UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K10-K/A
(Amendment No. 1)
(Mark
(Mark One)
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2013 |
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 |
For the transition period from to
Commission file numberFile No. 001-34221
The Providence Service Corporation
(Exact name of registrant as specified in its charter)
Delaware | 86-0845127 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
64 East Broadway Blvd., Tucson, Arizona | 85701 | |
(Address of principal executive offices) | (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 | Name of each exchange on which registered | |
Common Stock, $0.001 par value per share |
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| 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,Web site, 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)232.405) 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 the 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. (Check one):
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| ☐ |
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| ☒ | Accelerated filer |
Non-accelerated filer
| ☐ | Non-accelerated filer (Do not check if a smaller reporting company) |
| ☐ | Smaller reporting company |
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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,April 24, 2014, there were outstanding 13,556,90613,961,932 shares (excluding treasury shares of 959,803973,564) of the registrant’s Common Stock, $.001 par value per share, which is the only outstanding capital stock of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
None.
All or a portion of items 10 through 14 in Part III of this
EXPLANATORY NOTE
This Amendment No. 1 on Form 10-K are incorporated by reference to10-K/A (this “Amendment”) amends 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 thisAnnual Report on Form 10-K for the fiscal year ended December 31, 2013 that was filed with the Securities and Exchange Commission, or SEC, on or before such date.March 14, 2014 (the “Original Filing”). We are filing this Amendment solely for the purpose of including information required by Part III of Form 10-K. This information is being included in this Amendment because the Company’s definitive proxy statement will not be filed within 120 days of the end of our fiscal year ended December 31, 2013.
As required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, Item 15 of Part IV of the Original Filing has been amended to contain currently dated certifications from our Chief Executive Officer and Chief Financial Officer. The currently dated certifications are attached hereto as Exhibits 31.1 and 31.2. Because no financial statements are contained in this Amendment, we are not including certifications pursuant to 18 U.S.C. 1350.
Except as set forth in Part III below, no other changes are made to the Original Filing other than updating the cover page of the Original Filing. Unless expressly stated, this Amendment does not reflect events occurring after the filing of the Original Filing, nor does it modify or update in any way the disclosures contained in the Original Filing. Accordingly, this Amendment should be read in conjunction with our Original Filing and our other filings made with the SEC subsequent to the filing of the Original Filing. References herein to the “Company,” “Providence”, “we,” “our,” and “us” refer to The Providence Service Corporation.
TABLE OF CONTENTS
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PART III | |||||||
Item 10. | Directors, Executive Officers and Corporate Governance |
| 5 | ||||
Item 11. | Executive Compensation |
| 8 | ||||
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
| 40 | ||||
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
| 43 | ||||
Item 14. | Principal Accounting Fees and Services | 44 | |||||
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PART IV | |||||||
Item 15. | Exhibits, Financial Statement Schedules |
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SIGNATURES | 50 |
PART IIII
Item 1. 10.Business.Directors, Executive Officers and Corporate Governance.
Background The following table sets forth certain information with respect to the current directors as of April 24, 2014:
Name | Age | Class | Term Expires | |||
Richard A. Kerley (1)(2)(3) | 64 | 1 | 2016 | |||
Kristi L. Meints (1)(2)(3) | 59 | 3 | 2015 | |||
Warren S. Rustand | 71 | 2 | 2014 | |||
Christopher Shackelton (1)(2)(3)(4) | 34 | 1 | 2016 |
_______________
(1) | Member of the Audit Committee |
(2) | Member of the Compensation Committee |
(3) | Member of the Nominating and Governance Committee |
(4) | Lead Director |
There are no family relationships among the current directors or executive officers of the Company.
The Providence Service Corporation (“Providence”following is a brief summary of the background of each director:
Richard A. Kerley has served as our director since May 2010 and chairperson of the Compensation Committee since March 2011. Mr. Kerley is currently the Senior Vice President and Chief Financial Officer and member of the board of directors of Peter Piper, Inc., a privately-held pizza and entertainment restaurant chain. Mr. Kerley has served in these positions since November 2008. From July 2005 to October 2008, Mr. Kerley served as the “Company”, “we”, or “us”) providesChief Financial Officer of Fender Musical Instruments Corporation. From June 1981 to July 2005, Mr. Kerley was an audit partner with Deloitte & Touche LLP. Prior to becoming a partner at Deloitte & Touche, Mr. Kerley served as an audit manager and manages government sponsored human servicesstaff accountant from August 1971 to June 1981. He received a bachelor of business administration degree in accounting from Marshall University in 1971 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 primarilyis a certified public accountant in the client’s home or community, reducing the cost to the governmentState 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.Arizona.
Our human services revenueMr. Kerley is derived froma senior financial executive with experience in a variety of operational issues, financial budgeting, planning and analysis, capital investment decisions, mergers and acquisitions, operational and financial controls, internal and external reporting, financings and public offerings and filings with the SEC. Mr. Kerley’s strong financial background provides the Board with financial expertise, including an understanding of financial statements, finance, capital investing strategies and accounting.
Kristi L. Meintshas served as our provider contracts with statedirector 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 revenueschairperson of the managed entity, or a fixed fee.
We contract with either state or regional Medicaid agencies, local governments, or private managed care organizationsAudit Committee since August 2003. From January 2005 to provide management services for non-emergency transportation. MostDecember 2009 when she retired, and from August 1999 until September 2003, Ms. Meints served as Vice President and Chief Financial Officer 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,Chicago Systems Group, Inc. (now known as ProvidenceCSG Government Solutions, Inc.), a technology consulting firm based in Chicago, Illinois. From October 2003 through December 2004, she served as Chief Financial Officer of Arizona, Inc.)Peter Rabbit Farms, a carrot and Family Preservation Services, Inc., which provided the foundation upon which ourvegetable farming business in Southern California. From January 1998 until August 1999, she 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 developmentinterim Chief Financial Officer for Cordon Corporation, a start-up services and presented opportunitiescompany. Ms. Meints was group finance director 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”). ReDCoAvery Dennison Corporation, a New York Stock Exchange listed company that is a Pennsylvania corporation that provides homemulti-national manufacturer of consumer and community based services. During 2012industrial products, from March 1996 until December 1997. From February 1977 until June 1995, she held a variety of financial positions at SmithKline Beecham Corporation, including as director of finance, worldwide manufacturing animal health products; and 2013 we completedas manager of accounting and budgets for Norden Laboratories, Inc., one of its wholly owned subsidiaries. She received a few small acquisitions expanding our presencebachelor’s degree in North Carolina for homeaccounting from Wayne State College in 1975 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.a master’s degree in business administration from the University of Nebraska in 1984.
Since our inception, we have grown from 1,333 human service clients servedMs. Meint’s strong financial and operational background, including her experience as Chief Financial Officer of Chicago Systems Group, Inc. and Peter Rabbit Farms and senior finance positions at Avery Dennison Corporation and SmithKline Beecham Corporation, provides financial expertise to 56,320 human service clients asthe Board, including an understanding 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,financial statements, budgeting, operational and 3 provinces in Canada as of December 31, 2013.
Historically, we have relied exclusively on decentralized field offices to drive growth initiativescorporate finance 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.accounting.
Financial information aboutWarren S. Rustand has served as our segmentsdirector since May 2005, and our lead director from January 2007 to November 2012. On November 19, 2012, Mr. Rustand was appointed by the Board to serve as Interim Chief Executive Officer. As part of the changes in management and Board composition, Mr. Rustand stepped down as Lead Director on that day. Effective May 7, 2013, Mr. Rustand was appointed Chief Executive Officer. Since January 2004, Mr. Rustand has served as managing director of SC Capital Partners LLC, an investment banking group which includes: corporate advisory services, a private equity fund, capital sourcing, with a focus on the microcap market. Since January 2001, he has served as the Chief Executive Officer of Summit Capital Consulting, a firm which specializes in the development of small to midsize companies by sourcing, and structuring financial, and human capital resources for the organization. Mr. Rustand has served as a member of the board of directors for over 40 public, private, and not-for-profit organizations. The range of these organizations is from multibillion dollar public companies, to midsize, early stage, and startup companies. During the past five years, in addition to servicing as our director, Mr. Rustand has held directorships at WPO Foundation, L3, TLC Vision Corporation and MedPro Safety Products. Mr. Rustand was chairman and Chief Executive Officer of Rural/Metro Corporation, an emergency health care company from 1993 to 1998. In addition, Mr. Rustand has had a long term interest in public policy, and in 1973, was selected as a White House Fellow. During his fellowship, he served in various positions such as special assistant to the Secretary of Commerce and special assistant to the Vice President. In addition, from 1974 to 1976, he served as the Appointments Secretary to the President. Mr. Rustand serves as a director of MedPro Safety Products, Inc., a medical device safety products company, where he chairs the audit committee and serves on other board committees. He received his bachelor’s degree and master’s degree from the University of Arizona in 1965 and 1972, respectively.
We operate in two segments, Human Services (formerly knownMr. Rustand’s positions as the Social Services segment) and Non-Emergency Transportation Services (“NET Services”). During the third quarter of 2013, we changed the namea member of the Social Services segmentboard of directors for many public, private and not-for-profit organizations, managing director of SC Capital Partners LLC, Chief Executive Officer of Summit Capital and tenure as a senior executive at other organizations has enabled him to Human Servicesprovide the Board with valuable business, leadership and management perspectives and business acumen. Mr. Rustand also brings financial expertise to better describe the broad spectrum of services it provides and to reflect the future strategyBoard, including his prior service as chairman of the business. Financial information about segmentsaudit committee of other public companies.
Christopher S. Shackelton was appointed by the Board to serve as a director on July 26, 2012 and geographic areas, including revenues, net incomehas served as Chairman of the Board since November 19, 2012. Mr. Shackelton is a Managing Partner at Coliseum Capital Management, an investment firm which he co-founded in January 2006 and long-lived assetswhich is a stockholder of each segmentthe Company. Coliseum focuses on long-term investments in both public and from domesticprivate companies. From October 2003 to January 2006, Mr. Shackelton was an analyst at Watershed Asset Management, a special situations hedge fund. From July 2002 to October 2003, Mr. Shackelton was an analyst in the Investment Banking Division of Morgan Stanley & Co. Since November 2012, Mr. Shackelton has served on the board of directors for LHC Group, Inc., a nursing care company. In the past five years, Mr. Shackelton has served on the board of directors for Interstate Hotels & Resorts Inc., a global hotel management company, and foreign operationsRural/Metro Corporation, an emergency health care company, where he served as Chairman. Mr. Shackelton is currently a Trustee for the CompanyWalter S. Johnson Foundation, as well as for multiple Connecticut based charitable organizations. Mr. Shackelton received a whole is includedbachelor degree in Note 8 of our consolidated financial statements presented elsewhereEconomics from Yale College 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.2001.
Business descriptionMr. Shackelton’s experience investing in and working with a wide range of companies provides the Board with valuable business leadership and strategic focus. Through investments in Medicaid, Medicare and private insurance funded transport, logistics, ambulatory and home health service companies, Mr. Shackelton has acquired an in-depth knowledge of the health care industry, which is beneficial to the Board. In addition, Mr. Shackelton brings financial and accounting experience from other public company boards on which he led efforts on mergers and acquisitions, financings, restructurings and other initiatives.
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 forThe following is 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 locationbrief summary of the individual relative to the final destination, and other available transportation systems. We also provide transportation services to school children, including special needs studentsbackground of each executive officer who are physically fragile, or mentally ill children who cannot commute to school via traditional mainstream transportation, or need to be taken outis not a director as of school for therapy.April 24, 2014:
As a transportation logistics manager, we match transportation servicesMichael Fidgeon, 48, was appointed to serve as Chief Operating Officer of our Human Services segment in January 2013. Mr. Fidgeon began his career with the recipient’s needs. We employCompany in 1997 after the Company acquired Family Preservation Services. Mr. Fidgeon was the first Eastern Division employee hired by the Company with a proprietary information technology platformvision of developing services from Florida to Maine, and operational processeshas served as Virginia State Director and Chief Operating Officer and President of the East Region prior to managebeing appointed 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 oneChief Operating Officer of our 20 regional reservation centersHuman Services segment. Prior to his employment at the Company, Mr. Fidgeon worked in human services for multiple organizations. Mr. Fidgeon is the Chairman of his local Chamber of Commerce and assign appropriate local transportation providers. These decisions are aided by our proprietary logistics software. After we assign an appropriate transportation providerserves on multiple Boards of Directors to the member we carefully monitor the transportationseveral not-for-profit human 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, withagencies. Mr. Fidgeon received 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 companiesbachelor’s degree 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.psychology from Duke University.
RevenueMichael-Bryant Hicks, 39, was appointed to serve as Senior Vice President, General Counsel, Corporate Secretary and payers. We contract primarily with stateChief Compliance Officer on January 6, 2014. Mr. Hicks has significant corporate and local government entitiesregulatory experience in the healthcare industry. He was an Assistant General Counsel in the law department of DaVita HealthCare Partners Inc. (“DaVita”) in Denver, CO. Prior to DaVita, Mr. Hicks was Associate General Counsel for Beckman Coulter where he managed the legal function for the company's Asia and managed care organizations. Approximately 78.9%Latin America operations and provided legal counsel for domestic mergers and acquisitions and regulatory matters. Mr. Hicks began his career working as a corporate lawyer for two large law firms, Vinson and Elkins and Mayer Brown, Rowe & Maw. Additionally, Mr. Hicks received his law degree from Yale Law School and his bachelor's degree from the University of North Carolina at Chapel Hill. He also worked on small business incubation projects as a Fulbright Scholar in Quito, Ecuador.
Herman M. Schwarz, 51, was appointed to serve as Chief Executive Officer of our non-emergency transportation management services revenuebusiness (comprising Charter LCI Corporation, including its subsidiaries (collectively “LogistiCare”)) on May 20, 2009. Mr. Schwarz has nearly 25 years of experience and proven skills in 2013strategy development, operations management, financial management, mergers and acquisitions activity, and sales and marketing leadership. From January 2007 to May 2009, Mr. Schwarz served as Chief Operating Officer of LogistiCare responsible for its day-to-day operations including call center operations, client relationships, subcontractor management, service delivery and quality assurance. Prior to joining LogistiCare in 2007, Mr. Schwarz was generated under capitated contracts where we assume the responsibilityfounder and from August 2005 to December 2006 partner of meetingC3 Marketplace LLC, a buying service venture that delivers cost effective sourcing from Asia to small and medium sized retailers and manufacturers. Other previous executive positions included President and Chief Executive Officer of Aegis Communications Group Inc., or Aegis, a publicly-traded provider of outsourced call center services, President of Elrick & Lavidge, the covered transportation requirementsmarketing research division of Aegis, as well as various senior roles with Selig Industries and National Linen Service, divisions of National Service Industries, from 1992 to 2005. Mr. Schwarz received a specific geographic population. These contracts are generally structured with per member, per month rates based onmaster’s degree in business administration from the Wharton School of Business at the University of Pennsylvania and a defined scopebachelor’s degree in commerce from the University 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.Virginia.
We generateJustina Uzzell, 35, was appointed to serve as Senior Vice President and Chief People Officer, effective March 9, 2014. Justina’s prior experience was at Banner Health where she spent almost 15 years providing senior-level, human resources leadership in a significant portionvariety of our revenuecomplex and challenging environments. Most recently, Justina was the Chief Human Resource Officer and senior executive accountable for strategic, fiscal and operational excellence of human resources and staffing services throughout Banner Health’s service area across seven states. Prior to that, Justina was accountable for all of the human resources functions and business operations such as medical imaging, culinary services, security, service excellence, volunteer services and children’s learning center at two of Banner Health’s hospitals. Justina holds a B.B.A. in business management from the University of Phoenix and her MBA from Grand Canyon University. Justina is certified as a few payers. We derived approximately 15.3%, 15.2%Senior Professional in Human Resources (SPHR) and 17.9%Just Culture Champion by Outcome Engineering, LLC. Justina’s work has been featured in the healthcare segment of our non-emergency transportation services revenue from our contract with the State of New JerseyThe Advisory Board, in Washington, D.C., for the years ended December 31, 2013, 2012creation, implementation 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 resultresults-oriented approach of the seasonal demandHR Business Partner model. She is a member of the American College of Healthcare Executives, Society of Human Resource Management and American Society for non-emergency transportation services.Healthcare Human Resources Association.
Competition.Robert E. Wilson We compete, 67, was appointed to serve as our Executive Vice President and Chief Financial Officer on November 19, 2012. Prior to his appointment, Mr. Wilson had been a Managing Director in the Health Care Advisory Services practice of Grant Thornton since March 2011. From November 2008 until November 2010, Mr. Wilson was a Managing Director of Huron Consulting Group. He has almost 40 years of experience in the accounting, consulting and health care industries including over 25 years with a variety of organizations that provide similar non-emergency transportation services to Medicaid eligible beneficiaries in local markets suchArthur Andersen as American Medical Response, Coordinated Transportation Solutions, Inc., First Transit, Inc., Medical Transportation Management Inc., MV Transportation, Inc., and Southeast Trans.,both an audit partner servicing public company clients as well as clients in the health care industry and as a hostconsulting partner providing strategy and performance improvement solutions for health systems. From 2006 to 2008 he served as Chief Financial Officer for Billings Clinic, a community-owned health care company. Mr. Wilson served on the board of local/regionaldirectors and as chair of the audit committee for Rural/Metro Corporation, a medical transportation providers. Most local competitors may seekcompany, from 2003 to win contracts for specific counties or small geographic territories whereas we2011, and since January 2013 has served, and from 2004 to 2008 served, on the larger competitors listed above seek to win contracts forboard of directors and as chair of the audit and compliance committee of Providence Health & Services, a Washington based non-profit hospital system. Mr. Wilson received a bachelor degree in Business Administration from the University of Washington and 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, competitionMBA 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.California State University, Los Angeles.
Business development. With respect to our non-emergency transportation services salesAudit Committee 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.Audit Committee Financial Expert
In many The Company’s Board has a separately designated standing Audit Committee. The Audit Committee is currently composed of Ms. Meints (Chairperson) and Messrs. Kerley and Shackelton. The Board has determined that each member of the states where we have regional contracts, we seek to expand to include additional regions in these statesAudit Committee is independent as defined by the applicable Nasdaq listing standards and in contiguous states. All decisions about which RFPs to considerRule 10A-3 of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The Board has also determined that Ms. Meints, Mr. Kerley and Mr. Shackelton 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 sourceeach an “audit committee financial expert” as defined under Item 407 of our non-emergency transportation revenue.SEC Regulation S-K.
Human ServicesSection 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our executive officers, directors and persons who beneficially own more than ten percent of a registered class of the Common Stock to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of Providence. Executive officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish Providence with copies of all Section 16(a) forms they file.
To the Company’s knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, the Company believes that all Section 16(a) executive officers, directors and greater than ten percent beneficial stockholders of Providence complied with applicable Section 16(a) requirements during the year ended December 31, 2013 other than Herman Schwarz who reported a disposition transaction late on a Form 4.
Code of Ethics
We have adopted a code of ethics that applies to our senior management, including our chief executive officer, chief financial officer, controllers 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
Services offered. We provide homeCompensation Discussion and community based services, foster care and provider management services, directly and through entities we manage. The following describes such services:Analysis
Home and community based counselingGeneral
This Compensation Discussion and Analysis section, or CD&A, is designed to provide our stockholders with an explanation of our executive compensation philosophy and objectives, our 2013 executive compensation program and the compensation paid by the Company to the following named executive officers in 2013, referred to throughout this Form 10-K/A as our Named Executive Officers;
• | Warren S. Rustand, Chief Executive Officer | |
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| Robert E. Wilson, Executive Vice President and |
• | Herman M. Schwarz, Chief Executive Officer of LogistiCare Solutions, LLC | |
• | Craig A. Norris, Former Chief Executive Officer of Human Services | |
• | Fred D. Furman, Former Executive Vice President and General Counsel | |
• | Leamon A. Crooms III, Former Chief Strategic Officer |
Mr. Norris and Mr. Furman served as executive officers in the positions noted above through the end of our 2013 fiscal year. Mr. Furman resigned as an employee effective December 31, 2013 and Mr. Norris stepped down from his position effective March 14, 2014, as more fully discussed below. Mr. Crooms’ employment with the Company was terminated effective December 30, 2013. He is included as a Named Executive Officer as a result of the severance payments made to him in connection with his separation from the Company.
The Compensation Committee evaluates and approves compensation for our officers. As part of its responsibilities, the Compensation Committee approves and administers their cash compensation, equity compensation and supplementary benefits, as well as our retirement compensation programs. In deciding to continue with our existing executive compensation practices, the Compensation Committee has considered that the holders of over 93% of the votes cast at our 2013 annual meeting of stockholders on an advisory basis approved the compensation of our Named Executive Officers as disclosed in the proxy statement for that annual meeting.
