
Stock
Stock
The number of PRSUs eligible to be settled in cash or stock, as noted above, will be based on the achievement of
return on equity (determined by the quotient resulting from dividing the Company consolidated net income for the
performance periods of each grant by the average of its beginning of the year and end of the year stockholders’ equity for
the respective performance periods) (“ROE”) targets established by the Compensation Committee of the Company’s Board
for the performance periods under each grant.
Cash used to settle the PRSUs granted on March 14, 2011 totaled $560 in both 2013 and 2012.
88
The following table summarizes the activity of the shares and weighted-average grant date fair value of the
Company’s stock settled PRSUs during the year ended December 31, 2013:
Shares
Weighted-average
grant date
fair value
Non-vested at December 31, 2012 ....................................................................
Granted ..........................................................................................................
Forfeited ........................................................................................................
- $
103,626 $
(30,094 ) $
Non-vested at December 31, 2013 ....................................................................
73,532 $
-
20.05
20.24
19.98
Compensation expense of approximately $162 was recorded by the Company for the year ended December 31, 2013
related to the PRSUs granted in 2013.There was no compensation expense recorded by the Company for the years ended
December 31, 2013 and 2012 related to the PRSUs granted in 2012 as the threshold ROE level is not expected to be met.
Additionally, compensation expense of approximately $62, $371 and $906 was recorded by the Company for the years
ended December 31, 2013, 2012 and 2011, respectively, related to the PRSUs granted in 2011.
12. Earnings Per Share
The following table details the computation of basic and diluted earnings per share:
Year ended December 31,
2012
2013
2011
Numerator:
Net income available to common stockholders ............................... $
19,438 $
8,482 $
16,940
Denominator:
Denominator for basic earnings per share -- weighted-average
shares ...........................................................................................
13,499,885
13,225,448
13,242,702
Effect of dilutive securities:
Common stock options and restricted stock awards .................
Performance-based restricted stock units .................................
292,937
17,052
129,165
-
78,907
-
Denominator for diluted earnings per share -- adjusted weighted-
average shares assumed conversion .............................................
13,809,874
13,354,613
13,321,609
Basic earnings per share ...................................................................... $
Diluted earnings per share ................................................................... $
1.44 $
1.41 $
0.64 $
0.64 $
1.28
1.27
For the years ended December 31, 2013, 2012 and 2011, employee stock options to purchase 452,421, 1,563,247 and
1,601,158 shares, respectively, of common stock were not included in the computation of diluted earnings per share as the
exercise price of these options was greater than the average fair value of the common stock for the period and, therefore,
the effect of these options would have been anti-dilutive. The effect of issuing 1,139,145, 1,179,999 and 1,429,542 shares
of common stock on an assumed conversion basis related to the Senior Notes was not included in the computation of
diluted earnings per share for the years ended December 31, 2013, 2012 and 2011, respectively, as it would have been
antidilutive.
13. Leases
The Company leases many of its operating and office facilities for various terms under non-cancelable operating lease
agreements. The leases expire in various years and provide for renewal options. In the normal course of business, it is
expected that these leases will be renewed or replaced by leases on other properties.
89
The operating leases provide for increases in future minimum annual rental payments based on defined increases in
the Consumer Price Index, subject to certain minimum increases. Several of these lease agreements contain provisions for
periods in which rent payments are reduced. The total amount of rental payments due over the lease term is being charged
to rent expense on a straight-line basis over the term of the lease. The difference between rent expense recorded and the
amount paid as of December 31, 2013 and 2012 was approximately $1,355 and $1,207, respectively, and was included in
"Accrued expenses” in the consolidated balance sheets. Also, the lease agreements generally require the Company to pay
executory costs such as real estate taxes, insurance, and repairs.
Future minimum payments under non-cancelable operating leases with initial terms of one year or more consisted of
the following at December 31, 2013:
2014 .............................................................. $
2015 ..............................................................
2016 ..............................................................
2017 ..............................................................
2018 ..............................................................
Thereafter .....................................................
Total future minimum lease payments ......... $
Operating
Leases
15,662
11,845
8,956
6,536
4,041
8,866
55,906
Rent expense related to operating leases was approximately $21,398, $21,285 and $19,412, for the years ended
December 31, 2013, 2012 and 2011, respectively.
14. Retirement Plan
Human Services
The Company maintains a qualified defined contribution plan under Section 401(k) of the Internal Revenue Code of
1986, as amended (“IRC”), for all employees of its Human Services operating segment and corporate personnel, as well as
employees of its NET Services operating segment as of January 1, 2012. The Company, at its discretion, may make a
matching contribution to the plans. The Company’s contributions to the plans were approximately $501, $461 and $406, for
the years ended December 31, 2013, 2012 and 2011, respectively.