Executive Summary
Our compensation programs are intended to align our executive officers’ interests with those of our stockholders by rewarding performance that meets or exceeds the goals the Compensation Committee establishes with the objective of increasing stockholder value. In line with our pay for performance philosophy as described below, the total compensation received by our executive officers will vary based on corporate performance measured against annual and long-term performance goals. Our executive officers’ total compensation is comprised of a mix of base salary, annual incentive compensation and long-term incentive awards.
Our Compensation Committee continually reviews the compensation programs for our executive officers to ensure they achieve the desired goals of aligning our executive compensation structure with our stockholders’ interests and current market practices. As a result of its review process and in keeping with the Compensation Committee’s endeavor to more closely align our executive compensation structure with our stockholders’ interests and current market practices, the Compensation Committee implemented a policy, applicable beginning in 2012, that requires at least half of the equity-based compensation (based on the number of shares to be awarded annually) awarded to our executive officers to be performance based and measured over a multi-year performance period. Of the equity-based awards made in January and March 2013 under the Equity-Based Program for 2013 described below, performance restricted stock units represented approximately 80% of the total number of share based awards granted to our executive officers.
In 2013, our revenue remained consistent at $1.1 billion, with new contract wins and some contract terminations in both our non-emergency transportation services and human services segments. Our profitability increased considerably in 2013 due to reductions in transportation and general and administrative costs, a favorable effective tax rate related to equity compensation stock option exercises and the impact of the asset impairment charge in 2012. Our 2013 and 2012 financial performance was a determining factor in the compensation decisions and outcomes for 2013.
• | EBITDA (earnings before interest, taxes, depreciation and amortization) is the key financial performance metric we use for annual cash incentive awards. Performance with respect to this metric exceeded our budgeted target for 2013, and as a result, the annual cash incentives based on this metric were awarded to our executive officers for 2013. | |
• | EBITDA, diluted earnings per share and return on equity are the key financial performance metrics for equity-based awards. In determining the amount and type of equity-based awards to grant to each of our executive officers in 2013, the Compensation Committee considered, among other things, our financial performance as measured by these metrics for 2013 on an absolute basis as well as relative to the financial performance of a peer group of companies within our industry. The Compensation Committee allocated more than half of the equity-based compensation granted to the executive officers in 2013 to performance based restricted stock units. These restricted stock units, if earned based on the Company’s achievement of return on equity targets over a three year period established by the Compensation Committee discussed more fully below, will be settled in shares of the Company’s common stock. |
In addition, as further discussed below, the Compensation Committee reviewed the analysis conducted by its compensation consultant (discussed further below) in determining the compensation packages of our executive officers in 2013. Based on this analysis, the Compensation Committee made some adjustments to the Named Executive Officers’ annual base salaries but chose not to change the target bonus opportunity for 2013.
The discussion and analysis that follows includes sections related to:
• | our compensation philosophy; | |
• | the forms of compensation paid during 2013 to each of our Named Executive Officers; | |
• | the Compensation Committee’s process for determining Named Executive Officer compensation; and | |
• | certain determinations made by our Compensation Committee with respect to the various components of our Named Executive Officers’ compensation. |
References to “we”, “us” or “our” in this Compensation Discussion and Analysis refer to The Providence Service Corporation and not the Compensation Committee.
Compensation Philosophy
We believe that compensation programs offered to executives should support the achievement of our financial goals and the creation of long-term stockholder value. Accordingly, our guiding compensation principles focus on:
• | attracting and retaining high-performance leaders; | |
• | aligning the interests of our executives with those of our stockholders; | |
• | linking a meaningful portion of executive compensation to our financial performance; and | |
• | awarding a significant portion of compensation based on at-risk opportunity while aligning compensation with factors that typically have an impact on stock price performance. |
Our compensation program is designed to create a collegial atmosphere that encourages executives to cooperate toward the achievement of short-term and long-term goals that benefit us and stockholders, while at the same time rewarding each executive’s individual contribution to our success. To achieve this objective, the Compensation Committee has established a compensation package consisting of base salary, short-term incentive compensation in the form of an annual cash bonus, and long-term incentive compensation in the form of equity, including performance based awards that may be settled in stock or cash, as determined from time to time.
We believe it is appropriate that the Named Executive Officers’ overall compensation package be competitive with the level of compensation provided by a peer group of companies with comparable executives. To achieve this objective, we target salaries and incentive opportunities at competitive levels of our peers based on the best available market data. Compensation opportunities for exceptional business performance are higher, as we may pay above the industry median to motivate, reward and retain performers who significantly exceed our company and individual goals. Additional factors the Compensation Committee takes into consideration in determining an executive’s compensation level include role, tenure, experience, skills and individual performance.
Forms of Compensation Paid to Named Executive Officers
We provide our Named Executive Officers with some or all of the following forms of compensation:
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Base salaries take into consideration the Compensation Committee’s evaluation of the individual’s performance and level of pay compared to pay levels for similar positions within the Peer Group as defined below. Increases in base salaries are partially based upon individual performance after taking into account the amount we have budgeted for the year for potential merit increases in executive base salaries. They recognize the overall skills, experience and tenure in position of each Named Executive Officer and their responsibilities within, and expected contributions to, our company. |
• | Performance-Based Cash Bonuses under our Annual Incentive Compensation Program. Annual incentive compensation may be awarded to our Named Executive Officers in the |
• | Discretionary Cash Bonuses. In addition to performance-based incentive bonuses earned under our Annual Incentive Plan, the Compensation Committee may also award discretionary cash bonuses to all or |
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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.
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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 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.
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.
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:
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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.
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.
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.
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:
| • | Equity Grants under our Annual Equity-Based Compensation Program. Annual compensation may be awarded to our Named Executive Officers in the |
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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.
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.
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:
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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.Compensation Approval Process
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.
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 aboutcompensation of our contractsChief Executive Officer is determined and approved by the Compensation Committee. Our Chief Executive Officer annually reviews the performance of each Named Executive Officer, other than himself, relative to the annual performance goals established for the year. He then makes recommendations to the Compensation Committee with respect to all aspects of the compensation of the other Named Executive Officers, but does not participate in the final deliberations of the Compensation Committee with respect thereto. The Compensation Committee exercises discretion in modifying compensation recommendations relating to the other Named Executive Officers that were made by our Chief Executive Officer and approves all compensation decisions for the Named Executive Officers. Compensation paid to officers (other than our Named Executive Officers) as defined in Section 16 of the Exchange Act 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 harmrules and regulations promulgated thereunder, must also be approved by our reputation and, accordingly, our ability to obtain government sponsored contracts.Compensation Committee.
Our business is subject to risks of litigation.Executive Compensation Review Process
We areCompetitive Positioning. In line with our compensation philosophy, the compensation program for our Named Executive Officers that was set by our Compensation Committee for 2013 was comprised of a mix of base salary, annual cash bonuses and long-term incentive compensation in the humanform of equity-based awards, as well as group medical and other benefits, participation in our Deferred Compensation Plan or Rabbi Trust Plan, as applicable, and 401(k) Plan and/or limited perquisites. In determining the base salary, targeted cash bonus under our Annual Incentive Plan and equity awards under our Equity-Based Program, referred to as “total targeted compensation,” for each of our Named Executive Officers for 2013, the Compensation Committee reviewed compensation levels for comparable executives among our peer companies prepared by our compensation consultant as well as published compensation survey data, recommendations made by our Chief Executive Officer with respect to the other Named Executive Officers, and various other factors specific to the individual executive and then used its discretion to set compensation for individual executive officers, including our Chief Executive Officer, at levels warranted, in its judgment, by external, internal and/or individual circumstances.
The Compensation Committee has the authority under its charter to retain compensation consultants to assist it. In accordance with this authority, the Compensation Committee engaged Deloitte Consulting as its compensation consultant to provide information, analyses, and advice regarding matters related to the compensation of our Chief Executive Officer and other Named Executive Officers for 2013.
The Compensation Committee engaged Deloitte Consulting to perform a competitive compensation benchmarking analysis utilizing both Peer Group proxy statements and published survey data and a review of the executive officers’ annual incentive plan design (including the performance metrics and incentive payout opportunity) and equity based program. In addition, Deloitte Consulting provided relevant and timely information on regulatory, legislative and corporate governance topics that impact our executive compensation program. Further, Deloitte Consulting provided the Compensation Committee with recommendations for total direct compensation developed by it based upon a comparison of total direct compensation among the Peer Group, published survey sources and of comparable executive positions similar to our executive officers’ positions to achieve the objectives established by the Compensation Committee described above.
For 2013, the Compensation Committee considered the compensation practices of the Peer Group of companies within our industry with respect to each Named Executive Officer in determining such executive’s (a) total compensation opportunity, (b) base salary and (c) combined short-term and long-term incentive compensation. The Compensation Committee believes the total compensation provided to each Named Executive Officer was a reasonable competitive response to the growing employment opportunities for our executives within our industry and as a means to further align our executives’ interest with our stockholders’ interests. The companies comprising the Peer Group that the Compensation Committee considered when determining the compensation awarded to our Named Executive Officers for 2013 were:
• Allied Healthcare International, Inc. | • Healthways Inc. | |
• Almost Family, Inc. | • IPC The Hospitalist Company, Inc. | |
• Amedisys Inc. | • LHC Group, Inc. | |
• Assisted Living Concepts Inc. | • Metropolitan Health Networks Inc. | |
• Capital Senior Living Corp. | • National Healthcare Corp. | |
• Chemed Corp. | • Skilled Healthcare Group, Inc. | |
• Emeritus Corp. | • Sun Healthcare Group, Inc. | |
• Five Star Quality Care Inc. | • Sunrise Senior Living Inc. | |
• Gentiva Health Services Inc. | • The Ensign Group, Inc. |
These companies are competitors for our business as well as executive talent and are companies of comparable size measured in terms of revenue. Consequently, we are using the same peers for financial and stock price performance comparisons that we use for executive compensation comparisons.
In addition to the Peer Group data compiled by Deloitte Consulting, the Compensation Committee also reviewed published compensation survey data provided by Deloitte Consulting for purposes of evaluating the compensation of our Named Executive Officers. This published compensation survey data represented a broader industry view than the Peer Group data and also encompassed healthcare services and non-emergency transportationsocial 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, suchorganizations. The Compensation Committee used this market survey data as a claimmeans of comparing our executive compensation program as a whole, as well as the pay of individual executives if the jobs were sufficiently similar to make the comparison meaningful, and ensuring that our executive compensation as a whole is appropriately competitive, given our performance and size.
Factors Considered and Reviewed. In performing its duties, the Compensation Committee took into account a market benchmarking analysis provided by Deloitte Consulting, the recommendations of Deloitte Consulting and several other factors in determining the actual compensation of our Named Executive Officers, including that of our Chief Executive Officer, for fraud, certain wage2013. These other factors included the financial performance of the Company weighed against the external and hour violations or punitive damages, could adversely affect our cash flowinternal nature of the factors contributing to those results, the executive officer’s individual job performance, responsibilities, experience and financial condition.long-term potential. In addition, the Compensation Committee also considered relative individual tenure in position and relative internal equity among the Named Executive Officers. Ultimately, the Compensation Committee members took into account all of these factors and data and applied their own professional judgment in determining their recommendations and decisions on the total target compensation, the design of the annual incentive and long-term incentive awards and internal equity for the Named Executive Officers for 2013.
Furthermore, we canEach of the components of our Named Executive Officers’ total targeted compensation serves to meet one or more of our compensation objectives and each element of compensation is determined within the parameters established by the Compensation Committee. As a result of the foregoing consideration and review, the Compensation Committee determined that no increase in total targeted compensation would be subjectnecessary for our Named Executive Officers for 2013 in order to miscellaneous errorsbe competitive with the level of compensation provided by the Peer Group to comparable executives.
The Compensation Committee takes into account the estimated accounting (pro forma expense) and omissions liability relativethe tax impact of all material changes to the various management agreementsexecutive compensation program and discusses such matters periodically during the year. Generally, an accounting expense is accrued over the relevant service period for the particular pay element (generally equal to the performance period) and we have withrealize a tax deduction upon the not-for-profit entities we manage. Inpayment to 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.executive.
Determinations Made Regarding Executive Compensation for 2013
We face substantial competitionBase Salary. For 2013, the Compensation Committee reviewed the base salary amounts for each executive to ensure that they were competitive with the Peer Group base salary levels. In determining the base salary amounts for 2013 for each executive, the Compensation Committee also considered the internal comparisons of pay within the executive group as well as each of the executive’s individual job performance and the financial performance of the Company in attracting2012. The base salaries for Messrs. Wilson and retaining experienced professionals, particularly professionalsFurman for 2013 remained the same as those fixed by the Compensation Committee for 2012 at $400,000 and $407,000, respectively. In determining the base salary amounts for each of Messrs. Rustand, Norris, Schwarz and Crooms, the Compensation Committee considered the compensation data for the Peer Group and internal comparisons of pay within the executive group. The base salary for Mr. Rustand’s service as interim Chief Executive Officer remained the same as that fixed by the Compensation Committee for 2012 at $59,900 per month for the period of January 1, 2013 through May 6, 2013. Upon appointment as our Chief Executive Officer as of May 7, 2013, the base salary for Mr. Rustand was fixed at $590,000 per year, adjusted for the ratable period from May 7, 2013 through December 31, 2013. For 2013, the Committee decreased Mr. Norris’ annual base salary by 6% to $432,000 and increased Mr. Schwarz’s annual base salary by 3% to $432,000 in March 2013. These adjustments in base salary were designed to realign Mr. Norris’ fixed cash compensation with the competitive range of the peer group reviewed and with respect to our human services, and intellectual technology professionals with respectMr. Schwarz to our non-emergency transportation services, and we may be unablepromote internal equity. Mr. Crooms’ salary was reduced to sustain or grow our business if we cannot attract and retain qualified employees.$300,000 in March 2013.
Our success dependsAnnual Incentive Cash Compensation. For 2013, each of the Named Executive Officers (except for Mr. Wilson), was granted an opportunity to earn a significant degreeportion of the incentive, or performance-based, cash bonus based upon pre-established performance targets under the Annual Incentive Plan. The amount of the potential incentive cash bonus that may have been earned by Mr. Rustand was targeted at 50% of his salary for the period January 1, 2013 through May 6, 2013, and targeted at75% of his base salary for the period May 7, 2013 through December 31, 2013. The amounts that may have been earned by each of Messrs. Norris, Schwarz, Furman and Crooms were targeted at 75% of base salary. Messrs. Rustand, Norris, Schwarz, Furman and Crooms were also entitled to earn an additional bonus of up to 25% of their respective base salaries through sharing 20% of the amount, if any, by which EBITDA of the Company exceeded the EBITDA target, after expensing all compensation. Twenty percent of any such excess would be distributed pro-rata among Messrs. Rustand, Norris, Schwarz, Furman and Crooms, subject to the cap of 25% of each such individual’s base salary. The performance-based incentive was based on our ability to attract and retain highly qualified and experienced professionals who possessachievement of an EBITDA measure established for such purpose at 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. Somebeginning 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.year.
Since 1996,Mr. Wilson was eligible to receive incentive cash compensation for 2013 under his employment agreement equaling 50% of his base salary if the Company achieved its 2013 budgeted EBITDA.
The Compensation Committee believes the Annual Incentive Plan provides a reasonable incentive to our business has grown significantly in sizeexecutives to achieve and complexity. This growth has placed, and is expected to continue to place, significant demands on our management, systems, internal controlsexceed strategic objectives and financial performance targets established by the Board and physical resources. In addition, we expect that we will need toit 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 qualified personnel, retaining professionals to assist in developingaligns the appropriate control systems and expanding our information technology infrastructure. The natureinterests 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 onNamed Executive Officers with our financial results.
Our success depends onand our ability to compete effectively in the marketplace.
In our Human Services segment, we compete for clientsstockholders’ interests 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.enhances stockholder value.
InWith respect to the financial performance portion of the Annual Incentive Plan, the Compensation Committee approved the use of an EBITDA related measure for purposes of determining award amounts for 2013 with the payout percentages discussed above. Budgeted EBITDA of $51.0 million for 2013 was established by the Compensation Committee as the Target level for purposes of the Annual Incentive Plan and Mr. Wilson’s incentive compensation.
The budgeted EBITDA for 2013 was determined by executive management and approved by the Board. Performance below the Target level would have resulted in no incentive cash compensation on the determination date under the financial performance based incentive. Payment of any cash bonus under the financial performance based incentive is paid only to the extent the EBITDA targets are attained after expensing all compensation. For 2013, our NET Services segment, we compete with a variety of organizations that provide similar non-emergency transportation management servicesactual EBITDA exceeded our budgeted EBITDA by an amount sufficient 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 seekachieve the maximum annual incentive payment, which was paid 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.Named Executive Officers.
Our business is subject to security breaches and attacks.Equity-Based Compensation.
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. ComplianceAnnual Equity-Based Compensation Program.with existing regulations is costly, In determining the amount of equity-based compensation to award each executive officer, the Compensation Committee considers the prior year’s financial performance, our stock price performance relative to the performance of the Peer Group and changes in regulations or violationseach executive officer’s annual compensation relative to the annual compensation of regulations may result in increased costs or sanctions that could reduce our revenue and profitability.similar executives of the Peer Group.
Under the Equity-Based Program for 2013, each of the Named Executive Officers (except for Messrs. Rustand and Wilson) received, upon approval by the Compensation Committee on March 28, 2013, equity-based awards under the 2006 Plan equal in value to approximately $497,000, $497,000, $366,000 and $195,000 for Messrs. Norris, Schwarz, Furman and Crooms, respectively. The healthcare industry is subject to extensive federalequity-based awards consisted of the number of shares of restricted stock and state regulation relating to, among other things:number of cash settled performance restricted stock units, or PRSUs, as set forth in the table below.
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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 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.
Restricted | ||||||||
Executive | Stock | PRSUs | ||||||
Norris | 5,374 | 21,495 | ||||||
Schwarz | 5,374 | 21,495 | ||||||
Furman | 3,962 | 15,849 | ||||||
Crooms | 2,109 | 8,437 | ||||||
Total | 16,819 | 67,276 |
We could beOf the total number of shares granted to the Named Executive Officers under the Equity-Based Program for 2013, the restricted stock and performance restricted stock units represented a mix of 20% and 80%, respectively. The restricted stock awards will vest in three equal annual installments on the first, second and third anniversaries of the date of grant, provided that the recipient is employed by us on each vesting date.
Vesting of the performance restricted stock units, or PRSUs, is subject to actionsperformance-based conditions, as described below. Each vested PRSU will be settled through the issuance of a share of our company’s common stock. Vesting criteria for false claims if we do not complyPRSU awards require employment with government codingour company throughout the performance period through 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, lossincluding December 31, 2015 as well as achievement 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.performance goal.
The federal Anti-kickback Statute prohibits the offer, payment, solicitation or receiptnumber of any form of remunerationPRSUs that vest and are settled 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 providersstock will be potentially implicateddependent on the achievement of return on equity (determined by this statutethe quotient resulting from dividing our audited consolidated net income for the performance period by our average stockholders’ equity), or ROE, targets established by the Committee for the performance period described below. The Committee has established threshold and target levels of ROE for the cumulative ROE achieved by our company for the period beginning January 1, 2013 and ending December 31, 2015. Stock represented by the PRSUs, if earned, will be issued on or between March 1, 2016 and March 15, 2016. The Committee will certify in writing the ROE level achieved for the performance period on March 1, 2016 or as soon thereafter as the Committee is provided with our audited financials, but in no event later than March 15, 2016 (such date referred to as the Settlement Date). In addition, such certification will occur immediately prior 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:
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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.settlement.
The market for our services depends largely on federal, state and local legislative programs. These programs cannumber of PRSUs corresponding to the ROE level achieved, if any, will be modified or amended at any time. Moreover, partsettled by issuing an equal number of shares of our growth strategy includes aggressively pursuing opportunities createdcommon stock to each of the Named Executive Officers on the Settlement Date. The following are the payout percentages for the ROE target levels set 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.
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:Compensation Committee.
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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 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.
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.
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.
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:
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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.
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 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.
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:
High | Low | |||||||
2013 | ||||||||
Fourth Quarter | $ | 30.50 | $ | 24.34 | ||||
Third Quarter | $ | 31.31 | $ | 26.41 | ||||
Second Quarter | $ | 29.52 | $ | 16.58 | ||||
First Quarter | $ | 20.09 | $ | 15.86 | ||||
2012 | ||||||||
Fourth Quarter | $ | 16.99 | $ | 9.70 | ||||
Third Quarter | $ | 13.95 | $ | 9.56 | ||||
Second Quarter | $ | 15.78 | $ | 12.70 | ||||
First Quarter | $ | 15.94 | $ | 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.
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
Period | Total Number of Shares of Common Stock Purchased (1) | Average Price Paid per Share | 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) | ||||||||||||
Fourth quarter: | ||||||||||||||||
October 1, 2013 to October 31, 2013 | - | - | 243,900 | |||||||||||||
November 1, 2013 to November 30, 2013 | - | - | 243,900 | |||||||||||||
December 1, 2013 to December 31, 2013 | 3,666 | $ | 25.44 | - | 243,900 | |||||||||||
Total | 3,666 | $ | 25.44 | - | 243,900 |
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Equity Compensation Plan InformationIn addition, in the event of a change in control (as defined in the 2006 Plan) of our company during any performance period, the PRSUs will be deemed earned by each executive and settled in cash at the Target level established by the Committee and paid to the executive within the number of days set forth in the Form of Performance Restricted Stock Unit Agreement.
A significant portion of equity-based compensation for 2013 was awarded to the Named Executive Officers based on our financial performance for 2012, measured in terms of EBITDA, return on equity and total stockholder return on an absolute basis as well as compared to the financial performance of the Peer Group. The following table provides certain information asCompensation Committee also considered the longer term retention and incentive benefits provided by the restricted stock and PRSUs in determining the amount of December 31, 2013 with respectequity-based compensation to our equity based compensation plans.
Plan category | (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)) | |||||||||
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 | ||||||||
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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 elsewhereaward 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.
Year Ended December 31, | ||||||||||||||||||||
2013(1)(2)(3) | 2012 (1)(4) | 2011(5)(6)(7) | 2010(5) | 2009 | ||||||||||||||||
(dollars and shares in thousands) | ||||||||||||||||||||
Statement of operations data: | ||||||||||||||||||||
Revenues: | ||||||||||||||||||||
Non-emergency transportationservices | $ | 770,246 | $ | 750,658 | $ | 581,541 | $ | 537,776 | $ | 460,275 | ||||||||||
Human services | 352,436 | 355,231 | 361,439 | 341,921 | 340,738 | |||||||||||||||
Total revenues | 1,122,682 | 1,105,889 | 942,980 | 879,697 | 801,013 | |||||||||||||||
Operating expenses: | ||||||||||||||||||||
Cost of non-emergencytransportation services | 710,428 | 706,692 | 539,417 | 474,129 | 415,300 | |||||||||||||||
Client service expense | 309,623 | 304,084 | 304,407 | 289,152 | 275,126 | |||||||||||||||
General and administrativeexpense | 48,633 | 53,383 | 48,861 | 46,461 | 44,010 | |||||||||||||||
Depreciation andamortization | 14,872 | 15,023 | 13,656 | 12,652 | 12,852 | |||||||||||||||
Asset impairment charges | 492 | 2,506 | - | - | - | |||||||||||||||
Total operating expenses | 1,084,048 | 1,081,688 | 906,341 | 822,394 | 747,288 | |||||||||||||||
Operating income | 38,634 | 24,201 | 36,639 | 57,303 | 53,725 | |||||||||||||||
Non-operating (income) expenses | ||||||||||||||||||||
Interest expense, net | 6,894 | 7,508 | 10,002 | 16,011 | 20,432 | |||||||||||||||
Loss on extinguishment of debt.. | 525 | - | 2,463 | - | - | |||||||||||||||
(Gain) on bargain purchase | - | - | (2,711 | ) | - | - | ||||||||||||||
Income before income taxes | 31,215 | 16,693 | 26,885 | 41,292 | 33,293 | |||||||||||||||
Provision for income taxes | 11,777 | 8,211 | 9,945 | 17,665 | 12,167 | |||||||||||||||
Net income | $ | 19,438 | $ | 8,482 | $ | 16,940 | $ | 23,627 | $ | 21,126 | ||||||||||
Net earnings per share data: | ||||||||||||||||||||
Diluted | $ | 1.41 | $ | 0.64 | $ | 1.27 | $ | 1.78 | $ | 1.60 | ||||||||||
Weighted average sharesoutstanding: | ||||||||||||||||||||
Diluted | 13,810 | 13,355 | 13,322 | 14,965 | 13,211 | |||||||||||||||
Other data (8) (unaudited): | ||||||||||||||||||||
States served: | ||||||||||||||||||||
NET Services | 40 | 38 | 34 | 38 | 39 | |||||||||||||||
Human Services | 24 | 27 | 33 | 32 | 32 | |||||||||||||||
Locations: | ||||||||||||||||||||
NET Services | 35 | 36 | 33 | 34 | 36 | |||||||||||||||
Human Services | 347 | 358 | 359 | 273 | 266 | |||||||||||||||
Employees: | ||||||||||||||||||||
NET Services | 2,253 | 1,990 | 1,476 | 1,430 | 1,349 | |||||||||||||||
Human Services | 6,294 | 6,403 | 6,120 | 5,553 | 5,666 | |||||||||||||||
Contracts: | ||||||||||||||||||||
NET Services | 83 | 84 | 76 | 66 | 65 | |||||||||||||||
Human Services | 504 | 556 | 633 | 638 | 669 | |||||||||||||||
Clients: | ||||||||||||||||||||
NET Services (9) | 15,842,051 | 15,084,571 | 11,318,902 | 8,232,202 | 7,697,125 | |||||||||||||||
Human Services | 56,320 | 51,584 | 60,956 | 58,088 | 62,213 |
As of December 31, | ||||||||||||||||||||
2013(1)(2) | 2012(1) | 2011(7) | 2010 | 2009 | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Balance sheet data: | ||||||||||||||||||||
Cash and cash equivalents | $ | 98,995 | $ | 55,863 | $ | 43,184 | $ | 61,261 | $ | 51,157 | ||||||||||
Total assets | 424,758 | 391,737 | 379,053 | 386,933 | 383,107 | |||||||||||||||
Long-term obligations, including currentportion | 123,500 | 130,000 | 150,493 | 182,304 | 204,213 | |||||||||||||||
Other liabilities | 150,621 | 143,050 | 119,537 | 115,880 | 116,556 | |||||||||||||||
Total stockholders' equity | 150,637 | 118,687 | 109,023 | 88,749 | 62,338 |
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Item7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussionDiscretionary Equity-Based Compensation. On May 7, 2013 the Compensation Committee awarded 4,732 shares of restricted stock and analysis18,926 PRSUs to Mr. Rustand under the 2006 Plan equal in value to approximately $442,000. This discretionary award was made in connection with Mr. Rustand assuming the position 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.
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.
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 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.Company.
The termsOn June 7, 2013, the Compensation Committee awarded 1,452 additional shares of the contract may be reviewed prospectivelyrestricted stock and amended as necessary5,808 additional PRSUs 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 revenuesMr. Crooms under the annual block purchase contract for 2013, 20122006 Plan equal in value to approximately $200,000. This discretionary award was made in connection with awards of restricted stock to other key employees involved in business development activities in recognition of their efforts in growing and 2011 represented approximately 5.4%, 5.4% and 6.1%, respectively, ofexpanding our Human Services operating segment revenues for each year.business.
Management agreements.Policy Regarding the Timing of Equity Award Grants. We maintain management agreements with aThe Compensation Committee makes its decisions regarding the number of not-for-profit social services organizations whereby we provide certain management services. In exchange forstock options, shares of restricted stock and PRSUs to be awarded to the Named Executive Officers without regard to the effects that the release of our services, we receive a management fee that is either basedfinancial results might have on a percentageour stock price. Moreover, the exercise price of the revenuesoptions granted and the value of these organizations the restricted stock and/or a predetermined fee. We recognize management fees revenuePRSUs awarded are not known until after the close of regular trading on NASDAQ on the day the Compensation Committee meets, as such amountsthe exercise price per share for option grants and the per share value of the stock and PRSU awards 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%equal to the closing market price of our Human Services operating segment revenue in 2013, 2012 and 2011, respectively.Common Stock on the date of grant.
The costs associated with rendering these management servicesIn addition to the annual grants of performance restricted stock units and restricted stock that typically are primarily shown as general and administrative expensemade in the consolidated statementsfirst six months of income.each year to the non-employee members of the Board and the Named Executive Officers (and other executive officers throughout the year), such equity awards may be granted at other times during the year to new hires and employees receiving a promotion and in other special circumstances. Our policy is that only the Compensation Committee may make such grants to persons subject to the reporting requirements of Section 16 under the Exchange Act, or Section 16 Officers.
NET Services segmentPost-Retirement Compensation.
Capitation contracts.401(k) Plans. The majorityAll Named Executive Officers are eligible to participate in our 401(k) Plan and to receive a company match, subject to plan requirements and contribution limits established by the IRS. We provide matching contributions under our plan for participants of our non-emergency transportationhuman services revenue is generated under capitated contracts whereoperating segment equal to 10% of participant elective contributions up to a maximum amount of $400. At the end of each plan year, we assume the responsibility of meeting the covered transportation requirements ofalso may make a specific geographic population forcontribution on a fixed amount per period. Revenues under capitation contracts with our payers are baseddiscretionary basis on per-member monthly fees for an estimated numberbehalf of participants who have made elective contributions for the plan year. In 2013, we contributed $400 on behalf of each of Messrs. Norris, Schwarz, Furman and Crooms. Messrs. Rustand and Wilson elected not to participate 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.401(k) plan.
Deferred RevenueCompensation
At times. All of our Named Executive Officers, other than Mr. Schwarz, are eligible to participate in our Deferred Compensation Plan, which was put in place to compensate for the inability of certain of our highly compensated employees to take full advantage of our 401(k) plan. Participants in this plan may defer up to 100% of their base salary, service and performance based bonuses, commissions or Form 1099 compensation in order to provide for future retirement and other benefits. In addition, pursuant to the terms of the Deferred Compensation Plan, we may receive fundingmake discretionary credits to participants’ deferred compensation accounts. Participants are fully vested immediately in all amounts deferred by them and any discretionary credits made by us to their deferred compensation account. We may make additional other credits to the participant’s deferred compensation account for certain services in advance of services being rendered. These amounts are reflected inwhich 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 servicesvesting will be determined at the directiontime 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 atgrant. Participants may select from several fund choices and 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 andeferred compensation 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.
Accounting for business combinations, goodwill and other intangible assets
When we consummate an acquisition we separatelyincreases or decreases in value all acquired identifiable intangible assets apart from goodwill in accordance with Accounting Standards Codification,the performance of the funds selected. A participant may receive a distribution from the plan upon a qualifying distribution event such as separation from service, disability, death, change in control or ASC, Topic 805 -Business Combinations. We analyzean unforeseeable emergency, all as defined in the carrying value of goodwillplan. Distributions from the Deferred Compensation Plan are made in cash upon a qualifying distribution event. Distributions from the Deferred Compensation Plan may, as determined by the participant at the endtime permitted under the Deferred Compensation Plan, be made in a lump sum, annual installments or a combination of each fiscal year. When analyzing goodwill for impairment we first assess qualitative factorsboth. The Deferred Compensation Plan is intended 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 unitbe an unfunded plan administered 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 measuredmaintained 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 reportus primarily 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 valuespurpose 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 expectedproviding deferred compensation benefits 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.participants.
As of December 31, 2013, the fair valuesnone of our reporting units subjectNamed Executive Officers has elected to quantitative testing substantially exceededparticipate in our Deferred Compensation Plan.
Under the Rabbi Trust Plan, which was established for highly compensated employees of our NET Services operating segment, participants may defer up to 10% of their carrying values.base salary and all or a portion of their annual bonus. The amount of compensation to be deferred by each participant will be credited to the participant’s account and the value of the participant’s account will be determined in accordance with the Rabbi Trust Plan. The committee administering the Rabbi Trust Plan determines which investment alternatives are available under the Rabbi Trust Plan. If the committee designates more than one investment alternative to measure the value of each account, a participant is required to select one or more investment alternatives to calculate the adjustments to be credited or debited to his or her account. A participant may receive a distribution from the plan upon the occurrence of certain distribution events such as disability, death, retirement or termination of employment, all as defined in the Rabbi Trust Plan. Payment of distribution, other than in connection with death or termination of employment prior to retirement, will be made in cash in either a lump sum or annually up to 10 years as selected by the participant. If a participant does not make an election, the distribution will be payable annually over three years. In the event of death prior to retirement or termination of employment, with or without cause, the distribution will be made in one lump sum payment. The Rabbi Trust Plan is unfunded and benefits are paid from our general assets under the Rabbi Trust Plan.
Mr. Schwarz is eligible to participate in our Rabbi Trust Plan, but as of December 31, 2013, he was not a participant in this plan.
Change in Control and Severance Arrangements and Severance Payments in 2013.
We have entered into employment agreements with each of our Named Executive Officers. The following discussion describes the change in control provisions and severance arrangements of the employment agreements with the Named Executive Officers. Under these employment agreements, each Named Executive Officer is entitled to a severance payment upon the termination of his employment under certain circumstances and to a payment upon a change in control.
The employment agreements for Messrs. Schwarz, Norris, Furman and Crooms in effect in 2013 provided for a severance benefit in the event the executive is terminated by us without “Cause” or by the executive officer for “Good Reason” (each as defined in the executive’s employment agreement), or if the employment agreement is not extended or a new employment agreement is not entered into upon the expiration of the employment agreement. The severance benefit to which the executive will be entitled following such termination is equal to one and one half times the executive officer’s base salary then in effect; provided that prior to the date on which such benefit is paid the executive executes a general release in favor of us. In connection with the termination of their positions with the Company in 2013, Messrs. Furman and Crooms received severance payments of $610,500 and $450,000, respectively, pursuant to their employment agreements.
Certain payment provisions of these employment agreements are also triggered by a “Change in Control,” which is defined in the employment agreements, and an ensuing negative employment event. See “Potential Payments Upon Termination or a Change in Control – Change in Control Payments.” In the case of a Change in Control, other than Messrs. Rustand and Wilson, the benefit (which will not include an excise tax gross-up) payable to each Named Executive Officer would be calculated as follows:
Named Executive Officer | Multiple of the average of the executive’s annual W-2 compensation from us for the most recent five taxable years ending before the date on which the Change in Control occurs | |
Craig A. Norris (1) | Two times | |
Herman M. Schwarz | Two times | |
Fred D. Furman | Two times | |
Leamon A. Crooms III | One and one half times |
(1) Mr. Norris ceased to serve as an executive officer in 2014 and thus is no longer entitled to this change in control benefit.
In connection with our acquisitions, we calculatehis appointment as Chief Executive Officer in May 2013, the fair valueCompany entered into a two year employment agreement with Mr. Rustand. If Mr. Rustand is terminated without “Cause”, as defined by his employment agreement, he will be entitled to a severance benefit equal to his base salary that would have been paid from the date of termination through May 2015, or, if greater, a payment of six months of base salary, and any bonus earned for the prior completed fiscal year, but not yet paid, and a pro-rata portion of any management contracts, customer relationships, restrictive covenants, software licenses and developed technology. We assess whether any relevant factors limitbonus earned for 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 onthen fiscal year through the expected perioddate of time we will provide servicestermination; provided that prior to the payer. While we use discounted cash flowsdate on which such benefit is paid the executive executes a general release in favor of us. If such termination occurs in connection with or following a change in control, Mr. Rustand will be entitled to value intangible assets, we have elected to use(i) the straight-line methodgreater of amortization to determine amortization expense. If applicable, we assess the recoverabilityhis base compensation through May 2015 or 50% of the unamortized balanceannualized amount if his base compensation and (ii) a pro-rata portion of our long-lived assets based on undiscounted expected future cash flows. Ifhis bonus, assuming the review indicates that the carrying value is not fully recoverable, the excessCompany’s achievement 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.specified performance milestones.
In addition, we own Provado Insurance Services, Inc. (“Provado”),September 2013, the Company entered into an employment agreement with Mr. Wilson. The agreement provides that if he is terminated without “Cause,” as defined by his employment agreement, Mr. Wilson will be entitled to receive his monthly base salary through December 31, 2014 and any bonus earned for the prior completed fiscal year, but not yet paid, and a licensed captive insurance company domiciledpro-rata portion of any bonus earned for the then fiscal year through the date of termination; provided that prior to the date on which such benefit is paid the executive executes a general release in favor of us. If such termination occurs in connection with or following a change in control, Mr. Wilson will be entitled to (i) the Stategreater 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 membershis base compensation through December 31, 2014 or 50% of the networkannualized amount if his base compensation and (ii) a pro-rata portion 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 forhis bonus, assuming the foreseeable future and to resolve remaining and future claims related to these policies.Company’s achievement of specified EBITDA milestones.
Provado maintains reserves for obligations relatedThe Compensation Committee considered certain legal and tax provisions, fairness to stockholders, tenure of each executive officer and general corporate practice to select the reinsurance programs for general liability, automobile liability, and automobile physical damage coverage. Asevents that would have triggered payments under the employment agreements noted above. Potential payments to executives upon the occurrence of December 31, 2013 and 2012, Provado recorded reserves of approximately $1.9 million and $4.4 million, respectively.the events noted above did not impact the Compensation Committee’s decisions regarding other compensation elements.
Other Benefits and Perquisites.
During 2013, our Named Executive Officers received, to varying degrees, a limited amount of other benefits, including certain group life, health, medical and other non-cash benefits generally available to all salaried employees. In addition, we also pay for the premiums of certain health and dental benefits for their families and additional disability and life insurance premiums on their behalf, which are not available to all salaried employees. We utilize analyses prepared by third party administratorsalso provide certain perquisites to our Named Executive Officers, primarily relating to travel. More detail on these benefits and independent actuariesperquisites may be found elsewhere in this Form 10-K/A’s “Executive Compensation” section, in the table footnotes under the heading “Summary Compensation Table.”
Discussion of 2013 Compensation for Our Chief Executive Officer
In determining the compensation for Mr. Rustand upon his assuming the position of Chief Executive Officer, the Compensation Committee considered his compensation arrangement applicable during his service as interim Chief Executive Officer and compensation levels of Chief Executive Officers of our peers. The Compensation Committee made the determination of Mr. Rustand’s total targeted compensation based on historical claimshis contributions in furtherance of our and our stockholders’ interests and level of responsibility and the Compensation Committee’s intent of setting total targeted compensation for Mr. Rustand to be competitive with that of the Peer Group for comparable positions.
Mr. Rustand’s base salary for 2013 was set at $59,500 per month in connection with his service as interim Chief Executive Officer, from January 1, 2013 through May 6, 2013, which was unchanged from the previous year. Upon appointment to Chief Executive Officer, Mr. Rustand’s base salary was set at $590,000 per year, of which he received a pro rata portion from May 7, 2013 through December 31, 2013. Mr. Rustand’s salary level was competitive with the Peer Group for chief executive officer positions and reflected the Compensation Committee’s assessment of his individual job performance to date and the Company’s financial performance in 2012.
In May 2013, the Compensation Committee awarded Mr. Rustand equity-based compensation in the amount of approximately $442,000 under the Equity-Based Program consisting of an award of 4,732 shares of restricted stock and 18,926 PRSUs that, if earned, would be settled in shares of common stock. The restricted stock will vest in three equal annual installments commencing one year from the date of grant, provided that Mr. Rustand is employed by us on each vesting date. The Compensation Committee awards equity-based compensation each year based in part on the Company’s prior year financial performance.
Compensation Decisions for Fiscal Year 2014
In March 2014, the Compensation Committee approved the pay for performance compensation plan for the Named Executive Officers then employed by the Company for fiscal year 2014, which has features designed to compensate the Company’s executives for financial performance focusing on return on equity, as well as actual performance compared to budgeted performance. On March 14, 2014, Mr. Norris stepped down from his position as Chief Executive Officer of the Company’s Human Services business segment and is currently employed “at will” as a senior advisor. In connection with these changes, Mr. Norris received severance of $648,000 under his employment agreement and Mr. Norris is no longer eligible for compensation under the Company’s long-term incentive plan. For 2014, the base salaries for Mr. Rustand, Wilson and Schwarz were not changed. The Compensation Committee again approved an annual incentive cash compensation bonus plan similar to that for fiscal 2013. Under the 2014 cash bonus program, executives will be entitled to awards based on corporate performance measures. The Committee chose to tie the Named Executive Officers eligibility to earn cash bonuses to the Company’s corporate financial performance as a whole and approved the use of EBITDA as the applicable measure. The amount of potential incentive cash bonus that may be earned by each of Messrs. Rustand and Schwarz is targeted to 75% of their respective base salaries. Further, they are each entitled to earn an additional bonus of up to 25% of their respective base salaries by sharing 20% of the amount, if any, by which EBITDA of the Company exceeds the EBITDA target set by the Committee, after expensing all compensation. Any such excess amount available will be distributed prorata among these Named Executive Officers and one other employee participating in the plan. Mr. Wilson does not participate in this annual cash bonus plan. His bonus eligibility is defined by the employment agreement entered into with him in September 2013.