On August 31, 2007, the Board adopted The Providence Service Corporation Deferred Compensation Plan (the
“Deferred Compensation Plan”) for the Company’s eligible employees and independent contractors of a participating
employer (as defined in the Deferred Compensation Plan). Under the Deferred Compensation Plan participants may defer
all or a portion of their base salary, service bonus, performance-based compensation earned in a period of 12 months or
more, commissions and, in the case of independent contractors, compensation reportable on Form 1099.
NET Services
The Company maintained a qualified defined contribution plan under Section 401(k) of the IRC for all employees of
its NET Services operating segment through December 31, 2011. Under this plan, the Company contributed an amount
equal to 25% of the first 5% of participant elective contributions. At the end of each plan year, the Company could also
make a contribution on a discretionary basis on behalf of participants who have made elective contributions for the plan
year. In no event did participant shares of the Company’s matching contribution exceed 1.25% of participants’
compensation for the plan year. For the year ended December 31, 2011, the Company made contributions to this plan
totaling approximately $135. Effective January 1, 2012, employees of the NET Services segment were transferred to the
Human Services operating segment 401(k) plan as discussed above.
90
The Company also maintains a 409 (A) Deferred Compensation Rabbi Trust Plan for highly compensated employees
of its NET Services operating segment. This plan was put in place to compensate for the inability of highly compensated
employees to take full advantage of the Company’s 401(k) plan.
15. Income Taxes
The federal and state income tax provision is summarized as follows:
Federal:
Current ................................................................................. $
Deferred ...............................................................................
State:
Current ................................................................................. $
Deferred ...............................................................................
Foreign:
Current ................................................................................. $
Deferred ...............................................................................
2013
Year ended December 31,
2012
2011
12,666 $
(2,805)
9,861
2,412 $
(478)
1,934
(19) $
1
(18)
6,909 $
(81 )
6,828
2,124 $
85
2,209
(6 ) $
(820 )
(826 )
9,262
(302)
8,960
1,253
(21)
1,232
(40)
(207)
(247)
Total provision for income taxes ............................................. $
11,777 $
8,211 $
9,945
A reconciliation of the provision for income taxes with amounts determined by applying the statutory U.S. federal
income tax rate to income before income taxes is as follows:
Year Ended December 31,
2012
2013
2011
Federal statutory rates ........................................................................
Federal income tax at statutory rates .................................................. $
Change in valuation allowance...........................................................
State income taxes, net of federal benefit ...........................................
Difference between federal statutory and foreign tax rate..................
Stock option expense ..........................................................................
Meals and entertainment ....................................................................
Bargain purchase gain on the acquisition of ReDCo ..........................
Change in workers' compensation liability accural related to
ReDCo ............................................................................................
Other...................................................................................................
Provision for income taxes ................................................................. $
Effective income tax rate ....................................................................
35%
10,925 $
185
1,198
15
(862)
93
-
-
223
11,777 $
38%
35%
5,844 $
181
1,436
384
605
67
-
(372)
66
8,211 $
49%
35%
9,410
(417)
801
50
619
110
(949)
-
321
9,945
37%
91
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the
Company’s deferred tax assets and liabilities are as follows:
Deferred tax assets:
Net operating loss carryforwards .............................................................................. $
Accounts receivable allowance .................................................................................
Property and equipment depreciation ........................................................................
Accrued items and reserves .......................................................................................
Nonqualified stock options .......................................................................................
Deferred rent .............................................................................................................
Deferred financing costs ...........................................................................................
Other .........................................................................................................................
Deferred tax liabilities:
Prepaids .....................................................................................................................
Property and equipment depreciation ........................................................................
Goodwill and intangibles amortization .....................................................................
Other .........................................................................................................................
Net deferred tax liabilities ................................................................................................
Less valuation allowance .................................................................................................
Net deferred tax liabilities ................................................................................................ $
Current deferred tax assets, net of valuation allowance of $436 and $238 for 2013 and
December 31,
2013
2012
1,153 $
905
797
3,004
1,626
657
-
418
8,560
1,943
4,959
7,754
385
15,041
(6,481 )
(814 )
(7,295 ) $
1,183
-
632
1,472
1,654
676
201
431
6,249
1,592
5,459
8,893
38
15,982
(9,733)
(629)
(10,362)
2012, respectively ......................................................................................................... $
2,152 $
532
Noncurrent deferred tax liabilities, net of valuation allowance of $378 and $391 for
2013 and 2012, repectively ...........................................................................................
$
(9,447 )
(7,295 ) $
(10,894)
(10,362)
At December 31, 2013, the Company had approximately $465 of federal net operating loss carryforwards which
expire in years 2019 through 2030, and $20,176 of state net operating loss carryforwards which expire as follows:
2014 .............................................................. $
2015 ..............................................................
2016 ..............................................................
2017 ..............................................................
2018 ..............................................................
Thereafter .....................................................
$
-
240
2,136
1,988
-
15,812
20,176
As a result of statutory “ownership changes” (as defined for purposes of Section 382 of the IRC), the Company’s
ability to utilize its federal net operating losses is restricted. Realization is dependent on generating sufficient taxable
income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more
likely than not that all of the deferred tax assets will be realized, to the extent they are not covered by a valuation
allowance. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward period are reduced.
The net change in the total valuation allowance for the year ended December 31, 2013 was $185. The valuation
allowance includes $687 for state net operating loss carryforwards and $127 for state tax credit carryforwards for which the
Company has concluded that it is more likely than not that these state net operating loss and tax credit carryforwards will
not be realized in the ordinary course of operations. The Company will continue to assess the valuation allowance and to
the extent it is determined that the valuation allowance should be adjusted, an appropriate adjustment will be recorded.
92
The Company recognized certain excess tax benefits related to stock option plans for the years ended December 31,
2013, 2012 and 2011 in the amount of $1,120, $91 and $17, respectively. Such benefits were recorded as a reduction of
income taxes payable and an increase in additional paid-in-capital and are included in “Exercise of employee stock options”
in the accompanying statements of stockholders’ equity and comprehensive income.
The Company recognized a tax shortfall related to stock option plans for the years ended December 31, 2013, 2012
and 2011 in the amount of $683, $306 and $117, respectively. This was recorded as a reduction of deferred tax assets and a
decrease to additional paid-in-capital and is included in “Exercise of employee stock options” in the accompanying
statements of stockholders’ equity and comprehensive income.
The Company expects none of the unrecognized tax benefits to be recognized during the next twelve months. The
Company recognizes interest and penalties as a component of income tax expense. During the years ended December 31,
2013, 2012 and 2011, the Company recognized approximately $76, $8 and $3, respectively, in interest and penalties. The
Company had approximately $84 and $16 for the payment of penalties and interest accrued as of December 31, 2013 and
2012. A reconciliation of the liability for unrecognized income tax benefit is as follows:
Unrecognized tax benefits, beginning of year ............................... $
Increase (decrease) related to prior year positions ........................
Increase related to current year tax positions ................................
Settlements ....................................................................................
Unrecognized tax benefits, end of year ......................................... $
2013
December 31,
2012
2011
254 $
82
78
-
414 $
324 $
(104)
58
(24)
254 $
173
(41)
192
-
324
The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate in
future periods was approximately $414 as of December 31, 2013.
The Company is subject to taxation in the United States, Canada and various state jurisdictions. The statute of
limitations is generally three years for the United States, four years for Canada, and between eighteen months and four
years for the various states in which the Company operates. The Company is subject to the following material taxing
jurisdictions: United States, Canada, California, Florida, New Jersey and Virginia. The tax years that remain open for
examination by the United States, Florida and Virginia jurisdictions are years ended December 31, 2010, 2011, 2012 and
2013; the Canada, California and New Jersey filings that remain open to examination are years ended December 31, 2009,
2010, 2011, 2012 and 2013.
Residual United States income taxes have not been provided on undistributed earnings of the Company’s foreign
subsidiary as the foreign subsidiary had cumulative losses as of December 31, 2013. Should the foreign subsidiary have
future cumulative earnings, these earnings will be considered to be indefinitely reinvested and, accordingly, no provision
for United States federal and state income taxes will be provided thereon. Upon distribution of those earnings in the form of
dividends or otherwise, the Company may be subject to both United States income taxes and withholding taxes payable to
Canada less an adjustment for foreign tax credits.
16. Commitments and Contingencies
The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion
of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s
consolidated financial position, results of operations, or liquidity.
The Company has two deferred compensation plans for management and highly compensated employees. These
deferred compensation plans are unfunded, and benefits are paid from the general assets of the Company. The total of
participant deferrals, which is reflected in “Other long-term liabilities” in the consolidated balance sheets, was
approximately $1,485 and $1,169 at December 31, 2013 and 2012, respectively.
93
17. Transactions with Related Parties
Upon the Company’s acquisition of Maple Services, LLC in August 2005, the Company’s former Chief Executive
Officer, former Chief Financial Officer, and Chief Executive Officer of Human Services, became members of the board of
directors of the not-for-profit organization (Maple Star Colorado, Inc.) formerly managed by Maple Services, LLC. In
November 2012, the Company’s then Interim Chief Executive Officer and new Chief Financial Officer became members of
Maple Star Colorado, Inc. board of directors. Maple Star Colorado, Inc. is a non-profit member organization governed by
its board of directors and the state laws of Colorado in which it is incorporated. Maple Star Colorado, Inc. is not a federally
tax exempt organization and neither the Internal Revenue Service rules governing IRC Section 501(c)(3) exempt
organizations, nor any other IRC sections applicable to tax exempt organizations, apply to this organization. The Company
provided management services to Maple Star Colorado, Inc. under a management agreement for consideration in the
amount of approximately $302, $258 and $249 for the years ended December 31, 2013, 2012 and 2011, respectively.