As previously disclosed by the Company, in March 2014, the Committee also awarded time vested restricted stock (representing 20% of the equity based compensation based on the number of shares awarded) and stock settled PRSUs (representing 80% of the equity based compensation based on the number of shares awarded) to Messrs. Rustand and Schwarz. The restricted stock will vest in three equal annual installments on the first, second and third anniversaries of the date of grant, provided that the recipient is employed by the Company on each vesting date. Vesting of the performance restricted stock units and their settlement in stock will depend on achievement of targeted return on equity for a performance period beginning January 1, 2014 and ending December 31, 2016.
Stock Ownership Guidelines for Named Executive Officers
On January 13, 2012, the Compensation Committee amended the stock ownership guidelines for our Named Executive Officers. We believe that promoting stock ownership aligns the interests of our Named Executive Officers with those of our stockholders and provides strong motivation to build stockholder value. Under the amended stock ownership guidelines, our Chief Executive Officer is expected to own shares of our Common Stock with a value equal to three times his annual base salary and each of our other Named Executive Officers are expected to own shares of our Common Stock with a value equal to two times their respective annual base salaries.
Pursuant to the amended stock ownership guidelines, the following will count towards meeting the required holding level:
• | Shares held directly or indirectly; | |
• | Any restricted stock or stock units held under our Equity-Based Program (whether vested or unvested); | |
• | Shares owned jointly with or in trust for, their immediate family members residing in the same household; and, | |
• | Shares held through our Deferred Compensation Plan or Rabbi Trust Plan. |
Compliance with the established holding level requirement as determined under the amended guidelines is required by December 31, 2014. Once the ownership requirement has been achieved, the executive officers are free to sell shares of our Common Stock above the required holding level. In determining whether the executive meets the required holding level, the stock ownership guidelines were amended to require use of the grant date fair value for such purpose. In the event a Named Executive Officer does not achieve his holding level set forth above or thereafter sells shares of our Common Stock in violation of the stock ownership guidelines, the Board will consider all relevant facts and take such actions as it deems appropriate under the circumstances.
Hedging and Pledging Prohibition
We have a policy that prohibits employees and the Board from engaging in any hedging or monetization transactions, or other financial arrangements that establish a short position in our Common Stock or otherwise are designed to hedge or offset a decrease in market value. In addition, we have a policy that prohibits our executive officers and the Board from pledging our Common Stock as collateral for a loan or for a margin account.
Policy on Restitution
It is the Board’s policy that the Compensation Committee will, to the extent permitted by governing law, have the sole and absolute authority to make retroactive adjustments to any cash or equity-based incentive compensation paid to executive officers and certain other officers where the payment was predicated upon the achievement of certain financial results that were subsequently the subject of a restatement. Where applicable, we will seek to recover any amount determined to have been inappropriately received by the individual executive.
Limitations on Compensation Tax Deduction
Under Section 162(m) of the Code, we may not take a tax deduction for compensation paid to any Named Executive Officer (other than our Chief Financial Officer) that exceeds $1 million in any year unless the compensation is “performance-based.” While the Compensation Committee endeavors to structure compensation so that we may take a tax deduction, it does not have a policy requiring that all compensation must be deductible and it may, from time to time, authorize compensation that is not tax deductible.
Compensation Committee Report
The Compensation Committee of the Board operates under a written charter and is comprised entirely of directors meeting the independence requirements of NASDAQ listing requirements. The Board established this committee to discharge the Board’s responsibilities relating to compensation of our Chief Executive Officer and each of our other executive officers. The Compensation Committee has overall responsibility for decisions relating to all compensation plans, policies, and benefit programs as they affect the Chief Executive Officer and other executive officers.
The Compensation Committee has reviewed and discussed with Providence’s management the preceding section entitled “Compensation Discussion and Analysis.” Based on this review and discussions with management, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in the Company’s annual report through filing of this Form 10-K/A.
Compensation Committee
Richard Kerley (Chairperson) | Kristi L. Meints | Christopher Shackelton |
Summary Compensation Table
The following table sets forth certain information with respect to compensation paid by us for services rendered in all capacities to us and our subsidiaries during the generalfiscal years ended December 31, 2013, 2012 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 provided2011 to our employees. With respect to this program, we consider historical and projected medical utilization data when estimatingNamed Executive Officers, which group is comprised of (1) our health insurance program liability and related expense as well as using servicesChief Executive Officer, (2) our Chief Financial Officer, (3) each of a third party administrator. As ofour three other most highly compensated executive officers employed on December 31, 2013 and (4) one executive officer that terminated prior to December 31, 2013, who was one of the three most highly compensated executive officers during the fiscal year ended December 31, 2013:
Stock | Option | Non-Equity Incentive Plan | All Other | |||||||||||||||||||||||||||
Salary | Bonus | Awards | Awards | Compensation | Compensation | |||||||||||||||||||||||||
Name and Principal Position | Year | (1) ($) | ($) | (2) ($) | (3) ($) | (4) ($) | (5) (6) (7) ($) | Total ($) | ||||||||||||||||||||||
Warren S. Rustand | 2013 | 633,619 | 123,238 | 205,281 | - | 386,329 | 44,357 | 1,392,824 | ||||||||||||||||||||||
Chief Executive Officer | 2012 | 89,250 | - | - | 159,827 | - | 2,370 | 251,447 | ||||||||||||||||||||||
Craig A. Norris | 2013 | 439,500 | - | 230,521 | - | 432,000 | 21,770 | 1,123,791 | ||||||||||||||||||||||
Former Chief Executive Officer | 2012 | 462,000 | - | 392,640 | - | 46,200 | 31,065 | 931,905 | ||||||||||||||||||||||
of Human Services | 2011 | 462,000 | - | 488,760 | 139,489 | 92,400 | 31,146 | 1,213,795 | ||||||||||||||||||||||
Herman M. Schwarz | 2013 | 428,069 | - | 230,521 | - | 432,000 | 14,699 | 1,105,289 | ||||||||||||||||||||||
Chief Executive Officer of | 2012 | 418,000 | - | 742,745 | - | 41,800 | 22,443 | 1,224,988 | ||||||||||||||||||||||
LogistiCare Solutions, LLC, | 2011 | 418,000 | - | 429,960 | 139,489 | 83,600 | 23,714 | 1,094,763 | ||||||||||||||||||||||
our wholly-owned subsidiary | ||||||||||||||||||||||||||||||
Fred D. Furman | 2013 | 407,000 | - | 198,608 | - | 407,000 | 674,623 | 1,687,231 | ||||||||||||||||||||||
Former Executive Vice President | 2012 | 407,000 | - | 270,693 | - | 40,700 | 70,075 | 788,468 | ||||||||||||||||||||||
and General Counsel | 2011 | 407,000 | - | 313,510 | 139,489 | 81,400 | 71,320 | 1,012,719 | ||||||||||||||||||||||
Robert E. Wilson | 2013 | 400,000 | 200,000 | - | - | - | 30,383 | 630,383 | ||||||||||||||||||||||
Chief Financial Officer | 2012 | 50,000 | - | - | 410,691 | - | 3,922 | 464,613 | ||||||||||||||||||||||
Leamon A. Crooms III | 2013 | 307,500 | - | 183,281 | - | 225,000 | 452,995 | 1,168,776 | ||||||||||||||||||||||
Former Chief Strategic Officer |
___________________
(1) | Includes amounts contributed to our 401(k) Plan by each executive officer. |
(2) | This column shows the aggregate grant date fair value of the restricted stock and PRSUs awarded in 2013, 2012 and 2011 in accordance with FASB ASC 718. Additional information regarding the size of the awards is set forth in the notes to the “Grants of Plan Based Awards Table” and “Outstanding Equity Awards” table. The grant date fair values have been determined based on the assumptions set forth in our Annual Reports on Form 10-K for the years ended December 31, 2013, 2012 and 2011 (Note 10, Stock-Based Compensation Arrangements). Each of the Named Executive Officers (except for Messrs. Rustand in 2012, and Wilson in 2012 and 2013) were granted a number of PRSUs in 2013, 2012 and 2011 subject to certain performance conditions. The amounts included in this column for the PRSUs granted in 2013, 2012 and 2011 are consistent with the estimate of aggregate compensation cost to be recognized over the service period determined as of the grant date under FASB ASC 718. During 2013, approximately $126,368 in compensation expense was recorded for the awards granted in 2013, no compensation expense was recorded in 2013 or 2012 for the awards granted in 2012. The grant date fair value of the PRSU award granted in 2013 to each of Messrs. Rustand, Norris, Schwarz, Furman and Crooms assuming the maximum level of performance will be achieved totaled approximately $353,916, $397,443, $397,443, $293,048 and $316,011, however, amounts included in the table above reflect the threshold level of performance. Certain of the Named Executive Officers have received cash settlement for earned PRSUs granted in 2010 corresponding to the ROE level achieved by us for 2011 equal to 17.13%, which was between the Threshold and Maximum levels established by the Compensation Committee. Payment of the PRSU amounts was equally divided into three tranches corresponding to the required vesting period (described below). Cash payments were made on March 12, 2012 (the settlement date for these awards) in the amounts of $292,272, $236,841, and $127,659 to Messrs. Norris, Schwarz and Furman, respectively. The second tranche was paid on March 15, 2013 and the third tranche was paid on March 14, 2014. Amounts paid are not reflected in the table above. |
(3) | This column reflects the aggregate grant date fair value of options awarded in 2012 and 2011 in accordance with FASB ASC 718. Additional information regarding the size of the awards is set forth in the notes to the “Grants of Plan Based Awards Table” and “Outstanding Equity Awards” table. The grant date fair values have been determined based on the assumptions set forth in our Annual Reports on Form 10-K for the years ended December 31, 2012 and 2011 under the notes indicated above in note (2). |
(4) | The amounts in this column reflect cash incentive awards made to the Named Executive Officers under the Annual Incentive Plan for 2013, 2012 and 2011. |
(5) | We provide the Named Executive Officers with certain group life, health, medical and other non-cash benefits generally available to all salaried employees, which are included in this column. For 2013, the amounts in this column include the following: |
We paid health, dental, life and disability insurance premiums on behalf of Messrs. Rustand, Norris, Schwarz, Furman, Wilson and Crooms in the following amounts, respectively: $1,206, $21,371, $12,844, $17,688, $13,980 and $2,595.
Matching contributions by us under our retirement savings plan were made on behalf of Messrs. Norris, Schwarz, Furman and Crooms in the amount of $400 each.
We paid insurance premiums under two insurance plans that we had approximately $1.9provided for Mr. Rustand with aggregate coverage of up to $3.1 million. We paid $43,151 in aggregate premiums on these policies on behalf of Mr. Rustand in 2013. In addition, we paid insurance premiums under separate insurance plans we provided for Messrs. Schwarz and Furman with coverage of up to $1.0 million and $2.1 million,$810,000, respectively. We paid premiums on these policies on behalf of Messrs. Schwarz and Furman in the amounts of $1,455 and $8,371, respectively, in reserve for our self-funded health insurance programs.2013.
(6) | In addition to amounts disclosed in note (5) above, this column also includes the incremental value of perquisites for the Named Executive Officers detailed in the following table. |
Company | ||||||||
Apartment | Travel | |||||||
Year | (a) ($) | (b) ($) | Total ($) | |||||
Fred D. Furman | 2013 | 18,995 | 18,668 | 37,663 | ||||
Former Executive Vice President | ||||||||
and General Counsel | ||||||||
Robert E. Wilson | 2013 | - | 16,403 | 16,403 | ||||
Executive Vice President and | ||||||||
Chief Financial Officer |
_________________ | |
(a) | Mr. Furman resides and works outside of Arizona, but regularly commutes to our headquarters in Arizona. Included in “All Other Compensation” for Mr. Furman for the year ended December 31, 2013 were payments for expenses related to the cost to maintain an apartment for Mr. Furman when he works at our headquarters. We value this benefit based on the actual cost incurred to maintain an apartment for Mr. Furman in Arizona. |
(b) | For the year ended December 31, 2013, we paid $18,668 and $16,403 for transportation and other travel related expenses for Messrs. Furman and Wilson, respectively, to commute to the corporate office. We value this benefit based on the actual cost incurred for Messrs. Furman and Wilson to commute from their respective primary residencies to our corporate office. |
(7) | In addition to amounts disclosed in notes (5) and (6) above, this column also includes payments for severance and other benefits of $610,500 and $450,000 paid to Messrs. Furman and Crooms, respectively, related to their departures from the Company on December 31, 2013 and December 30, 2013, respectively. |
Grants of Plan Based Awards Table
We regularly analyzeThe following Grants of Plan Based Awards table provides additional information about stock and option awards and non-equity incentive plan awards granted to the Named Executive Officers during the year ended December 31, 2013. The compensation plans under which the grants in the following table were made are described under the subheadings entitled “Determinations Made Regarding Executive Compensation for 2013 - Annual Incentive Cash Compensation” and “Determinations Made Regarding Executive Compensation for 2013 - Equity-Based Compensation” in the “Compensation Discussion and Analysis” section.
Estimated Future Payouts Under Non-Equity Incentive Plan Awards | Estimated Future Payouts Under | |||||||||||||||||
Name (3) | Grant Date | Threshold ($) | Target ($) | Maximum ($) | Threshold (#) | Target (#) | Maximum (#) | All Other Stock Awards: Number of Shares of Stock or Units (#) (4) | Grant Date Fair Value of Stock and Option Awards | |||||||||
Rustand | ||||||||||||||||||
(1) | - | 289,747 | 386,329 | - | - | - | - | - | ||||||||||
5/7/13 | - | - | - | - | - | - | 4,732 | 88,488 | ||||||||||
5/7/13 | - | - | - | 6,309 | - | 18,926 | - | 116,792 | ||||||||||
Norris | ||||||||||||||||||
(1) | - | 324,000 | 432,000 | - | - | - | - | - | ||||||||||
3/28/13 | - | - | - | - | - | - | 5,374 | 99,365 | ||||||||||
3/28/13 | - | - | - | 7,165 | - | 21,495 | - | 131,156 | ||||||||||
Schwarz | ||||||||||||||||||
(1) | 324,000 | 432,000 | - | - | - | - | - | |||||||||||
3/28/13 | - | - | - | - | - | - | 5,374 | 99,365 | ||||||||||
3/28/13 | - | - | - | 7,165 | - | 21,495 | - | 131,156 | ||||||||||
Furman | ||||||||||||||||||
(1) | 305,250 | 407,000 | - | - | - | - | - | |||||||||||
3/28/13 | - | - | - | - | - | - | 3,962 | 101,903 | ||||||||||
3/28/13 | - | - | - | 5,283 | - | 15,849 | - | 96,706 | ||||||||||
Crooms | ||||||||||||||||||
(1) | 225,000 | 300,000 | - | - | - | - | - | |||||||||||
3/28/13 | - | - | - | - | - | - | 2,109 | 38,995 | ||||||||||
3/28/13 | - | - | - | 2,812 | - | 8,437 | - | 51,480 | ||||||||||
6/7/13 | - | - | - | - | - | - | 1,452 | 40,003 | ||||||||||
6/7/13 | - | - | - | 1,936 | - | 5,808 | - | 52,803 |
(1) | Amounts represent the target (payment made if the EBITDA criteria are met for the fiscal year) and maximum payouts (payment made if the EBITDA criteria are exceeded for the fiscal year) under the Annual Incentive Plan for 2013. The actual amounts earned by the Named Executive Officers in 2013 under the Annual Incentive Plan are set forth under the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table. |
(2) | Amounts represent the Threshold and Maximum number of units eligible to be earned related to the PRSUs granted to each of the Named Executive Officers in 2013. The units will be settled in shares of common stock. The grant date fair value of the award is consistent with estimate of aggregate compensation cost to be recognized over the service period determined as of the grant date under FASB ASC 718. |
(3) | Mr. Wilson is not included in the table above as no compensation was granted to him under the 2013 Incentive Compensation Plan. Mr. Wilson’s 2013 bonus was based on the terms of his employment agreement subject to the Company reaching its EBITDA target. |
(4) | The number of shares shown in this column represents restricted stock awards made to the Named Executive Officers for 2013 under the Equity-Based Program. The grant date fair value of each of these awards was calculated in accordance with the provisions of FASB ASC 718. The grant date fair value of the award for Mr. Furman was recalculated on December 31, 2013 due to a modification of his award on that date. |
Employment Agreements with the Named Executive Officers other than Warren S. Rustand and Robert E. Wilson
The following discussion and the discussion under the subheading below entitled “—Estimated Benefits Upon Termination or a Change in Control.” describe certain terms of the employment agreements with the Named Executive Officers other than Messrs. Rustand and Wilson. The discussion of the agreements with Messrs. Rustand and Wilson is set forth below under the subheading entitled “—Employment Agreements with Warren S. Rustand and Robert E. Wilson.”
On May 17, 2011, we entered into an employment agreement with Mr. Schwarz and we entered into amended and restated employment agreements with Messrs. Norris, Furman and Crooms in order to make the terms of their then existing employment agreements consistent with those of the employment agreement with Mr. Schwarz, collectively referred to as the Employment Agreements. The employment agreement with Mr. Schwarz commenced upon the expiration of the then existing employment agreement with him on December 6, 2011 and expires concurrently with the amended and restated employment agreements with the other Named Executive Officers on March 22, 2014. On March 24, 2014, we entered into a new substantially similar employment agreement with Mr. Schwarz. As discussed above Messrs. Furman and Crooms’ employment with the Company terminated on December 31, 2013 and December 30, 2013, respectively, and Mr. Norris stepped down from his position as an executive officer of the Company in March 2014.
The employment agreements had terms of three years (except for the agreement with Mr. Schwarz as noted above) with no automatic renewal. Among other things, the Employment Agreements include provisions for compensation and benefits (including term life insurance maintained by Providence for their benefit) for each executive officer and restrictive covenants as well as severance in the event of termination of employment under certain circumstances and a payment upon certain termination events in connection with or following a Change in Control (defined below). Details with respect to the severance and Change in Control provisions are set forth below under the subheading entitled “—Potential Payments Upon Termination or Change in Control.”
The annual base salary paid to each Named Executive Officer is reviewed at least annually by the Board and the Compensation Committee or other applicable committee of the Board in accordance with our reservescompensation polices and guidelines and may be modified as a result of such review at the sole discretion of the Board and/or the Compensation Committee. In addition to an annual base salary during the term of the employment agreements, each Named Executive Officer is eligible to participate in any bonus plans or incentive compensation programs, if any, at a level consistent with his position and our policies and practices.
The employment agreements contain restrictive covenants providing for incurred but not reported claims,the employee’s non-competition, non-solicitation/non-piracy and non-disclosure. The term of the non-competition and non-solicitation covenants is for a period that includes the term of each of the employment agreements and for reported but not paid claimsa period of 18 months after the employment agreement is terminated for any reason.
The employment agreements with Messrs. Furman and Crooms terminated upon their separation with the Company, other than certain provisions related to our reinsurancenon-competition, non-solicitation, non-piracy and self-funded insurance programs. We believe our reserves are adequate. However, significant judgment is involvednon-disclosure, intellectual property and non-disparagement, which by their terms survive termination. Mr. Norris’ employment agreement was modified in assessing these reserves suchMarch 2014 to reflect his continuing status as assessing historical paid claims, average lags betweenan “at-will” employee of the claims’ incurred date, reported datesCompany.
Employment Agreements with Warren S. Rustand and paid dates,Robert E. Wilson
Warren S. Rustand
Effective May 7, 2013, Mr. Rustand was appointed Chief Executive Officer and the frequency and severityCompany entered into an employment agreement (“Rustand Employment Agreement”) with Mr. Rustand with a term through December 31, 2015. The Rustand Employment Agreement replaced a letter agreement that governed his employment as interim Chief Executive Officer, except for certain bonus provisions described below. Under the Rustand Employment Agreement, Mr. Rustand is entitled to an annual base salary of claims. There$590,000. In addition to an annual base salary during the term of the Rustand Employment Agreement, Mr. Rustand is eligible to participate in bonus plans or incentive compensation programs, if any, as may be differences between actual settlement amountsin effect from time to time, at a level consistent with his position and recorded reserveswith the Company’s then current policies and any resulting adjustments are includedpractices.
Effective May 7, 2013, Mr. Rustand was eligible to participate in expense once a probable amount is known. There were no significant adjustments recorded in the periods covered by this report. Any significant increase inbonus program whereby he was paid a pro-rata portion (based on the number of claimsdays during the fiscal year following May 7, 2013) of an amount equal to seventy-five percent (75%) of his annual base salary upon the achievement of a financial performance target set by the Board for 2013 and a pro-rata portion of an additional amount equal to a portion of a pool equal to twenty percent (20%) of the amount by which the Company exceeds such financial performance target for 2013 up to twenty-five (25%) of Mr. Rustand’s annual base salary. Additionally, Mr. Rustand was entitled to receive a bonus equal to 50% of his annualized based compensation specified under the prior letter agreement which was calculated, paid and pro-rated based on the number of days elapsed commencing January 1, 2013 and through May 7, 2013.
Per the Rustand Employment Agreement, the Company will maintain term life insurance on the life of Mr. Rustand for a period of five years. Mr. Rustand will have the absolute right to designate the beneficiaries under his the policy. The Company will pay the premium for the shorter of (i) the period of five years commencing on the later of (a) the Effective Date or costs associated(b) the date the insurance goes into effect or (ii) the period Mr. Rustand is employed by the Company. Premiums in respect thereof will thereafter be paid by Mr. Rustand.
Mr. Rustand is also eligible to receive certain severance benefits in the event he is terminated by the Company without Cause (as defined by the Rustand Employment Agreement) including if such termination occurs in connection with claims made under these programs above our reserves could haveor following a material adverse effect on our financial results.Change in Control.
If the sum of any lump sum payments due to Mr. Rustand would constitute an “excess parachute payment” (as defined in Section 280G of the Internal Revenue Code of 1986, as amended), then such lump sum payment or other benefit due to Mr. Rustand will be reduced to the largest amount that will not result in receipt by him of a parachute payment.
The Rustand Employment Agreement contains restrictive covenants providing for Mr. Rustand’s non-competition, non-solicitation/non-piracy, non-disclosure and non-disparagement. The term of the non-competition and non-solicitation covenants is for a period that includes the term of the Rustand Employment Agreement, and for a period of two years after the Rustand Employment Agreement is terminated for any reason.
Robert E. Wilson
Effective September 13, 2013, Mr. Wilson entered into an Employment Agreement (“Wilson Employment Agreement”). The term of the Wilson Employment Agreement extends to December 31, 2014.
Mr. Wilson is entitled to an annual base salary of $400,000. In addition to the annual base salary during the term of the Wilson Employment Agreement, Mr. Wilson is eligible to receive an annual bonus in the amount of fifty percent (50%) of his base salary upon the achievement of one hundred percent (100%) of budgeted EBITDA performance for each of the 2013 and 2014 calendar years, as determined by the Board of Directors or the Compensation Committee of the Board.
We will maintain term life insurance on the life of Mr. Wilson. Mr. Wilson has the absolute right to designate the beneficiaries under this respective policy. We will pay the premiums for a period commencing on the later of (a) the date of Mr. Wilson’s employment agreement or (b) the date the insurance goes into effect and expiring on the earlier of (i) the five year anniversary of commencement or (ii) upon termination of Mr. Wilson’s employment with us, at which time the policy would lapse or Mr. Wilson would have the option to take over the policy.
Mr. Wilson is eligible to receive certain severance benefits in the event he is terminated by the Company without Cause (as such term is defined in the Employment Agreement), including if such termination occurs in connection with or following a Change in Control.
If the sum of any lump sum payments due to Mr. Wilson following a Change of Control would constitute an “excess parachute payment” (as defined in Section 280G of the Internal Revenue Code of 1986, as amended), then such lump sum payment or other benefit due to Mr. Wilson will be reduced to the largest amount that will not result in receipt by him of a parachute payment.
The Wilson Employment Agreement contains non-competition, non-solicitation/non-piracy, non-disclosure and non-disparagement covenants. The non-competition and non-solicitation covenants apply during the term of the Wilson Employment Agreement and for a period of two years after the Wilson Employment Agreement is terminated for any reason.
Stock-based2013 Annual Incentive Plan
Under the Annual Incentive Plan, as part of the mix of our Named Executive Officers’ total targeted compensation for 2013, each of the Named Executive Officers (except for Mr. Wilson, who received an award in the amount of $200,000, or 50% of his base annual salary) was granted an opportunity to earn a portion of the incentive, or performance-based, cash bonus. Under the Annual Incentive Plan, the amount of the potential incentive cash bonus that may be earned by each of Messrs. Rustand (for the period of May 7, 2013 through December 31, 2013), Norris, Schwarz, Furman and Crooms was targeted at 75% of his base salary with the potential to earn up to an additional 25% of base salary if the performance target was exceeded. Messrs. Rustand, Norris, Schwarz, Furman and Crooms received financial performance based incentive for 2013 totaling $386,329, $432,000, $432,000, $407,000 and $225,000, respectively. Mr. Crooms’ amount of $225,000 was set per the terms of his Separation and General Release Agreement. Additional information with respect to our Annual Incentive Plan is set forth earlier in this Executive Compensation section under the heading entitled “Compensation Discussion and Analysis — Determinations Made Regarding Executive Compensation for 2013–Annual Incentive Cash Compensation.”
Equity Arrangements
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
Our 2006 Plan allows us the flexibilityis intended to issue up to 4,400,000 sharesadvance our interests and that of our common stock pursuantstockholders by providing for the grant of stock-based and other incentive awards to awards of stock options, stock appreciation rights, restricted stock, unrestricted stock, stock units including restricted stock unitsenhance our ability to attract and performance awards toretain employees, directors, consultants, advisors and others who are in a position to make contributions to our success and toany entity in which we own, directly or indirectly, 50% or more of the outstanding capital stock as determined by aggregate voting rights or other voting interests and encourage such persons to take into account ours and our stockholders’ long-term interests and the interests of our stockholders through ownership of our common stockCommon 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.
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.
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:
Year Ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Revenues: | ||||||||||||
Non-emergency transportation services | 68.6 | % | 67.9 | % | 61.7 | % | ||||||
Human services | 31.4 | 32.1 | 38.3 | |||||||||
Total revenues | 100.0 | 100.0 | 100.0 | |||||||||
Operating expenses: | ||||||||||||
Cost of non-emergency transportation services | 63.3 | 63.9 | 57.2 | |||||||||
Client service expense | 27.6 | 27.5 | 32.3 | |||||||||
General and administrative expense | 4.3 | 4.8 | 5.2 | |||||||||
Depreciation and amortization | 1.3 | 1.4 | 1.4 | |||||||||
Asset impairment charge | - | 0.2 | - | |||||||||
Total operating expenses | 96.5 | 97.8 | 96.1 | |||||||||
Operating income | 3.5 | 2.2 | 3.9 | |||||||||
Non-operating expense: | ||||||||||||
Interest expense, net | 0.6 | 0.7 | 1.0 | |||||||||
Loss on extinguishment of debt | 0.1 | - | 0.3 | |||||||||
Gain on bargain purchase | - | - | (0.3 | ) | ||||||||
Income before income taxes | 2.8 | 1.5 | 2.9 | |||||||||
Provision for income taxes | 1.1 | 0.7 | 1.1 | |||||||||
Net income | 1.7 | % | 0.8 | % | 1.8 | % |
Overview of trends of our results of operations for 2013
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.
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, | Dollar change | Percent change | |||||||||||||
2013 | 2012 | ||||||||||||||
$ | 770,246 | $ | 750,658 | $ | 19,588 | 2.6 | % |
NET Services revenues were favorably impacted in 2013 by:
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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):
Year Ended December 31, | Dollar change | Percent change | ||||||||||||||
2013 | 2012 | |||||||||||||||
Home and community based services | $ | 305,616 | $ | 309,300 | $ | (3,684 | ) | -1.2 | % | |||||||
Foster care services | 38,490 | 33,534 | 4,956 | 14.8 | % | |||||||||||
Management fees | 8,330 | 12,397 | (4,067 | ) | -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.
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, | Dollar change | Percent change | ||||||||||||||
2013 | 2012 | |||||||||||||||
Payroll and related costs | $ | 92,549 | $ | 79,048 | $ | 13,501 | 17.1 | % | ||||||||
Purchased services | 591,538 | 600,494 | (8,956 | ) | -1.5 | % | ||||||||||
Other operating expenses | 25,261 | 25,713 | (452 | ) | -1.8 | % | ||||||||||
Stock-based compensation | 1,080 | 1,437 | (357 | ) | -24.8 | % | ||||||||||
Total cost of non-emergencytransportation services | $ | 710,428 | $ | 706,692 | $ | 3,736 | 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.
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, | Dollar change | Percent change | ||||||||||||||
2013 | 2012 | |||||||||||||||
Payroll and related costs | $ | 229,452 | $ | 228,782 | $ | 670 | 0.3 | % | ||||||||
Purchased services | 27,748 | 26,000 | 1,748 | 6.7 | % | |||||||||||
Other operating expenses | 51,792 | 48,408 | 3,384 | 7.0 | % | |||||||||||
Stock-based compensation | 631 | 894 | (263 | ) | -29.4 | % | ||||||||||
Total client service expense | $ | 309,623 | $ | 304,084 | $ | 5,539 | 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 expensewas 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, | Dollar change | Percent change | |||||||||||||
2013 | 2012 | ||||||||||||||
$ | 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.
Depreciation and amortization. Depreciation and amortization were as follows (in thousands):
Year Ended December 31, | Dollar change | Percent change | |||||||||||||
2013 | 2012 | ||||||||||||||
$ | 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, | Dollar change | Percent change | |||||||||||||
2013 | 2012 | ||||||||||||||
$ | 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.
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, | ||||||||
2013 | 2012 | |||||||
Net income | $ | 19,438 | $ | 8,482 | ||||
Interest expense, net | 6,894 | 7,508 | ||||||
Provision for income taxes | 11,777 | 8,211 | ||||||
Depreciation and amortization | 14,872 | 15,023 | ||||||
EBITDA | 52,981 | 39,224 | ||||||
Asset impairment charge (a) | 492 | 2,506 | ||||||
Payments related to retirement ofexecutive officers, net (b) | 1,277 | 1,293 | ||||||
Strategic alternatives costs (c) | - | 593 | ||||||
Loss on extinguishment of debt (d) | 525 | - | ||||||
Adjusted EBITDA | $ | 55,275 | $ | 43,616 |
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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, | Dollar change | Percent change | |||||||||||||
2012 | 2011 | ||||||||||||||
$ | 750,658 | $ | 581,541 | $ | 169,117 | 29.1 | % |
NET Services revenue was favorably impacted by the following:
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Human services.Human services revenues are comprised of the following (in thousands):
Year Ended December 31, | Dollar change | Percent change | ||||||||||||||
2012 | 2011 | |||||||||||||||
Home and community based services | $ | 309,300 | $ | 314,556 | $ | (5,256 | ) | -1.7 | % | |||||||
Foster care services | 33,534 | 34,204 | $ | (670 | ) | -2.0 | % | |||||||||
Management fees | 12,397 | 12,679 | $ | (282 | ) | -2.2 | % | |||||||||
Total human services revenues | $ | 355,231 | $ | 361,439 | $ | (6,208 | ) | -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.
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, | Dollar change | Percent change | ||||||||||||||
2012 | 2011 | |||||||||||||||
Payroll and related costs | $ | 79,048 | $ | 58,289 | $ | 20,759 | 35.6 | % | ||||||||
Purchased services | 600,494 | 455,888 | 144,606 | 31.7 | % | |||||||||||
Other operating expenses | 25,713 | 24,043 | 1,670 | 6.9 | % | |||||||||||
Stock-based compensation | 1,437 | 1,197 | 240 | 20.1 | % | |||||||||||
Total cost of non-emergencytransportation services | $ | 706,692 | $ | 539,417 | $ | 167,275 | 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.
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, | Dollar change | Percent change | ||||||||||||||
2012 | 2011 | |||||||||||||||
Payroll and related costs | $ | 228,782 | $ | 222,129 | $ | 6,653 | 3.0 | % | ||||||||
Purchased services | 26,000 | 32,880 | (6,880 | ) | -20.9 | % | ||||||||||
Other operating expenses | 48,408 | 48,588 | (180 | ) | -0.4 | % | ||||||||||
Stock-based compensation | 894 | 810 | 84 | 10.4 | % | |||||||||||
Total client service expense | $ | 304,084 | $ | 304,407 | $ | (323 | ) | -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.
General and administrative expense.General and administrative expenses were as follows (in thousands):
Year Ended December 31, | Dollar change | Percent change | |||||||||||||
2012 | 2011 | ||||||||||||||
$ | 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, | Dollar change | Percent change | |||||||||||||
2012 | 2011 | ||||||||||||||
$ | 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.
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.
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 | 2011 | |||||||
Net income | $ | 8,482 | $ | 16,940 | ||||
Interest expense, net | 7,508 | 10,002 | ||||||
Provision for income taxes | 8,211 | 9,945 | ||||||
Depreciation and amortization | 15,023 | 13,656 | ||||||
EBITDA | 39,224 | 50,543 | ||||||
Asset impairment charge (a) | 2,506 | - | ||||||
Payments related to retirement ofexecutive officers, net (b) | 1,293 | - | ||||||
Strategic alternatives costs (c) | 593 | - | ||||||
Loss on extinguishment of debt (d) | - | 2,463 | ||||||
Gain on bargain purchase (e) | - | (2,711 | ) | |||||
Adjusted EBITDA | $ | 43,616 | $ | 50,295 |
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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.
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:
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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 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.
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.
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.
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.
Contractual cash obligations.
The following is a summary of our future contractual cash obligations as of December 31, 2013:
At December 31, 2013 | ||||||||||||||||||||
Contractual cash obligations (000's) | Total | Less than 1 Year | 1-3 Years | 3-5 Years | After 5 Years | |||||||||||||||
Debt | $ | 123,500 | $ | 48,250 | $ | 8,250 | $ | 67,000 | $ | - | ||||||||||
Interest (1) | 9,972 | 3,601 | 3,715 | 2,656 | - | |||||||||||||||
Purchased services commitments | 487 | 404 | 83 | - | - | |||||||||||||||
Operating Leases | 55,906 | 15,662 | 20,800 | 10,578 | 8,866 | |||||||||||||||
Total | $ | 189,865 | $ | 67,917 | $ | 32,848 | $ | 80,234 | $ | 8,866 |
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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.
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.
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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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.
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 inInternal 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.
/s/ KPMG LLP
Phoenix, ArizonaMarch 14, 2014
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 inInternal 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.
/s/ KPMG LLP
Phoenix, ArizonaMarch 14, 2014
The Providence Service Corporation
Consolidated Balance Sheets
(in thousands except share and per share data)
December 31, | ||||||||
2013 | 2012 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 98,995 | $ | 55,863 | ||||
Accounts receivable, net of allowance of$4.2 million in 2013 and $3.7 million in 2012 | 88,315 | 98,628 | ||||||
Management fee receivable | 1,821 | 2,662 | ||||||
Other receivables | 4,786 | 4,105 | ||||||
Prepaid expenses and other | 11,831 | 12,622 | ||||||
Restricted cash | 3,772 | 1,787 | ||||||
Deferred tax assets | 2,152 | 532 | ||||||
Total current assets | 211,672 | 176,199 | ||||||
Property and equipment, net | 32,709 | 30,380 | ||||||
Goodwill | 113,263 | 113,915 | ||||||
Intangible assets, net | 43,476 | 49,651 | ||||||
Other assets | 11,681 | 10,639 | ||||||
Restricted cash, less current portion | 11,957 | 10,953 | ||||||
Total assets | $ | 424,758 | $ | 391,737 | ||||
Liabilities and stockholders' equity | ||||||||
Current liabilities: | ||||||||
Current portion of long-term obligations | $ | 48,250 | $ | 14,000 | ||||
Accounts payable | 3,904 | 4,569 | ||||||
Accrued expenses | 52,484 | 32,976 | ||||||
Accrued transportation costs | 54,962 | 61,316 | ||||||
Deferred revenue | 3,687 | 7,055 | ||||||
Reinsurance liability reserve | 10,778 | 12,713 | ||||||
Total current liabilities | 174,065 | 132,629 | ||||||
Long-term obligations, less current portion | 75,250 | 116,000 | ||||||
Other long-term liabilities | 15,359 | 13,527 | ||||||
Deferred tax liabilities | 9,447 | 10,894 | ||||||
Total liabilities | 274,121 | 273,050 | ||||||
Commitments and contingencies (Notes 13 and 16) | ||||||||
Stockholders' equity | ||||||||
Common stock: authorized 40,000,000 shares; $0.001 parvalue; 14,477,312 and 13,785,947 issued and outstanding(including treasury shares) | 14 | 14 | ||||||
Additional paid-in capital | 194,363 | 180,778 | ||||||
Accumulated deficit | (33,641 | ) | (53,079 | ) | ||||
Accumulated other comprehensive loss, net of tax | (1,419 | ) | (893 | ) | ||||
Treasury shares, at cost, 956,442 and 928,478 shares | (15,641 | ) | (15,094 | ) | ||||
Total Providence stockholders' equity | 143,676 | 111,726 | ||||||
Non-controlling interest | 6,961 | 6,961 | ||||||
Total stockholders' equity | 150,637 | 118,687 | ||||||
Total liabilities and stockholders' equity | $ | 424,758 | $ | 391,737 |
See accompanying notes to the consolidated financial statements
The Providence Service Corporation
Consolidated Statements of Income
(in thousands except share and per share data)
Year ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Revenues: | ||||||||||||
Non-emergency transportation services | 770,246 | 750,658 | 581,541 | |||||||||
Human services | 352,436 | 355,231 | 361,439 | |||||||||
Total revenues | 1,122,682 | 1,105,889 | 942,980 | |||||||||
Operating expenses: | ||||||||||||
Cost of non-emergency transportation services | 710,428 | 706,692 | 539,417 | |||||||||
Client service expense | 309,623 | 304,084 | 304,407 | |||||||||
General and administrative expense | 48,633 | 53,383 | 48,861 | |||||||||
Depreciation and amortization | 14,872 | 15,023 | 13,656 | |||||||||
Asset impairment charge | 492 | 2,506 | - | |||||||||
Total operating expenses | 1,084,048 | 1,081,688 | 906,341 | |||||||||
Operating income | 38,634 | 24,201 | 36,639 | |||||||||
Other (income) expense: | ||||||||||||
Interest expense | 7,035 | 7,640 | 10,206 | |||||||||
Loss on extinguishment of debt | 525 | - | 2,463 | |||||||||
Gain on bargain purchase | - | - | (2,711 | ) | ||||||||
Interest income | (141 | ) | (132 | ) | (204 | ) | ||||||
Income before income taxes | 31,215 | 16,693 | 26,885 | |||||||||
Provision for income taxes | 11,777 | 8,211 | 9,945 | |||||||||
Net income | $ | 19,438 | $ | 8,482 | $ | 16,940 | ||||||
Earnings per common share: | ||||||||||||
Basic | $ | 1.44 | $ | 0.64 | $ | 1.28 | ||||||
Diluted | $ | 1.41 | $ | 0.64 | $ | 1.27 | ||||||
Weighted-average number of commonshares outstanding: | ||||||||||||
Basic | 13,499,885 | 13,225,448 | 13,242,702 | |||||||||
Diluted | 13,809,874 | 13,354,613 | 13,321,609 |
See accompanying notes to the consolidated financial statements
The Providence Service Corporation
Consolidated Statements of Comprehensive Income
(in thousands)
Year ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Net income | $ | 19,438 | $ | 8,482 | $ | 16,940 | ||||||
Other comprehensive income (loss): | ||||||||||||
Foreign currency translation adjustments | (526 | ) | 235 | (247 | ) | |||||||
Other comprehensive income (loss) | (526 | ) | 235 | (247 | ) | |||||||
Comprehensive income | $ | 18,912 | $ | 8,717 | $ | 16,693 |
See accompanying notes to the consolidated financial statements
The Providence Service Corporation
Consolidated Statements of Stockholders' Equity
(in thousands except share data)
Common Stock | Additional Paid-In | Accumulated | AccumulatedOtherComprehensive Income | Treasury Stock | Non- Controlling | |||||||||||||||||||||||||||||||
Shares | Amount | Capital | Deficit | (Loss) | Shares | Amount | Interest | Total | ||||||||||||||||||||||||||||