Amounts due to the Company from Maple Star Colorado, Inc. for management services provided to it by the Company at
December 31, 2013 and 2012 were approximately $220 and $231, respectively.
The Company operates a call center in Phoenix, Arizona. The building in which the call center is located is currently
leased to the Company from VWP McDowell, LLC (“McDowell”) under a five year lease that expires in 2014. Under the
lease agreement, as amended, the Company may terminate the lease with a six month prior written notice. Certain
immediate family members of Herman Schwarz, Chief Executive Officer of LogistiCare, have a partial ownership interest
in McDowell. In the aggregate these family members own an approximately 13% interest in McDowell directly and
indirectly through a trust. For 2013, 2012 and 2011, the Company expensed approximately $412, $417 and $423,
respectively, in lease payments to McDowell. Future minimum lease payments due under the amended lease total
approximately $810 at December 31, 2013.
18. Quarterly Results (Unaudited)
Quarter ended
March 31,
2012
June 30,
2012
September 30,
2012
December 31,
2012
Revenues .......................................................... $
Operating income .............................................
Net income .......................................................
Earnings per share:
Basic ............................................................. $
Diluted .......................................................... $
260,147 $
6,593
3,041
278,937 $
4,370
1,418
280,286 $
4,982
1,158
0.23 $
0.23 $
0.11 $
0.11 $
0.09 $
0.09 $
286,519
8,256
2,865
0.22
0.22
Revenues .......................................................... $
Operating income .............................................
Net income .......................................................
Earnings per share:
Basic ............................................................. $
Diluted .......................................................... $
Quarter ended
March 31,
2013
June 30,
2013
September 30,
2013
December 31,
2013
281,487 $
13,105
6,678
287,637 $
11,453
5,876
276,713 $
7,976
3,527
276,845
6,100 (1)
3,357 (1)(2)
0.51 $
0.49 $
0.44 $
0.43 $
0.26 $
0.25 $
0.24
0.24
(1) The fourth quarter of 2013 includes a charge of approximately $1,277 for severance and related payments (net of the
benefit of forfeiture of stock based compensation) for two executive officers and one key employee.
(2) The tax provision in the fourth quarter of 2013 included a favorable tax adjustment for the tax treatment of certain
equity compensation expenses resulting in a quarterly effective income tax rate of 25.8%.
94
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Controls and Procedures.
(a) Evaluation of disclosure controls and procedures
The Company, under the supervision and with the participation of its management, including its principal executive
officer and principal financial officer, evaluated the effectiveness of the design and operation of its disclosure controls and
procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of
the end of the period covered by this report (December 31, 2013) (“Disclosure Controls”). Based upon the Disclosure
Controls evaluation, the principal executive officer and principal financial officer have concluded that the Disclosure
Controls are effective in reaching a reasonable level of assurance that (i) information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) information
required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and
communicated to the Company’s management, including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in internal controls
The principal executive officer and principal financial officer also conducted an evaluation of the Company’s internal
control over financial reporting (“Internal Control”) to determine whether any changes in Internal Control occurred during
the quarter ended December 31, 2013 that have materially affected or which are reasonably likely to materially affect
Internal Control. Based on that evaluation, there has been no such change during the quarter ended December 31, 2013.
(c) Limitations on the Effectiveness of Controls
Control systems, no matter how well conceived and operated, are designed to provide a reasonable, but not an
absolute, level of assurance that the objectives of the control system are met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in
a cost-effective control system, misstatements due to error or fraud may occur and not be detected. The Company conducts
periodic evaluations of its internal controls to enhance, where necessary, its procedures and controls.
(d) Management’s report on internal control over financial reporting
Management’s report on internal control over financial reporting is presented in Part II, Item 8, of this report and is
hereby incorporated by reference.
(e) Audit report of the registered public accounting firm
The audit report of the registered public accounting firm is presented in Part II, Item 8, of this report and is hereby
incorporated by reference.
95
Item 9B.
Other Information.
None.
Item 10.
Directors, Executive Officers and Corporate Governance.
PART III
This Item is incorporated by reference to our definitive proxy statement on Schedule 14A for our 2014 stockholder
meeting; provided that if such proxy statement is not filed on or before April 30, 2014, such information will be included in
an amendment to this Report on Form 10-K filed on or before such date.
Code of Ethics
We have adopted a code of ethics that applies to our senior management, including our chief executive officer, chief
financial officer, controller and persons performing similar functions. Copies of our code of ethics are available without
charge upon written request directed to Ann Mullen, Ethics Program Manager, at The Providence Service Corporation, 64
East Broadway Blvd., Tucson, AZ, 85701.