Balance at December 31, 2010 | 13,580,385 | $ | 14 | $ | 172,541 | $ | (78,501 | ) | $ | (881 | ) | 619,768 | $ | (11,384 | ) | $ | 6,961 | $ | 88,750 | |||||||||||||||||
Stock-based compensation | - | - | 3,675 | - | - | - | - | - | 3,675 | |||||||||||||||||||||||||||
Exercise of employee stock options, including nettax shortfall of $100 | 7,872 | - | (44 | ) | - | - | - | - | - | (44 | ) | |||||||||||||||||||||||||
Restricted stock issued | 33,694 | - | - | - | - | 3,808 | (51 | ) | - | (51 | ) | |||||||||||||||||||||||||
Foreign currency translation adjustments | - | - | - | - | (247 | ) | - | - | - | (247 | ) | |||||||||||||||||||||||||
Net income | - | - | - | 16,940 | - | - | - | - | 16,940 | |||||||||||||||||||||||||||
Balance at December 31, 2011 | 13,621,951 | 14 | 176,172 | (61,561 | ) | (1,128 | ) | 623,576 | (11,435 | ) | 6,961 | 109,023 | ||||||||||||||||||||||||
Stock-based compensation | - | - | 3,873 | - | - | - | - | - | 3,873 | |||||||||||||||||||||||||||
Exercise of employee stock options, including nettax shortfall of $215 | 90,915 | - | 733 | - | - | - | - | - | 733 | |||||||||||||||||||||||||||
Restricted stock issued | 73,081 | - | - | - | - | 11,302 | (169 | ) | - | (169 | ) | |||||||||||||||||||||||||
Stock repurchase | - | - | - | - | - | 293,600 | (3,490 | ) | - | (3,490 | ) | |||||||||||||||||||||||||
Foreign currency translation adjustments | - | - | - | - | 235 | - | - | - | 235 | |||||||||||||||||||||||||||
Net income | - | - | - | 8,482 | - | - | - | - | 8,482 | |||||||||||||||||||||||||||
Balance at December 31, 2012 | 13,785,947 | 14 | 180,778 | (53,079 | ) | (893 | ) | 928,478 | (15,094 | ) | 6,961 | 118,687 | ||||||||||||||||||||||||
Stock-based compensation | - | - | 3,079 | - | - | - | - | - | 3,079 | |||||||||||||||||||||||||||
Exercise of employee stock options, including nettax benefit of $437 | 592,126 | - | 10,506 | - | - | - | - | - | 10,506 | |||||||||||||||||||||||||||
Restricted stock issued | 99,239 | - | - | - | 27,964 | (547 | ) | - | (547 | ) | ||||||||||||||||||||||||||
Foreign currency translation adjustments | - | - | - | - | (526 | ) | - | - | - | (526 | ) | |||||||||||||||||||||||||
Net income | - | - | - | 19,438 | - | - | - | - | 19,438 | |||||||||||||||||||||||||||
Balance at December 31, 2013 | 14,477,312 | $ | 14 | $ | 194,363 | $ | (33,641 | ) | $ | (1,419 | ) | 956,442 | $ | (15,641 | ) | $ | 6,961 | $ | 150,637 |
See accompanying notes to the consolidated financial statements
The Providence Service Corporation
Consolidated Statements of Cash Flows
(in thousands)
Year ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Operating activities | ||||||||||||
Net income | $ | 19,438 | $ | 8,482 | $ | 16,940 | ||||||
Adjustments to reconcile net income to net cashprovided by operating activities: | ||||||||||||
Depreciation | 7,738 | 7,537 | 5,921 | |||||||||
Amortization | 7,134 | 7,486 | 7,735 | |||||||||
Provision for doubtful accounts | 3,245 | 2,305 | 3,131 | |||||||||
Stock based compensation | 3,079 | 3,873 | 3,675 | |||||||||
Deferred income taxes | (3,282 | ) | (816 | ) | (530 | ) | ||||||
Amortization of deferred financing costs | 960 | 1,138 | 1,695 | |||||||||
Loss on extinguishment of debt | 525 | - | 2,463 | |||||||||
Excess tax benefit upon exercise of stock options | (1,120 | ) | (91 | ) | (17 | ) | ||||||
Asset impairment charge | 492 | 2,506 | - | |||||||||
Gain on bargain purchase | - | - | (2,711 | ) | ||||||||
Other non-cash charges | 364 | 158 | 645 | |||||||||
Changes in operating assets and liabilities, net of effectsof acquisitions: | ||||||||||||
Accounts receivable | 7,186 | (16,589 | ) | (9,019 | ) | |||||||
Management fee receivable | 659 | 875 | 2,302 | |||||||||
Other receivables | 540 | (319 | ) | 2,334 | ||||||||
Restricted cash | (141 | ) | 163 | (80 | ) | |||||||
Prepaid expenses and other | (856 | ) | 256 | (680 | ) | |||||||
Reinsurance liability reserve | (19 | ) | 1,034 | (431 | ) | |||||||
Accounts payable and accrued expenses | 18,863 | 2,412 | (5,342 | ) | ||||||||
Accrued transportation costs | (6,354 | ) | 13,660 | 5,788 | ||||||||
Deferred revenue | (3,366 | ) | 4,862 | (3,179 | ) | |||||||
Other long-term liabilities | 152 | 3,556 | 398 | |||||||||
Net cash provided by operating activities | 55,237 | 42,488 | 31,038 | |||||||||
Investing activities | ||||||||||||
Purchase of property and equipment | (10,183 | ) | (9,522 | ) | (11,306 | ) | ||||||
Net increase (decrease) in short-term investments | 177 | 444 | (113 | ) | ||||||||
Acquisitions, net of cash acquired | (989 | ) | (190 | ) | (4,889 | ) | ||||||
Restricted cash for reinsured claims losses | (2,848 | ) | 2,633 | 1,692 | ||||||||
Net cash used in investing activities | (13,843 | ) | (6,635 | ) | (14,616 | ) | ||||||
Financing activities | ||||||||||||
Repurchase of common stock, for treasury | (547 | ) | (3,658 | ) | (51 | ) | ||||||
Proceeds from common stock issued pursuant to stockoption exercise | 10,069 | 949 | 56 | |||||||||
Excess tax benefit upon exercise of stock options | 1,120 | 91 | 17 | |||||||||
Proceeds from long-term debt | 76,000 | - | 115,000 | |||||||||
Repayment of long-term debt | (82,500 | ) | (20,493 | ) | (146,811 | ) | ||||||
Debt financing costs | (2,082 | ) | (65 | ) | (2,651 | ) | ||||||
Capital lease payments | (9 | ) | (23 | ) | (15 | ) | ||||||
Net cash provided by (used in) financing activities | 2,051 | (23,199 | ) | (34,455 | ) | |||||||
Effect of exchange rate changes on cash | (313 | ) | 25 | (44 | ) | |||||||
Net change in cash | 43,132 | 12,679 | (18,077 | ) | ||||||||
Cash at beginning of period | 55,863 | 43,184 | 61,261 | |||||||||
Cash at end of period | $ | 98,995 | $ | 55,863 | $ | 43,184 |
See accompanying notes to the consolidated financial statements
The Providence Service Corporation
Supplemental Cash Flow Information
(in thousands)
Year ended December 31, | ||||||||||||
Supplemental cash flow information | 2013 | 2012 | 2011 | |||||||||
Cash paid for interest | $ | 5,839 | $ | 6,505 | $ | 8,605 | ||||||
Cash paid for income taxes | $ | 13,395 | $ | 8,877 | $ | 11,294 | ||||||
Acquisitions: | ||||||||||||
Purchase price | $ | 989 | $ | 190 | $ | 8,573 | ||||||
Less: | ||||||||||||
Cash acquired | - | - | (3,684 | ) | ||||||||
Acquisitions, net of cash acquired | $ | 989 | $ | 190 | $ | 4,889 |
See accompanying notes to the consolidated financial statements
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 FASBAccounting 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 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 | $ | 243 | $ | 243 | ||||
Contractual obligations | 839 | 698 | ||||||
Subtotal restricted cash for contractual obligations | 1,082 | 941 | ||||||
Collateral for letters of credit - Reinsured claims losses | 3,033 | 5,634 | ||||||
Escrow/Trust - Reinsured claims losses | 11,614 | 6,165 | ||||||
Subtotal restricted cash for reinsured claims losses | 14,647 | 11,799 | ||||||
Total restricted cash | 15,729 | 12,740 | ||||||
Less current portion | 3,772 | 1,787 | ||||||
$ | 11,957 | $ | 10,953 |
Of the restricted cash amount at December 31, 2013 and 2012:
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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.
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.
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.
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.
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 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.
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:
December 31, | ||||||||
2013 | 2012 | |||||||
Prepaid insurance | $ | 4,409 | $ | 3,739 | ||||
Prepaid rent | 1,685 | 1,067 | ||||||
Prepaid taxes | 1,426 | 1,358 | ||||||
Prepaid bus tokens and passes | 1,367 | 1,224 | ||||||
Prepaid maintenance agreements and copier leases | 862 | 723 | ||||||
Interest receivable - certificates of deposit | 503 | 679 | ||||||
Prepaid payroll | 105 | 2,494 | ||||||
Other | 1,474 | 1,338 | ||||||
Total prepaid expenses and other | $ | 11,831 | $ | 12,622 |
4. Property and Equipment
Property and equipment consisted of the following:
Estimated | |||||||||||||
Useful | December 31, | ||||||||||||
Life (years) | 2013 | 2012 | |||||||||||
Land | -- | $ | 1,911 | $ | 1,477 | ||||||||
Building |
| 39 | 11,629 | 9,515 | |||||||||
Computer and telecom equipment | 3 | - | 5 | 25,138 | 22,517 | ||||||||
Software |
| 3 | 12,333 | 11,337 | |||||||||
Leasehold improvements | Lease Term | 6,528 | 5,795 | ||||||||||
Furniture and fixtures | 7 | 3,963 | 3,799 | ||||||||||
Automobiles | 5 | 2,732 | 2,113 | ||||||||||
Construction in progress | -- | 1,816 | 2,716 | ||||||||||
66,050 | 59,269 | ||||||||||||
Less accumulated depreciation | 33,341 | 28,889 | |||||||||||
$ | 32,709 | $ | 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:
Human Services | NET Services | Consolidated Total | ||||||||||
Balances at December 31, 2011 | ||||||||||||
Goodwill | $ | 79,223 | $ | 191,215 | $ | 270,438 | ||||||
Accumulated impairment losses | (60,701 | ) | (96,000 | ) | (156,701 | ) | ||||||
18,522 | 95,215 | 113,737 | ||||||||||
Psych Support Inc. acquisition | 125 | - | 125 | |||||||||
WCG foreign currency translation adjustment | 53 | - | 53 | |||||||||
Balances at December 31, 2012 | ||||||||||||
Goodwill | 79,401 | 191,215 | 270,616 | |||||||||
Accumulated impairment losses | (60,701 | ) | (96,000 | ) | (156,701 | ) | ||||||
18,700 | 95,215 | 113,915 | ||||||||||
WCG foreign currency translation adjustment | (160 | ) | - | (160 | ) | |||||||
Impairment charge | (492 | ) | - | (492 | ) | |||||||
Balances at December 31, 2013 | ||||||||||||
Goodwill | 79,241 | 191,215 | 270,456 | |||||||||
Accumulated impairment losses | (61,193 | ) | (96,000 | ) | (157,193 | ) | ||||||
$ | 18,048 | $ | 95,215 | $ | 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 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) | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||||||||
Management contracts | 10 | $ | 11,422 | $ | (9,975 | ) | $ | 12,008 | $ | (9,347 | ) | |||||||||
Customer relationships | 15 | 73,990 | (33,319 | ) | 74,130 | (28,609 | ) | |||||||||||||
Customer relationships | 10 | 1,417 | (1,027 | ) | 1,417 | (886 | ) | |||||||||||||
Customer relationships | 3 | 989 | (21 | ) | - | - | ||||||||||||||
Developed technology | 6 | - | - | 6,000 | (5,067 | ) | ||||||||||||||
Restrictive covenants | 5 | - | - | 35 | (30 | ) | ||||||||||||||
Total | 14.1* | $ | 87,818 | $ | (44,342 | ) | $ | 93,590 | $ | (43,939 | ) |
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 | Amount | |||
2014 | $ | 6,309 | ||
2015 | 5,715 | |||
2016 | 5,232 | |||
2017 | 4,817 | |||
2018 | 4,817 | |||
Thereafter | 16,586 | |||
Total | $ | 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:
December 31, | ||||||||
2013 | 2012 | |||||||
Accrued compensation | $ | 22,940 | $ | 18,438 | ||||
NET Services contract adjustments | 12,445 | 3,119 | ||||||
Other | 17,099 | 11,419 | ||||||
$ | 52,484 | $ | 32,976 |
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-annuallybeginning 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 payableat 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% atDecember 31, 2013) through August 2018 with interest payable at least onceevery three months | 16,000 | - | ||||||
$60,000 term loan, LIBOR plus 1.75% - 2.50%, with principal payable quarterlybeginning December 31, 2014 and interest payable at least once every three months,through August 2018 | 60,000 | - | ||||||
123,500 | 130,000 | |||||||
Less current portion | 48,250 | 14,000 | ||||||
$ | 75,250 | $ | 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 | Amount | |||
2014 | $ | 48,250 | ||
2015 | 3,375 | |||
2016 | 4,875 | |||
2017 | 6,750 | |||
2018 | 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”).
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.
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 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 | $ | 352,436 | $ | 770,246 | $ | - | $ | 1,122,682 | ||||||||
Depreciation and amortization | 7,147 | 7,725 | - | 14,872 | ||||||||||||
Operating income | 640 | 37,994 | - | 38,634 | ||||||||||||
Net interest expense | 196 | 6,698 | - | 6,894 | ||||||||||||
Loss on extinguishment of debt | 265 | 260 | - | 525 | ||||||||||||
Total assets | 140,964 | 247,666 | 36,128 | 424,758 | ||||||||||||
Capital expenditures (d) | 2,538 | 5,308 | 3,326 | 11,172 |
For the year ended December 31, 2012 | ||||||||||||||||
Human Services (c) | NET Services | Corporate(a)(b) | Consolidated Total | |||||||||||||
Revenues | $ | 355,231 | $ | 750,658 | $ | - | $ | 1,105,889 | ||||||||
Depreciation and amortization | 7,408 | 7,615 | - | 15,023 | ||||||||||||
Operating income | 707 | 23,494 | - | �� | 24,201 | |||||||||||
Net interest expense (income) | (61 | ) | 7,569 | - | 7,508 | |||||||||||
Total assets | 145,770 | 216,698 | 29,269 | 391,737 | ||||||||||||
Capital expenditures | 2,489 | 6,271 | 762 | 9,522 |
For the year ended December 31, 2011 | ||||||||||||||||
Human Services(c) | NET Services | Corporate(a)(b) | Consolidated Total | |||||||||||||
Revenues | $ | 361,439 | $ | 581,541 | $ | - | $ | 942,980 | ||||||||
Depreciation and amortization | 7,082 | 6,574 | - | 13,656 | ||||||||||||
Operating income | 11,221 | 25,418 | - | 36,639 | ||||||||||||
Net interest expense | 47 | 9,955 | - | 10,002 | ||||||||||||
Gain on bargain purchase | 2,711 | - | - | 2,711 | ||||||||||||
Loss on extinguishment of debt | 1,857 | 606 | - | 2,463 | ||||||||||||
Total assets | 155,710 | 204,667 | 18,676 | 379,053 | ||||||||||||
Capital expenditures | 3,023 | 4,302 | 3,981 | 11,306 |
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December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Cash | $ | 22,424 | $ | 18,017 | $ | 6,921 | ||||||
Property and equipment | 10,407 | 8,727 | 9,150 | |||||||||
Prepaid expenses | 2,599 | 2,128 | 2,160 | |||||||||
Other assets | 698 | 397 | 445 |
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The following table details the Company’s revenues, net income and long-lived assets by geographic location.
For the year ended December 31, 2013 | ||||||||||||
United States (a) | Canada | Consolidated Total | ||||||||||
Revenue | $ | 1,112,120 | $ | 10,562 | $ | 1,122,682 | ||||||
Net income | 19,527 | (89 | ) | 19,438 | ||||||||
Long-lived assets | 186,415 | 3,033 | 189,448 |
For the year ended December 31, 2012 | ||||||||||||
United States (a) | Canada | Consolidated Total | ||||||||||
Revenue | $ | 1,091,778 | $ | 14,111 | $ | 1,105,889 | ||||||
Net income | 11,045 | (2,563 | ) | 8,482 | ||||||||
Long-lived assets | 190,415 | 3,531 | 193,946 |
For the year ended December 31, 2011 | ||||||||||||
United States (a) | Canada | Consolidated Total | ||||||||||
Revenue | $ | 920,341 | $ | 22,639 | $ | 942,980 | ||||||
Net income | 16,924 | 16 | 16,940 | |||||||||
Long-lived assets | 195,777 | 5,997 | 201,774 |
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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.
The following table reflects the total number of shares of the Company’s common stock reserved for future issuance as of December 31, 2013:
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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”).
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.
Common Stock. To achieve the purposes of the Company’s stock-based compensation program described above,this purpose, 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 underIn August 2012, the 2003 Plan andstockholders approved amendments to the 2006 Plan, were generally ten year options granted at fair market valuewhich included, among other things, the adoption of a fungible share plan design, a prohibition on liberal share counting and a prohibition on the dateissuance of grantdividend equivalent rights with time based vesting over a period determined atrespect to appreciation awards or unearned performance awards all as set forth in 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 remaining available for future grants | ||||||||||||||||
Number of shares of the Company's common stock authorized for issuance | ||||||||||||||||
Number of shares of the Company's common stock subject to | ||||||||||||||||
Options | Stock Grants | |||||||||||||||
1997 Plan | 428,572 | - | - | - | ||||||||||||
2003 Plan | 1,400,000 | - | 270,502 | - | ||||||||||||
2006 Plan | 4,400,000 | 1,549,786 | 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, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Cost of non-emergency transportation services | $ | 1,054 | $ | 1,354 | $ | 1,069 | ||||||
Client service expense | 604 | 792 | 652 | |||||||||
General and administrative expense | 1,421 | 1,727 | 1,954 | |||||||||
Total stock-based compensation | $ | 3,079 | $ | 3,873 | $ | 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.amended.
The Compensation Committee considers several factors to determine the timing, amount and type of awards to grant under our 2006 Plan including the achievement of financial performance measures established by the Board, base salaries and non-equity incentive compensation, and surveys of compensation data for comparable companies prepared by a consultant.
Under the 2006 Plan, the Compensation Committee has broad discretion 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.
As of December 31, 2013, we had a total of 2,385,910 unissued shares of Common Stock under the 2006 Plan, including 836,124 shares reserved for issuance upon the exercise of outstanding options and vesting of restricted stock and PRSU awards.
2013 Annual Equity-Based Program
Under the Equity-Based Program, as part of the mix of total targeted compensation that was set for our Named Executive Officers for 2013, each of the Named Executive Officers (except for Messrs. Rustand and Wilson) was entitled to receive equity-based awards under the 2006 Plan equal in value to approximately $496,800, $496,800, $366,300 and $195,000 for Messrs. Norris, Schwarz, Furman and Crooms, respectively.
Additional information with respect to our Equity-Based Program is set forth earlier in this “Executive Compensation” section under the heading entitled “Compensation Discussion and Analysis — Determinations Made Regarding Executive Compensation for 2013 — Equity-Based Compensation.”
Outstanding Equity Awards at December 31, 2013
The following table summarizesreflects the stock option activity forequity awards granted by us to the year endedNamed Executive Officers outstanding at 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 beginningof period | 1,724,421 | $ | 19.48 | |||||||||||||
Granted | - | - | ||||||||||||||
Exercised | (592,126 | ) | 17.01 | |||||||||||||
Forfeited or expired | (258,043 | ) | 24.22 | |||||||||||||
Outstanding at endof period | 874,252 | $ | 19.76 | 4.2 | $ | 5,812 | ||||||||||
Vested or expected tovest at end of period | 768,945 | $ | 20.64 | 4.1 | $ | 4,515 | ||||||||||
Exercisable at endof period | 872,009 | $ | 19.78 | 4.2 | $ | 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:
Year ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Weighted-average grant date fair value | Not Applicable | $ | 6.92 | $ | 10.40 | |||||||
Options exercised: | ||||||||||||
Total intrinsic value | $ | 4,544 | $ | 351 | $ | 47 | ||||||
Cash received | $ | 10,069 | $ | 949 | $ | 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 | 225,744 | $ | 15.25 | |||||
Granted | 63,407 | $ | 24.30 | |||||
Vested | (99,239 | ) | $ | 16.01 | ||||
Forfeited | (31,070 | ) | $ | 18.69 | ||||
Non-vested at December 31, 2013 | 158,842 | $ | 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.
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:
Year ended December 31, | ||||||||||||
2012 | 2011 | |||||||||||
Expected dividend yield | 0.0% | 0.0% | ||||||||||
Expected stock price volatility | 82.1% | 86.8% | - | 88.1% | ||||||||
Risk-free interest rate | 0.4% | - | 0.5% | 1.9% | - | 2.6% | ||||||
Expected life of options (in years) | 3.3 | - | 3.6 | 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 | Fiscal Year Performance Vesting | ||||||||||||||||||||
Return on Equity Performance Levels | Settlement Form | ||||||||||||||||||||
Date of Grant | Threshold | Target | Vesting | ||||||||||||||||||
March 14, 2011 | 122,144 | 14 | % | 18 | % | 2011 | Graded vesting | Cash | |||||||||||||
January 13, 2012 | 113,891 | 14 | % | 18 | % | 2012 | - | 2014 | Cliff vesting | Cash | |||||||||||
March 28, 2013 | 67,276 | 12 | % | 15 | % | 2013 | - | 2015 | December 31, 2015 | Stock | |||||||||||
May 7, 2013 | 18,926 | 12 | % | 15 | % | 2013 | - | 2015 | December 31, 2015 | Stock | |||||||||||
June 7, 2013 | 17,424 | 12 | % | 15 | % | 2013 | - | 2015 | December 31, 2015 | 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 $560 in both 2013 and 2012.
Option Awards (1) | Stock Awards | PRSU Awards | ||||||||||||||
Name and Grant Date | Number of Securities Underlying Unexercised Options (#) Exercisable (2) | Number of Securities Underlying Unexercised Options (#) Unexercisable (2) | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) (3)(4) | Market Value of Shares or Units of Stock That Have Not Vested ($) (3)(4) | Equity incentive plan awards: number of unearned shares, units or other rights that have not vested (#)(5) | Equity incentive plan awards: market or payout value of unearned shares, units or other rights that have not vested ($)(6) | ||||||||
Warren S. Rustand (7) | ||||||||||||||||
5/26/05 | 10,000 | — | 24.05 | 5/26/15 | — | — | — | — | ||||||||
12/6/05 | 10,000 | — | 28.47 | 12/6/15 | — | — | — | — | ||||||||
1/3/07 | 10,000 | — | 24.59 | 1/3/17 | — | — | — | — | ||||||||
6/9/08 | 10,000 | — | 26.14 | 6/9/18 | — | — | — | — | ||||||||
6/14/10 | 7,814 | — | 16.35 | 6/14/20 | — | — | — | — | ||||||||
5/7/11 | 1,333 | 667 | 14.16 | 5/7/21 | — | — | — | — | ||||||||
11/21/12 | — | 22,500 | 12.59 | 11/20/17 | — | — | — | — | ||||||||
13,705 | 352,493 | 6,309 | 162,259 | |||||||||||||
Craig A. Norris | ||||||||||||||||
2/16/05 | 5,000 | — | 20.62 | 2/16/15 | — | — | — | — | ||||||||
12/6/05 | 20,000 | — | 28.47 | 12/6/15 | — | — | — | — | ||||||||
6/9/08 | 20,833 | — | 26.14 | 6/9/18 | — | — | — | — | ||||||||
5/20/10 | 30,000 | — | 17.35 | 5/20/20 | — | — | — | — | ||||||||
3/14/11 | 7,999 | 4,001 | 14.72 | 3/14/21 | — | — | — | — | ||||||||
18,903 | 486,185 | 7,165 | 184,284 | |||||||||||||
Herman M. Schwarz | ||||||||||||||||
6/9/08 | 12,723 | — | 26.14 | 6/9/18 | — | — | — | — | ||||||||
5/15/09 | 20,000 | — | 11.72 | 5/15/19 | — | — | — | — | ||||||||
5/20/10 | 30,000 | — | 17.35 | 5/20/20 | — | — | — | — | ||||||||
3/14/11 | 7,999 | 4,001 | 14.72 | 3/14/21 | — | — | — | — | ||||||||
34,663 | 891,532 | 7,165 | 184,284 | |||||||||||||
Robert E. Wilson | ||||||||||||||||
11/21/12 | 30,000 | 30,000 | 12.59 | 11/20/17 | — | — | — | — | ||||||||
Fred D. Furman | ||||||||||||||||
12/6/05 | 20,000 | — | 28.47 | 12/6/15 | — | — | — | — | ||||||||
6/9/08 | 14,032 | — | 26.14 | 6/9/18 | — | — | — | — | ||||||||
3/14/11 | — | 4,001 | 14.72 | 3/14/21 | — | — | — | — | ||||||||
Leamon A. Crooms III | ||||||||||||||||
5/20/10 | 10,827 | — | 17.35 | 3/31/14 | — | — | — | — | ||||||||
3/14/11 | 3,666 | — | 14.72 | 3/31/14 | — | — | — | — |
(1) | On December 6, 2005 and again on December 30, 2008, the Board, upon recommendation of the Compensation Committee, approved the acceleration of the vesting dates of all outstanding unvested stock options and restricted stock previously awarded to eligible directors, employees and consultants, including stock options and restricted stock awards granted to the Named Executive Officers effective December 29, 2005 and December 30, 2008, respectively. All other terms of the stock options and restricted stock remained the same. | |||
(2) | The options expire ten years from the date of grant (except for the options granted to Messrs. Rustand and Wilson, which expire five years from the date of grant). The options have an exercise price equal to the closing market price of our Common Stock on the date of grant. Except for the options granted to Messrs. Rustand and Wilson, the options and restricted stock awards vest in three equal annual installments beginning one year from the date of grant. The options granted to Mr. Rustand vest at the end of his current term as director in 2014. The unvested options granted to Mr. Wilson will vest on December 31, 2014. | |||
(3) | Represents unvested restricted stock awards that vest as follows: |
Award | Grant Date | Vesting | ||
Restricted Stock | 3/14/11 | 1/3 per year beginning on the anniversary of the grant | ||
Restricted Stock | 1/13/12 | 1/3 per year beginning on the anniversary of the grant | ||
Restricted Stock | 3/22/12 | 1/3 per year beginning on the anniversary of the grant | ||
Restricted Stock | 3/28/13 | 1/3 per year beginning on the anniversary of the grant | ||
Restricted Stock | 5/7/13 | 1/3 per year beginning on December 31, 2013 | ||
Restricted Stock | 6/7/13 | 1/3 per year beginning on the anniversary of the grant |
(4) | The market value of the unvested restricted stock awards was calculated using the closing market price of our Common Stock on December 31, 2013. | |||
(5) | Represents unvested performance restricted stock units granted during 2013, at the threshold performance level, that vest on December 31, 2015. | |||
(6) | The market value of the unvested performance restricted stock units was calculated using the closing market price of our Common Stock on December 31, 2013. | |||
(7) | The outstanding equity awards for Mr. Rustand include awards granted to him as both a director and executive officer. |
Option Exercises and Stock Vesting Table
The following table summarizesprovides additional information about the activity ofvalue realized by the sharesNamed Executive Officers on option award exercises and weighted-average grant date fair value of the Company’s stock settled PRSUsand PRSU award vesting during the year ended December 31, 2013: 2013.
Shares | Weighted-average grant date fair value | |||||||
Non-vested at December 31, 2012 | - | $ | - | |||||
Granted | 103,626 | $ | 20.05 | |||||
Forfeited | (30,094 | ) | $ | 20.24 | ||||
Non-vested at December 31, 2013 | 73,532 | $ | 19.98 |
Option Awards | Stock Awards (1) | |||||||||||||||
Name | Number of | Value Realized on Exercise | Number of | Value | ||||||||||||
Warren S. Rustand (2) | - | - | 9,877 | 226,098 | ||||||||||||
Craig A. Norris | - | - | 10,559 | 185,350 | ||||||||||||
Herman M. Schwarz | - | - | 17,802 | 322,735 | ||||||||||||
Fred D. Furman | 66,824 | 522,129 | 17,050 | 365,320 | ||||||||||||
Leamon A. Crooms III | - | - | 2,818 | 53,790 |
(1) | Excludes vested PRSUs that were settled in cash on March 14, 2014 as follows: |
Name | Number of Shares Vested (#) | Value Realized Upon Settlement ($) | ||
Craig A. Norris | 6,314 | 97,424 | ||
Herman M. Schwarz | 5,116 | 78,947 | ||
Fred D. Furman | 2,758 | 42,553 |
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.
(2) | The number of shares acquired on vesting and value realized on vesting for Mr. Rustand included awards granted to him as both a director and executive officer. |
12. Earnings Per Share
The following table details the computation of basic and diluted earnings per share:
Year ended December 31, | ||||||||||||
2013 | 2012 | 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 | 292,937 | 129,165 | 78,907 | |||||||||
Performance-based restricted stock units | 17,052 | - | - | |||||||||
Denominator for diluted earnings per share -- adjustedweighted-average shares assumed conversion | 13,809,874 | 13,354,613 | 13,321,609 | |||||||||
Basic earnings per share | $ | 1.44 | $ | 0.64 | $ | 1.28 | ||||||
Diluted earnings per share | $ | 1.41 | $ | 0.64 | $ | 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.
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:
Operating Leases | ||||
2014 | $ | 15,662 | ||
2015 | 11,845 | |||
2016 | 8,956 | |||
2017 | 6,536 | |||
2018 | 4,041 | |||
Thereafter | 8,866 | |||
Total future minimum lease payments | $ | 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 ServicesNon-qualified Deferred Compensation
The Company maintainsWe maintain 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’sour eligible employees and independent contractors ofor 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. The committee administering the Deferred Compensation Plan determines which investment alternatives are available under the Deferred Compensation Plan. Each participant’s account(s) is/are measured by reference to various investment alternatives available under the Deferred Compensation Plan from time to time as selected by the participant. A participant directs the committee as to which investment alternative he or she has selected to measure his or her deferred compensation account. Each account will be valued on each day securities are traded on a national stock exchange based upon the performance of the investment alternative(s) selected by the participant. Generally, a participant elects in the participation agreement whether to receive the vested balance of his or her deferred compensation account in a lump sum or installments. Installment payments will be made annually over up to either a two- or 15-year period as set forth in the plan. Distributions may be made upon separation from service, disability, death or a change in control. There may also be in-service distributions, education distributions, de minimis distributions and unforeseen events distributions as provided for in the Deferred Compensation Plan. Payment may be delayed to the extent permitted in accordance with regulations and guidance under Section 409A of the Code, and the rulings and regulations thereunder. The Company may terminate the Deferred Compensation Plan at any time. The Deferred Compensation Plan is unfunded and benefits are paid from our general assets.
We also maintain a Rabbi Trust Plan for highly compensated employees of our NET Services operating segment. Under the Rabbi Trust Plan, participants may defer up to 10% of their base salary and all or a portion of their annual bonus. The amount of compensation to be deferred by each participant will be credited to the participant’s account and the value of the participant’s account will be determined in accordance with the Rabbi Trust Plan. The committee administering the Rabbi Trust Plan designates one or more investment alternative(s) solely as a method of calculating any earnings, gains, losses and other adjustments with respect to account balances credited to a participant’s account under the Rabbi Trust Plan. The account amount will be valued as of the close of business on the business day when the published or calculated value of the investment alternative(s) selected becomes effective generally, but not more frequently than once per business day. If the committee designates more than one investment alternative to measure the value of each account, a participant is required to select one or more investment alternatives to calculate the adjustments to be credited or debited to his or her account. Each participant’s account will be adjusted to reflect the investment performance of the selected investment alternative(s). No participant, beneficiary or heir shall have the right to transfer, assign, anticipate, hypothecate or otherwise encumber any part or all of the amounts payable under the Rabbi Trust Plan. Distributions are made upon certain distribution events, as set forth in the Rabbi Trust Plan, such as disability, death, retirement or termination of employment. Payment of distribution, other than in connection with death or termination of employment prior to retirement, will be made in cash in either a lump sum or annually up to 10 years as selected by the participant. If a participant does not make an election, the distribution will be payable annually over three years. In the event of death prior to retirement or termination of employment, with or without cause, the distribution will be made in one lump sum payment. A participant has the right to apply to the committee for a hardship distribution in the event the participant incurs an unforeseeable emergency. Payment may be delayed to the extent permitted in accordance with regulations and guidance under Section 409A of the Code, and the rulings and regulations thereunder. The committee administering the Rabbi Trust Plan has the right to terminate the Plan. The Rabbi Trust Plan is unfunded and benefits are paid from our general assets under the Rabbi Trust Plan.
None of the Named Executive Officers have elected to participate in any of our deferred compensation plans.
Potential Payments Upon Termination or Change in Control
NET ServicesGeneral
Each Named Executive Officer’s employment agreement provides for severance payments in the event of termination of employment under certain circumstances and a payment in the event of a Change in Control, none of which include excise tax gross-ups.
The Company maintained a qualified defined contribution plan under Section 401(k)receipt of the IRCpayments and benefits to the Named Executive Officers under the employment agreements are generally conditioned upon their complying with non-competition, non-solicitation/non-piracy and non-disclosure provisions. By the terms of such agreements, the executives acknowledge that a breach of some or all of the covenants described therein will entitle us to injunctive relief restraining the commission or continuance of any such breach, in addition to any other available remedies.
The Compensation Committee considered certain legal and tax provisions, fairness to stockholders, tenure of each executive officer and general corporate practice to select the events that will trigger payments under the employment agreements noted below.
Severance Payments
Each Named Executive Officer (except for all employees of its NET Services operating segment through December 31, 2011. Under this plan, the Company contributed an amountMessrs. Rustand and Wilson) under their respective employment agreement is eligible to receive a severance benefit equal to 25%one and one half times the executive officer’s base salary upon executing a general release in favor of us in the event of a termination of the first 5%executive officer either by us without Cause, or by the executive officer for Good Reason (each as defined below). Upon termination without Cause, Messrs. Rustand’s and Wilson’s employment agreements entitle them to severance equal to certain earned bonus payments and, in the case of participant elective contributions. AtMr. Rustand, the greater of his base salary payable through the end of each plan year, the Company could also makeagreement term or six months of his base salary, and, in the case of Mr. Wilson, his base salary through the end of the agreement term.
Under the employment agreements, “Cause” is defined as:
Fraud or theft committed by the employee against us or any of our subsidiaries, affiliates, joint ventures and related organizations, including any entity managed by us (collectively referred to as “Affiliates”), or commission of a contributionfelony; or
Gross negligence of the employee or willful misconduct by the employee that results, in either case, in material economic harm to us or our Affiliates; or
Breach of any provision by the employee of the Employment Agreement or breach of any fiduciary duty or duty of loyalty owed to us or our Affiliates, if such breach continues uncured for a period 10 days after written notice from us to the employee specifying the failure, refusal, or violation and our intention to terminate the Employment Agreement for Cause; or
Conduct of the employee tending to bring us or our Affiliates into public disgrace; or
Neglect or refusal by the employee to perform duties or responsibilities as directed by us, the Board or any executive committee established by the Board, or violation by the employee of any express direction of any lawful rule or regulation established by us or the Board or any committee established by the Board which is consistent with the scope of the employee’s duties under the Employment Agreement, if such failure, refusal, or violation continues uncured for a period 10 days after written notice from us to the employee specifying the failure, refusal, or violation and our intention to terminate the Employment Agreement for Cause; or
Commission of any acts or omissions by the employee resulting in or intended to result in direct material personal gain to the employee at our or our Affiliates’ expense; or
Employee materially compromises our or our Affiliates’ trade secrets or other confidential and proprietary information.
Cause does not include a bona fide disagreement over a corporate policy, so long as the employee does not willfully violate on a discretionarycontinuing basis on behalf of participants who have made elective contributions forspecific written directions from the plan year. In no event did participant sharesBoard or any executive committee of the Company’s matching contribution exceed 1.25% of participants’ compensation forBoard, which directions are consistent with the plan year. For the year ended December 31, 2011, the Company made contributions to this plan totaling approximately $135. Effective January 1, 2012, employeesprovisions of the NET Services segment were transferredEmployment Agreement. Action or inaction by the employee is not considered “willful” unless done or omitted by him intentionally and without his reasonable belief that his action or inaction was in our or our Affiliates’ best interests, and does not include failure to act by reason of total or partial incapacity due to physical or mental illness.
Under the Employment Agreements, “Good Reason” is defined as:
The assignment to the Human Services operating segment 401(k) planemployee by us of any duties inconsistent with the employee’s status with us or a substantial alteration in the nature or status of the employee’s responsibilities from those in effect on the effective date of the Employment Agreement, or a reduction in the employee’s titles or offices as discussed above.in effect on the effective date of the Employment Agreement, except in connection with the termination of his employment for Cause or disability or as a result of the employee’s death, or by the employee other than for Good Reason, or our establishment of a new office to which the employee may be asked to report, or our hiring of a President or other officer which may result in the reassignment of some of the employee’s duties to someone in our employ below the level of the employee; or
A reduction by us in the employee’s base salary as in effect on the effective date of the Employment Agreement or as the same may be increased from time to time during the term of the employment agreement; or
The relocation of the employee to one of our offices located more than ninety (90) miles from their designated office location or, in the case of Mr. Schwarz, outside of the greater metropolitan area of Atlanta, GA; or
Any material breach by us of a material term or provision contained in the Employment Agreement, which breach is not cured within thirty (30) days following the receipt by the Board of written notice of such breach.
The Company also maintainstable below includes a 409 (A) Deferred Compensation Rabbi Trust Plan for highly compensated employeesdescription and the amount of its NET Services operating segment. This plan was put in placeestimated payments and benefits that would be provided by us (or our successor) to compensate for the inability of highly compensated employees to take full advantageeach of the Company’s 401(k) plan. Named Executive Officers employed by us as of December 31, 2013, under the Employment Agreements, assuming that such agreement had been in effect and the termination circumstance occurred on December 31, 2013 and did not involve a Change in Control (as defined below):
Reason for Termination of Employment | ||||||||||
Named Officer and Nature of | Voluntary by | Termination | Cause | Death | Disability | |||||
Warren S. Rustand: | ||||||||||
Total cash payment | – | 590,000 | – | – | – | |||||
Cost of continuation of benefits | – | – | – | – | – | |||||
Value of accelerated stock option and stock awards (1) | – | – | – | – | – | |||||
Total | – | 590,000 | – | – | – | |||||
Craig A. Norris: | ||||||||||
Total cash payment | – | 648,000 | – | – | – | |||||
Cost of continuation ofbenefits | – | – | – | – | – | |||||
Value of accelerated stock option and stock awards (1) | – | – | – | – | – | |||||
Total | – | 648,000 | – | – | – | |||||
Herman M. Schwarz: | ||||||||||
Total cash payment | – | 648,000 | – | – | – | |||||
Cost of continuation ofbenefits | – | – | – | – | – | |||||
Value of accelerated stock option and stock awards (1) | – | – | – | – | – | |||||
Total | – | 648,000 | – | – | – | |||||
Robert E. Wilson: | ||||||||||
Total cash payment | – | 400,000 | – | – | – | |||||
Cost of continuation of benefits | – | – | – | – | – | |||||
Value of accelerated stock option and stock awards (1) | – | – | – | – | – | |||||
Total | – | 400,000 | – | – | – |
15. Income Taxes____________________
(1) | Except for the equity-based awards granted to each Named Executive Officer in 2013, 2012 and 2011, all equity awards were vested at December 31, 2013. |
(2) | The employment agreements for Messrs. Rustand and Wilson do not provide for severance for termination by the executive for “Good Reason.” |
The federal and state income tax provision is summarized as follows:
Year ended December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Federal: | ||||||||||||
Current | $ | 12,666 | $ | 6,909 | $ | 9,262 | ||||||
Deferred | (2,805 | ) | (81 | ) | (302 | ) | ||||||
9,861 | 6,828 | 8,960 | ||||||||||
State: | ||||||||||||
Current | $ | 2,412 | $ | 2,124 | $ | 1,253 | ||||||
Deferred | (478 | ) | 85 | (21 | ) | |||||||
1,934 | 2,209 | 1,232 | ||||||||||
Foreign: | ||||||||||||
Current | $ | (19 | ) | $ | (6 | ) | $ | (40 | ) | |||
Deferred | 1 | (820 | ) | (207 | ) | |||||||
(18 | ) | (826 | ) | (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, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Federal statutory rates | 35 | % | 35 | % | 35 | % | ||||||
Federal income tax atstatutory rates | $ | 10,925 | $ | 5,844 | $ | 9,410 | ||||||
Change in valuation allowance | 185 | 181 | (417 | ) | ||||||||
State income taxes, net offederal benefit | 1,198 | 1,436 | 801 | |||||||||
Difference between federal statutoryand foreign tax rate | 15 | 384 | 50 | |||||||||
Stock option expense | (862 | ) | 605 | 619 | ||||||||
Meals and entertainment | 93 | 67 | 110 | |||||||||
Bargain purchase gain on theacquisition of ReDCo | - | - | (949 | ) | ||||||||
Change in workers' compensation liabilityaccural related to ReDCo | - | (372 | ) | - | ||||||||
Other | 223 | 66 | 321 | |||||||||
Provision for income taxes | $ | 11,777 | $ | 8,211 | $ | 9,945 | ||||||
Effective income tax rate | 38 | % | 49 | % | 37 | % |
Deferred income taxes reflectChange in Control Payments
Certain payment provisions of the net tax effectsemployment agreements are also triggered by a “Change in Control.” Under the Employment Agreements, a “Change in Control” is defined as an event or events, in which:
any “person” as defined in Sections 13(d) and 14(d) of temporary differences between the carryingExchange Act (other than (i) us or our subsidiaries, (ii) any fiduciary holding securities under our employee benefit plan or our subsidiaries, or (iii) any company owned by our stockholders), is or becomes the “beneficial owner” of 25% (50% in the case of Messrs. Rustand and Wilson) or more of our voting outstanding securities;
we consummate (i) mergers or consolidations as more specifically described in the Employment Agreements, (ii) a liquidation or (iii) the sale or disposition of all or substantially all of our assets; or
other than in the case of Messrs. Rustand and Wilson, a majority of our directors are replaced in certain circumstances during any period of two consecutive years.