Item 11.
Executive Compensation.
This Item is incorporated by reference to our definitive proxy statement on Schedule 14A for our 2014 stockholder
meeting; provided that if such proxy statement is not filed on or before April 30, 2014, such information will be included in
an amendment to this Report on Form 10-K filed on or before such date.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
This Item is incorporated by reference to our definitive proxy statement on Schedule 14A for our 2014 stockholder
meeting; provided that if such proxy statement is not filed on or before April 30, 2014, such information will be included in
an amendment to this Report on Form 10-K filed on or before such date.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
This Item is incorporated by reference to our definitive proxy statement on Schedule 14A for our 2014 stockholder
meeting; provided that if such proxy statement is not filed on or before April 30, 2014, such information will be included in
an amendment to this Report on Form 10-K filed on or before such date.
Item 14.
Principal Accounting Fees and Services.
This Item is incorporated by reference to our definitive proxy statement on Schedule 14A for our 2014 stockholder
meeting; provided that if such proxy statement is not filed on or before April 30, 2014, such information will be included in
an amendment to this Report on Form 10-K filed on or before such date.
Item 15.
Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements
PART IV
The following consolidated financial statements including footnotes are included in Item 8.
• Consolidated Balance Sheets at December 31, 2013 and 2012;
• Consolidated Statements of Income for the years ended December 31, 2013, 2012 and 2011;
96
• Consolidated Statements of Comprehensive Income for the years ended December 31, 2013, 2012 and 2011;
• Consolidated Statements of Stockholders’ Equity at December 31, 2013, 2012 and 2011; and
• Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011.
(2) Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts
(in thousands)
Additions
Balance at
beginning
of
period
Charged to
costs and
expenses
Charged to
other
accounts
Balance at
end of
period
Deductions
Year Ended December 31, 2013:
Allowance for doubtful accounts ....................... $
Deferred tax valuation allowance ......................
3,685 $
629
2,991 $
185
3,467(1) $
-
5,925 (2) $
-
4,218
814
Year Ended December 31, 2012:
Allowance for doubtful accounts ....................... $
Deferred tax valuation allowance ......................
5,835 $
448
2,856 $
181
2,741(1) $
-
7,747 (2) $
-
3,685
629
Year Ended December 31, 2011:
Allowance for doubtful accounts ....................... $
Deferred tax valuation allowance ......................
5,252 $
865
3,314 $
(417)
3,003 (1) $
-
5,734 (2) $
-
5,835
448
Notes:
(1) Amounts primarily include the allowance for contractual adjustments related to our non-emergency transportation
services operating segment that are recorded as adjustments to non-emergency transportation services revenue as well
as certain reclassifications within the “Accounts Receivable” line item of the consolidated balance sheets made to
conform with the current period presentation of the allowance for doubtful accounts in this schedule related to our
correctional services business.
(2) Write-offs, net of recoveries
All other schedules are omitted because they are not applicable or the required information is shown in our financial
statements or the related notes thereto.
97
(3) Exhibits
Exhibit
Number
3.1(1)
Description
Second Amended and Restated Certificate of Incorporation of The Providence Service Corporation,
including Certificate of Designation of Series A Junior Participating Preferred Stock, as filed with the
Secretary of State of Delaware on December 9, 2011.
3.2(2)
Amended and Restated Bylaws of The Providence Service Corporation, effective March 10, 2010.
4.1(3)
Convertible Senior Subordinated Note Indenture, dated November 13, 2007, between The Providence
Service Corporation and The Bank of New York Trust Company, N.A., as Trustee.
4.2(4)
Form of Note (included as Exhibit A to the Indenture, listed as Exhibit 4.1 hereto).
4.3(5)
Amended and Restated Rights Agreement, dated as of December 9, 2011, by and between The Providence
Service Corporation and Computershare Trust Company, N.A., as Rights Agent.
+10.1(6)
The Providence Service Corporation Stock Option and Incentive Plan, as amended.
+10.2(7)
2003 Stock Option Plan, as amended.
+10.3(8)
The Providence Service Corporation 2006 Long-Term Incentive Plan, as amended.
+10.4(9)
Amended and Restated Providence Service Corporation Deferred Compensation Plan.
10.5(3)
10.6(13)
10.7(13)
10.8(13)
Registration Rights Agreement, dated November 13, 2007, by and among The Providence Service
Corporation and the Purchasers named therein.
Amended and Restated Credit and Guaranty Agreement dated as of August 2, 2013 among The Providence
Service Corporation, Bank of America, N.A. SunTrust Bank, BMO Harris Bank, Merrill Lynch, Pierce,
Fenner & Smith Incorporated and SunTrust Robinson Humphrey, Inc.
Amended and Restated Pledge Agreement dated as of August 2, 2013 by and among The Providence Service
Corporation (including its subsidiaries) and Bank of America, N.A., as administrative agent.
Amended and Restated Security Agreement, dated as of August 2, 2013, by and among The Providence
Service Corporation (including its subsidiaries) and Bank of America, N.A., as administrative agent.
+10.9(10)
Amended and Restated Employment Agreement dated May 17, 2011 between The Providence Service
Corporation and Fred D. Furman.
+10.10(15)
Separation and General Release Agreement dated December 31, 2013 between The Providence Service
Corporation and Fred D. Furman.
+10.11(10)
Amended and Restated Employment Agreement dated May 17, 2011 between The Providence Service
Corporation and Craig A. Norris.
+10.12(10)
Employment Agreement dated May 17, 2011 between The Providence Service Corporation and Herman
Schwarz.
+10.13(12)
Employment Agreement dated May 7, 2013 between The Providence Service Corporation and Warren S.
Rustand.
+10.14(14)
Employment Agreement dated September 13, 2013 between The Providence Service Corporation and Robert
E. Wilson.
+10.15(11) Form of Restricted Stock Agreements, as amended.
98
+10.16(11) Form of Stock Option Agreements.
+10.17(11) Form of 2011 Performance Restricted Stock Unit Agreements.
+10.18(1)
Form of 2012 Performance Restricted Stock Unit Agreements.
+10.19(12) Form of 2013 Performance Restricted Stock Unit Agreements.
*12.1
Statement re Computation of Ratios of Earnings to Fixed Charges.
*21.1
Subsidiaries of the Registrant.
*23.1
Consent of KPMG LLP.
*31.1
Certification pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive Officer.
*31.2
Certification pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 of the Chief Financial Officer.
*32.1
*32.2
Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, of the Chief Executive Officer.
Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, of the Chief Financial Officer.
101. INS
XBRL Instance Document
101.SCH
XBRL Schema Document
101.CAL
XBRL Calculation Linkbase Document
101.LAB
XBRL Label Linkbase Document
101.PRE
XBRL Presentation Linkbase Document
101.DEF
XBRL Definition Linkbase Document
+ Management contract or compensatory plan or arrangement.
*
Filed herewith
(1) Incorporated by reference from an exhibit to the registrant’s annual report on Form 10-K for the year ended December
31, 2011 filed with the Securities and Exchange Commission on March 15, 2012.
(2) Incorporated by reference from an exhibit to the registrant’s annual report on Form 10-K for the year ended December
31, 2009 filed with the Securities and Exchange Commission on March 12, 2010.
(3) Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the Securities and
Exchange Commission on November 15, 2007.
(4) Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the Securities and
Exchange Commission on November 7, 2007.
(5) Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the Securities and
Exchange Commission on December 9, 2011.
(6) Incorporated by reference from an exhibit to the registrant’s registration statement on Form S-1 (Registration No. 333-
106286) filed with the Securities Exchange Commission on June 19, 2003.
99
(7) Incorporated by reference from an exhibit to the registrant’s quarterly report on Form 10-Q for the quarter ended
June 30, 2005 filed with the Securities and Exchange Commission on August 9, 2005.
(8) Incorporated by reference from an appendix to the registrant’s definitive proxy statement on Schedule 14A filed with
the Securities and Exchange Commission on April 20, 2011.
(9) Incorporated by reference from an exhibit to the registrant’s annual report on Form 10-K for the year ended December
31, 2009 filed with the Securities and Exchange Commission on March 11, 2011.
(10) Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the Securities and
Exchange Commission on May 19, 2011.
(11) Incorporated by reference from an exhibit to the registrant’s quarterly report on Form 10-Q for the quarter ended
March 31, 2011 filed with the Securities and Exchange Commission on May 6, 2011.
(12) Incorporated by reference from an exhibit to the registrant’s quarterly report on Form 10-Q for the quarter ended
March 31, 2013 filed with the Securities and Exchange Commission on May 10, 2013.
(13) Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the Securities and
Exchange Commission on August 5, 2013.
(14) Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the Securities and
Exchange Commission on September 17, 2013.
(15) Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the Securities and
Exchange Commission on January 1, 2014.
100
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
THE PROVIDENCE SERVICE CORPORATION
By: /s/ WARREN S. RUSTAND
Warren S. Rustand
Chief Executive Officer
Dated: March 14, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/S/ WARREN S. RUSTAND
Warren S. Rustand
Chief Executive Officer and Director
(Principal Executive Officer)
March 14, 2014
/S/ ROBERT E. WILSON
Robert E. Wilson
Chief Financial Officer (Principal
Financial and Accounting Officer)
March 14, 2014
/S/ CHRISTOPHER SHACKELTON
Christopher Shackelton
Chairman of the Board
March 14, 2014
/S/ RICHARD A. KERLEY
Richard A. Kerley
Director
/S/ KRISTI L. MEINTS
Kristi L. Meints
Director
March 14, 2014
March 14, 2014
101
Providence Service Corporation
Ratio of Earnings to Fixed Charges
Exhibit 12.1
2009
For the Years
Ended December 31,
2011
(in thousands, except ratios)
2012
2010
Earnings:
Income before income taxes and minority
interest ............................................................. $
Fixed charges .....................................................
Earnings ........................................................... $
33,293 $
31,276
64,569 $
41,292 $
28,197
69,489 $
26,885 $
22,583
49,468 $
16,693 $
21,436
38,129 $
Fixed charges:
Interest expense ................................................. $
Interest element of rentals ..................................
Fixed charges .................................................... $
20,798 $
10,478
31,276 $
16,268 $
11,929
28,197 $
10,206 $
12,377
22,583 $
7,640 $
13,796
21,436 $
2013
31,560
20,869
52,429
7,035
13,834
20,869
Ratio of earnings to fixed charges .....................
2.06
2.46
2.19
1.78
2.51
Name of Subsidiary
State Incorporation
Providence Community Corrections, Inc. (f/k/a Camelot Care Corporation)
Delaware
EXHIBIT 21.1
Cypress Management Services, Inc.
Family Preservation Services, Inc.
Family Preservation Services of Florida, Inc.
Family Preservation Services of North Carolina, Inc.
Family Preservation Services of West Virginia, Inc.
Providence of Arizona, Inc.
Providence Service Corporation of Delaware
Providence Service Corporation of Maine
Providence Service Corporation of Oklahoma
Providence Service Corporation of Texas
Rio Grande Management Company, LLC
Family Preservation Services of Washington DC, Inc.
Dockside Services, Inc.
Florida
Virginia
Florida
North Carolina
West Virginia
Arizona
Delaware
Maine
Oklahoma
Texas
Arizona
Dist. of Columbia
Indiana
Providence Community Services, Inc. (f/k/a Pottsville Behavioral Counseling Group, Inc.)
Pennsylvania
Providence Community Services, LLC
College Community Services
Choices Group, Inc.
Providence Management Corporation of Florida
Providence Service Corporation of New Jersey, Inc.
Social Services Providers Captive Insurance Co.
Drawbridges Counseling Services, LLC
Oasis Comprehensive Foster Care, LLC
Children’s Behavioral Health, Inc.
Maple Star Nevada
Transitional Family Services, Inc.
AlphaCare Resources, Inc.
California
California
Delaware
Florida
New Jersey
Arizona
Kentucky
Kentucky
Pennsylvania
Nevada
Georgia
Georgia
Family-Based Strategies, Inc.
A to Z In-Home Tutoring, LLC
W. D. Management, LLC
0798576 B.C. LTD
PSC of Canada Exchange Corp.
Camelot Care Centers, Inc.
Health Trans, Inc.
LogistiCare Solutions, LLC
Provado Technologies, LLC
Provado Insurance Service, Inc.
Providence Service Corporation of Alabama
Red Top Transportation, Inc.
WCG International Consultants Ltd.
AmericanWork, Inc.
LogistiCare Solutions Independent Practice Association, LLC
Maple Star Washington, Inc.
Ride Plus LLC
The ReDCo Group, Inc.
Raystown Developmental Services, Inc.
Delaware
Nevada
Missouri
British Columbia, Canada
British Columbia, Canada
Illinois
Delaware
Delaware
Florida
South Carolina
Alabama
Florida
British Columbia, Canada
Delaware
New York
Washington
Delaware
Pennsylvania
Pennsylvania
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
The Providence Service Corporation:
We consent to the incorporation by reference in the registration statement Nos. 333-166978, 333-151079, 333-
112586, 333-117974, 333-127852, 333-135126, and 333-145843 on Form S-8 and registration statement No. 333-148092
on Form S-3 of The Providence Service Corporation and subsidiaries (the Company) of our reports dated March 14, 2014,
with respect to the consolidated balance sheets of the Company as of December 31, 2013 and 2012, and the related
consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the
three-year period ended December 31, 2013, and the related financial statement schedule, and the effectiveness of internal
control over financial reporting as of December 31, 2013, which reports appear in the December 31, 2013 annual report on
Form 10-K of the Company.
/s/ KPMG LLP
Phoenix, Arizona
March 14, 2014
Exhibit 31.1
I, Warren S. Rustand, certify that:
CERTIFICATIONS
1. I have reviewed this annual report on Form 10-K of The Providence Service Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for,
the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: March 14, 2014
/s/ Warren S. Rustand
Warren S. Rustand
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
I, Robert E. Wilson, certify that:
CERTIFICATIONS
1. I have reviewed this annual report on Form 10-K of The Providence Service Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for,
the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which
this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: March 14, 2014
/s/ Robert E. Wilson
Robert E. Wilson
Chief Financial Officer
(Principal Financial and Accounting Officer)
THE PROVIDENCE SERVICE CORPORATION
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United
States Code), the undersigned officer of The Providence Service Corporation (the “Company”), does hereby certify with
respect to the Annual Report of the Company on Form 10-K for the year ended December 31, 2013 (the “Report”) that, to
the best of such officer’s knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Date: March 14, 2014
/s/ Warren S. Rustand
Warren S. Rustand
Chief Executive Officer
(Principal Executive Officer)
THE PROVIDENCE SERVICE CORPORATION
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United
States Code), the undersigned officer of The Providence Service Corporation (the “Company”), does hereby certify with
respect to the Annual Report of the Company on Form 10-K for the year ended December 31, 2013 (the “Report”) that, to
the best of such officer’s knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Date: March 14, 2014
/s/ Robert E. Wilson
Robert E. Wilson
Chief Financial Officer
(Principal Financial and Accounting Officer)
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Corporate
Information
BOARD OF DIRECTORS
CORPORATE OFFICERS
Warren S. Rustand
Chief Executive Officer
Robert E. Wilson
Executive Vice President,
Chief Financial Officer
Herman M. Schwarz
Chief Executive Officer,
LogistiCare
Michael-Bryant Hicks
Senior Vice President, General
Counsel, Corporate Secretary, and
Chief Compliance Officer
Justina Sanchez-Uzzell
Senior Vice President,
Chief People Officer
Michael C. Fidgeon
Chief Operating Officer,
Providence Human Services
Christopher Shackelton1,2,3
Chairman of the Board
Managing Partner
Coliseum Capital Management
Richard A. Kerley1,2,3
Chief Financial Officer
Peter Piper, Inc.
Kristi L. Meints1,2,3
Retired Chief Financial Officer
Chicago Systems Group
Warren S. Rustand
Chief Executive Officer
Providence Service Corporation
1 Nominating and Corporate
Governance Committee
2 Audit Committee
3 Compensation Committee
COMPANY HEADQUARTERS
Providence Service Corporation
64 East Broadway Boulevard
Tucson, AZ 85701
Phone: 520-747-6600/800-747-6950
Fax: 520-747-6605
Web: www.provcorp.com
INVESTOR RELATIONS
The investing public, securities analysts
and stockholders seeking information
about the Company should visit the
Investor Information section of our cor-
porate website at www.provcorp.com,
or contact Investor Relations at either
the Company’s corporate headquarters
or via e-mail at irinfo@provcorp.com.
COMMON STOCK
The Company’s Common Stock is
traded on The NASDAQ Stock Market
LLC’s Global Select Market under the
symbol “PRSC.”
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
KPMG LLP
LEGAL COUNSEL
Paul Hastings LLP
75 East 55th Street
New York, NY 10022
TRANSFER AGENT
Computershare Investor Services, LLC
P.O. Box 43078
Providence, RI 02940-3078
Phone: 404-588-3654/800-568-3476
SAFE HARBOR
This annual report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.
Words such as “believe,” “demonstrate,” “expect,” “estimate,” “forecast,” “anticipate,” “should” and “likely” and similar expressions
identify forward-looking statements. In addition, statements that are not historical should also be considered forward-looking statements.
Readers are cautioned not to place undue reliance on those forward-looking statements, which speak only as of the date the statement
was made. Such forward-looking statements are based on current expectations that involve a number of known and unknown risks,
uncertainties and other factors which may cause actual events to be materially different from those expressed or implied by such forward-
looking statements. These factors include, but are not limited to, the global credit crisis, capital market conditions, the implementation
of the healthcare reform law, state budget changes and legislation and other risks detailed in Providence’s filings with the Securities and
Exchange Commission, including this Annual Report on Form 10-K for the fiscal year ended December 31, 2013. Providence is under no
obligation to (and expressly disclaims any such obligation to) update any of the information in this document if any forward-looking
statement later turns out to be inaccurate whether as a result of new information, future events or otherwise.
Annual Report Design by Curran & Connors, Inc. / www.curran-connors.com
64 East Broadway Boulevard
Tucson, Arizona 85701
Phone: 520-747-6600
www.provcorp.com
6 T REES
2 , 872 G ALLONS
192 LBS .
529 LBS .
P R E S E R V E D F O R
WAT E R / WA S T E WAT E R
S O L I D WA S T E
T H E F U T U R E
F L O W S AV E D
N O T G E N E R AT E D
A I R E M I S S I O N S
N O T G E N E R AT E D
This is a greener annual report. By producing our report in this manner, Providence Service
Corporation reduces its impact on the environment in the ways listed above.
Environmental savings calculations provided by the Environmental Paper Network (calculator.environmentalpaper.org).
FSC® is not responsible for any calculations on saving resources by choosing this paper.