Mr. Schwarz’s employment agreement also addresses a change in control of more than 50% of the combined voting power of the outstanding securities of Logisticare.
In the event of a Change in Control of the Company during the term of their employment agreements, and prior to the 24 month anniversary of the consummation date of the Change in Control (i) we terminate the executive’s employment without Cause, (ii) the executive terminates his employment for Good Reason, in lieu of any other amounts payable under the Employment Agreements, or (iii) the Employment Agreements expire by their terms and we do not offer to renew the agreement for an additional term to expire no earlier than the 24 month anniversary of assetsthe consummation date of the Change in Control, each of Messrs. Norris and liabilitiesSchwarz would receive a lump sum payment equal to two times the average of his annual W-2 compensation from us for financial reporting purposesthe most recent five taxable years ending before the effective date of a Change in Control. The lump sum payment will be paid to the Named Executive Officer within ten days of his termination of employment following the Change in Control. Messrs. Rustand’s and Wilson’s employment agreements entitle them to receive (i) the greater of (a) annual base salary through the end of the term of the employment agreement or (b) fifty percent (50%) of annual base salary, and (ii) a pro-rata portion of any bonus earned prior to termination if a Change in Control occurs during the agreement term and after such Change in Control but prior to the end of the term, they are terminated without Cause.
Upon a Change in Control each of the Named Executive Officers is entitled to an accelerated vesting and payment of stock options, restricted stock and PRSU awards granted to that Named Executive Officer. However, if the sum of any lump payments, the value of any accelerated vesting of stock options and restricted stock awards, and the amounts used for income tax purposes. Significant componentsvalue of any other benefits payable to the Named Executive Officer, would constitute an “excess parachute payment” (as defined in Section 280G of the Company’s deferred tax assets and liabilities are as follows: Code), then such lump sum payment or other benefit will be reduced to the largest amount that will not result in receipt by the Named Executive Officer of a parachute payment.
December 31, | ||||||||
2013 | 2012 | |||||||
Deferred tax assets: | ||||||||
Net operating loss carryforwards | $ | 1,153 | $ | 1,183 | ||||
Accounts receivable allowance | 905 | - | ||||||
Property and equipment depreciation | 797 | 632 | ||||||
Accrued items and reserves | 3,004 | 1,472 | ||||||
Nonqualified stock options | 1,626 | 1,654 | ||||||
Deferred rent | 657 | 676 | ||||||
Deferred financing costs | - | 201 | ||||||
Other | 418 | 431 | ||||||
8,560 | 6,249 | |||||||
Deferred tax liabilities: | ||||||||
Prepaids | 1,943 | 1,592 | ||||||
Property and equipment depreciation | 4,959 | 5,459 | ||||||
Goodwill and intangibles amortization | 7,754 | 8,893 | ||||||
Other | 385 | 38 | ||||||
15,041 | 15,982 | |||||||
Net deferred tax liabilities | (6,481 | ) | (9,733 | ) | ||||
Less valuation allowance | (814 | ) | (629 | ) | ||||
Net deferred tax liabilities | $ | (7,295 | ) | $ | (10,362 | ) | ||
Current deferred tax assets, net of valuation allowance of $436and $238 for 2013 and 2012, respectively | $ | 2,152 | $ | 532 | ||||
Noncurrent deferred tax liabilities, net of valuation allowanceof $378 and $391 for 2013 and 2012, repectively | (9,447 | ) | (10,894 | ) | ||||
$ | (7,295 | ) | $ | (10,362 | ) |
AtThe following table quantifies the estimated maximum amount of payments and benefits under the Employment Agreements and agreements relating to awards granted under our 2006 Plan to which the Named Executive Officers employed by us as of December 31, 2013 thewould have been entitled upon a Change in Control of our 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 | 240 | |||
2016 | 2,136 | |||
2017 | 1,988 | |||
2018 | - | |||
Thereafter | 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 dependentthat occurred 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 coursetermination 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.employment.
Name | Change in Control Payment | Value of Accelerated Vesting of Equity Awards | Total Termination Benefits | |||
Warren S. Rustand | 1,180,000 | 501,742 | 1,681,742 | |||
Craig A. Norris (2) | 1,748,640 | 867,138 | 2,615,778 | |||
Herman M. Schwarz | 1,004,216 | 874,665 | 1,878,881 | |||
Fred D. Furman | 1,537,591 | 626,392 | 2,163,983 | |||
Robert E. Wilson | 400,000 | 71,746 | 471,746 |
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:
December 31, | ||||||||||||
2013 | 2012 | 2011 | ||||||||||
Unrecognized tax benefits, beginning of year | $ | 254 | $ | 324 | $ | 173 | ||||||
Increase (decrease) related to prior year positions | 82 | (104 | ) | (41 | ) | |||||||
Increase related to current year tax positions | 78 | 58 | 192 | |||||||||
Settlements | - | (24 | ) | - | ||||||||
Unrecognized tax benefits, end of year | $ | 414 | $ | 254 | $ | 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.
(1) | No value has been assigned to any provisions of the Employment Agreements that remain in force following the Change in Control. |
(2) | Mr. Norris ceased to serve as an executive officer in 2014 and thus is no longer entitled to this change in control benefit. |
16. Commitments and ContingenciesCompensation of Non-Employee Directors
As compensation for their service as directors of the Company in 2013, each non-employee member of the Board received a $79,200 annual stipend. For service as committee Chairs, the Chairs of the Audit Committee and Compensation Committee each received an additional stipend of $39,600 and the Chair of the Nominating and Governance Committee received an additional stipend of $26,400. For service as Chairman of the Board, the Chairman of the Board received an additional stipend of $52,800. Payment of the annual stipends was made on a monthly basis in advance of each month of service. No additional payments were made to non-employee members for participating in Board and committee meetings.
On June 7, 2013, each non-employee member of the Board then serving, excluding Mr. Shackelton, received an award of equity-based compensation under our 2006 Long-Term Incentive Plan, or 2006 Plan, consisting of 12,500 shares of restricted Common Stock. The Company is involvedrestricted stock vests 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 effectthree equal installments on the Company’s consolidated financial position, resultsfirst, second and third anniversaries of operations, or liquidity.the date of grant. Additionally, on June 7, 2013, in lieu of compensation payable to Mr. Shackelton for his service to the Board as a director, Coliseum Capital Partners, L.P. was granted 12,500 stock equivalent units, which vest in three equal installments on the first, second and third anniversaries of the date of grant. Coliseum Capital Partners, L.P. was additionally granted 12,500 stock equivalents units on June 7, 2013, which vest in three equal annual installments beginning on January 21, 2014. This grant was made in compensation of Mr. Shackelton’s services as a director beginning in 2012.
The Company has two deferred compensation plansNon-employee directors are also reimbursed for management and highly compensated employees. These deferred compensation plans are unfunded, and benefits are paid from the general assetsreasonable expenses incurred in connection with attending meetings of the Company. The totalBoard and meetings of participant deferrals, which is reflected in “Other long-term liabilities” in the consolidated balance sheets, was approximately $1,485 and $1,169 at December 31, 2013 and 2012, respectively.Board committees.
17. Transactions2013 Director Compensation Table
Fees Earned or | Stock | Option | ||||||
Paid in Cash | Awards(1)(2) | Awards (1)(3) | Total | |||||
Name | ($) | ($) | ($) | ($) | ||||
Christopher S. Shackelton (4)* | 158,400 | 688,750 | - | 847,150 | ||||
Richard Kerley* | 118,800 | 344,375 | - | 463,175 | ||||
Kristi L. Meints* | 118,800 | 344,375 | - | 463,175 |
* | Committee Chair |
(1) | On June 7, 2013, Mr. Kerley and Ms. Meints were awarded 12,500 shares of restricted stock under the 2006 Plan. The aggregate grant date fair value of the restricted stock awarded to each non-employee director was $344,375. The aggregate grant date fair value of the restricted stock was computed in accordance with the Financial Accounting Standards Board’s, or FASB Accounting Standards Codification (“ASC”) Topic 718-Compensation-Stock Compensation,or ASC 718. For a discussion of valuation assumptions, see Note 10, Stock-Based Compensation Arrangements, of our Annual Report on Form 10-K for the year ended December 31, 2013. Other than the 6,650 and 12,500 shares of restricted stock awarded to each non-employee director in 2011 and 2012, respectively, and the 12,500 shares of restricted stock awarded to each non-employee director described above, there were no other stock awards outstanding as of December 31, 2013 that were previously granted to the non-employee members of the Board. As of December 31, 2013, two thirds of the 6,650 shares of restricted stock were vested, one third of the 12,500 shares of restricted stock granted in 2012 were vested and none of the 12,500 shares of restricted stock granted in 2013 were vested. |
(2) | On June 7, 2013, Coliseum Capital Partners, L.P. was granted 12,500 stock equivalent units, which vest in three equal installments on the first, second and third anniversaries of the date of grant. Coliseum Capital Partners, L.P. was additionally granted 12,500 stock equivalents units on June 7, 2013, which vest in three equal annual installments beginning on January 21, 2014. The aggregate grant date fair value of the stock equivalent units was computed in accordance with ASC 718 and totaled $688,750. None of the stock equivalent units granted in 2013 were vested as of December 31, 2013. |
(3) | The following table sets forth the number of outstanding unexercised options to purchase shares of Common Stock and the associated exercise price and grant date fair value held by each non-employee director as of December 31, 2013. All outstanding options were fully vested as of December 31, 2013 with the exception of those options that were granted to each non-employee director in May 2011 that vest in one-third increments on the first, second and third anniversaries of the grant date: |
Number of stock options | ||||||||
Grant Date | Exercise Price | Richard Kerley | Kristi L. Meints | |||||
1/19/05 | $ 20.30 | - | 10,000 | |||||
1/3/07 | $ 24.59 | - | 10,000 | |||||
6/9/08 | $ 26.14 | - | 10,000 | |||||
12/6/05 | $ 28.47 | - | 10,000 | |||||
6/14/10 | $ 16.35 | - | 7,814 | |||||
5/17/11 | $ 14.16 | 2,000 | 2,000 | |||||
Total | 2,000 | 49,814 |
(4) | All of Mr. Shackelton’s compensation for service on the Board inures to the benefit of Coliseum Capital Management LLC (of which Mr. Shackelton is a Managing Partner) pursuant to this entity’s policy regarding Mr. Shackelton’s service on the board of companies in which it has an equity interest. |
Under the Company’s stock ownership guidelines, as amended, non-employee directors are expected to own shares of our Common Stock with Related Partiesa value equal to three times their annual stipend.
Pursuant to the amended stock ownership guidelines, the following will count towards meeting the required holding level:
Shares held directly or indirectly;
Any restricted stock or stock units held under our Equity-Based Program (whether vested or unvested); and,
Shares owned jointly with or in trust for, their immediate family members residing in the same household.
Compliance with the established holding level requirement as determined under the guidelines is required by December 31, 2014. Once the ownership requirement has been achieved, the non-employee directors are free to sell shares of our Common Stock above the required holding level. The grant date fair value of each award will be used to determine whether a director meets the required holding level. In the event a non-employee director does not achieve his or her holding level set forth above or thereafter sells shares of our Common Stock in violation of the stock ownership guidelines, the Board will consider all relevant facts and take such actions as it deems appropriate under the circumstances.
Compensation Committee Interlocks and Insider Participation
Upon the Company’s acquisition The Compensation Committee consists of Maple Services, LLC in August 2005, the Company’s former Chief Executive Officer, former Chief Financial Officer,Messrs. Kerley (Chairperson) and Chief Executive Officer of Human Services, became membersShackelton and Ms. Meints. No person who served as a member of the board of directors ofCompensation Committee during 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 yearsfiscal year ended December 31, 2013 2012was a current or former officer or employee of Providence, or engaged in certain transactions with us, which was required to be disclosed by regulations of the SEC. There were no compensation committee “interlocks” during the fiscal year ended December 31, 2013, which generally means that none of Providence’s executive officers served as a director or member of the compensation committee of another entity, one of whose executive officers served as a member of our Board or as a member of our Board’s Compensation Committee.
Item 12.Security Ownership of Certain Beneficial Owners and 2011, respectively. Amounts dueManagement and Related Stockholder Matters
Principal Stockholders
The following table sets forth certain information, as of April 24, 2014, with respect to the beneficial ownership of Providence’s Common Stock by each stockholder known by us to own beneficially more than five percent of our outstanding Common Stock. Except as otherwise specified, the named beneficial owner has sole voting and investment power with respect to the shares.
Name and Address | No. of Shares of Common Stock Beneficially Owned (1) | Percent of Voting Power of Common Stock (1) | ||
Coliseum Capital Management, LLC Adam Gray Christopher Shackelton (2) |
2,322,350 |
16.6% | ||
Ameriprise Financial, Inc. Columbia Management Investment Advisors, LLC (3) |
932,775 |
6.7% | ||
Renaissance Technologies LLC (4) | 816,000 | 5.8% | ||
BlackRock, Inc. (5) | 771,627 | 5.5% | ||
Steelhead Partners, LLC (6) | 757,591 | 5.4% |
__________________
(1) | The securities “beneficially owned” by each stockholder are determined in accordance with the definition of “beneficial ownership” set forth in the regulations of the SEC. Accordingly, they may include securities to which the stockholder has or shares voting or investment power or has the right to acquire within 60 days of April 24, 2014. Beneficial ownership may be disclaimed as to certain of the securities. |
(2) | This information is based on ownership information reported by Coliseum Capital Management, LLC in its Form 13F filed on February 14, 2014, a Form 4 filed on January 29, 2014, and group information reported in a Schedule 13D/A filed by Coliseum Capital Management, LLC, Coliseum Capital, LLC, Coliseum Capital Partners, L.P., Coliseum Capital Partners II, L.P., Adam Gray, Christopher Shackelton (Metro Center, 1 Station Place, 7th Floor South, Stamford, CT 06902) and Blackwell Partners, LLC (c/o DUMAC, LLC, 280 S. Mangum Street, Suite 210, Durham, NC 27701) with the SEC on August 15, 2013. Based on information available in the Schedule 13D/A, the shares are held by (a) Coliseum Capital Partners, L.P. and Coliseum Capital Partners II, L.P., investment limited partnerships for which Coliseum Capital, LLC, a Delaware limited liability company, or CC, is general partner and for which Coliseum Capital Management, LLC, a Delaware limited liability company, or CCM, serves as investment adviser, and (b) Blackwell Partners, LLC, or Blackwell, a separate account investment advisory client of CCM. Christopher Shackelton and Adam Gray manage CCM and CC. Each of Christopher Shackelton, Adam Gray, Blackwell, CCP, CC and CCM disclaim beneficial ownership of these securities except to the extent of each person's own pecuniary interest therein. |
(3) | Ameriprise Financial, Inc. (145 Ameriprise Financial Center, Minneapolis, MN 55474), or AFI, is the parent company of Columbia Management Investment Advisors, LLC, or CMIA, (225 Franklin St., Boston, MA 02110). AFI may be deemed to beneficially own the shares reported by CMIA. The shares reported by AFI include those shares separately reported by CMIA. Each of AFI and CMIA disclaims beneficial ownership of all shares of Common Stock reported. This information is based on the Schedule 13G/A filed with the SEC on February 13, 2014. |
(4) | This information is based on the Schedule 13G filed by Renaissance Technologies LLC and Rennaisance Technologies Holdings Corporation (800 Third Avenue, New York, New York 10022) with the SEC on February 13, 2014. |
(5) | This information is based on the Schedule 13G/A filed by BlackRock, Inc. (40 East 52nd Street, New York, NY 10022) with the SEC on February 10, 2014. |
(6) | This information is based on the Schedule 13G/A filed by Steelhead Partners, LLC (“Stealhead”), James Michael Johnston, Brian Katz Klein (333 108th Avenue NE, Suite 2010, Bellevue, WA 98004) and Steelhead Pathfinder Master, L.P. (“Stealhead Pathfinder”)(c/o Maples Corporate Services Limited, P.O. Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands) with the SEC on February 14, 2014. According to the 13G/A, as of December 31, 2013, Steelhead Pathfinder and another client account for which Steelhead serves as the investment manager (collectively, the “Funds”) beneficially own certain convertible notes which are convertible into 757,591 shares of the Company’s common stock (based on the conversion rates set forth in such notes as of December 31, 2013). Steelhead Pathfinder beneficially owns certain convertible notes which are convertible into 725,815 shares of the Company’s common stock (based on the conversion rates set forth in such notes as of December 31, 2013). The securities reported as beneficially owned by Steelhead (the “Securities”) are held by and for the benefit of the Funds. Steelhead, as the investment manager of the Funds, and each of J. Michael Johnston and Brian K. Klein, as the member-managers of Steelhead, may be deemed to beneficially own the Securities held by the Funds for the purposes of Rule 13d-3 under the Securities Exchange Act of 1934 (the “Act”), insofar as they may be deemed to have the power to direct the voting or disposition of those Securities. Each of Steelhead, Mr. Johnston and Mr. Klein disclaims beneficial ownership as to the Securities, except to the extent of his or its pecuniary interests therein. |
Management and Directors Only
The following table sets forth certain information, as of April 24, 2014, with respect to the beneficial ownership of Providence’s Common Stock by (a) all of Providence’s directors, (b) all of Providence’s Named Executive Officers who were employed by the Company on such date as an executive officer and (c) all of Providence’s directors and executive officers who were employed by the Company on such date as an executive officer as a group. Except as otherwise specified, the named beneficial owner has sole voting and investment power with respect to his/her shares:
Name | No. of shares of Common Stock Beneficially Owned (1) | Percent of Voting Power of Common Stock (1) | ||
Herman M. Schwarz (2) | 111,061 | * | ||
Robert E. Wilson (3) | 15,000 | * | ||
Richard A. Kerley (4) | 25,567 | * | ||
Kristi L. Meints (5) | 86,143 | * | ||
Warren S. Rustand (6) | 65,225 | * | ||
Christopher S. Shackelton (7) | 2,322,350 | 16.6% | ||
All directors and executive officers as a group (9 persons)(8) |
2,627,036 |
18.6% |
_______________
* | Less than 1% |
(1) | The securities “beneficially owned” by an individual are determined as of April 24, 2014 in accordance with the definition of “beneficial ownership” set forth in the regulations of the SEC. Accordingly, they may include securities to which the individual has or shares voting or investment power or has the right to acquire within 60 days after April 24, 2014. Beneficial ownership may be disclaimed as to certain of the securities. |
(2) | Includes 36,338 shares of Common Stock held by Mr. Schwarz and 74,723 shares of Common Stock issuable upon the exercise of options that are exercisable within 60 days of April 24, 2014. |
(3) | Includes 15,000 shares of Common Stock issuable upon the exercise of options that are exercisable within 60 days of April 24, 2014. |
(4) | Includes 24,900 shares of Common Stock held by Mr. Kerley and 667 shares of Common Stock issuable upon the exercise of options that are exercisable within 60 days of April 24, 2014. |
(5) | Includes 36,329 shares of Common Stock held by Ms. Meints and 49,814 shares of Common Stock issuable upon the exercise of options that are exercisable within 60 days of April 24, 2014. |
(6) | Includes 15,411 shares of Common Stock held by Mr. Rustand and 49,814 shares of Common Stock issuable upon the exercise of options that are exercisable within 60 days of April 24, 2014. |
(7) | Includes 2,322,350 shares of Common Stock held by Coliseum Capital Partners, L.P., Coliseum Capital Partners II, L.P. and Blackwell Partners, LLC (for additional information see footnote 2 to the Principal Stockholders table above). Mr. Shackelton disclaims beneficial ownership of these securities except to the extent of his pecuniary interest therein. |
(8) | Includes 2,436,017 shares of Common Stock and 191,019 shares of Common Stock issuable upon the exercise of options that are exercisable within 60 days of April 24, 2014. |
Item 13.Certain Relationships and Related Transactions, and Director Independence.
Certain Relationships and Related Transactions
Policy Regarding Certain Relationships and Related Transactions
Pursuant to its written charter, the Audit Committee has adopted a Related Person Transaction Policy that, subject to certain exceptions, requires the Audit Committee (or the chair of the Audit Committee in certain instances) to review and either ratify, approve or disapprove all “transactions” with “related persons,” which have the meanings given to such terms in Item 404(a) of Regulation S-K.
In determining whether to approve or ratify a transaction with a related person under the policy, the Audit Committee is to consider all relevant information and facts available to it regarding the transaction and take into account factors such as the related person’s relationship to the Company from Maple Star Colorado, Inc. for management services providedand interest (direct or indirect) in the transaction, the terms of the transaction and the benefits to it by the Company at December 31, 2013 and 2012 were approximately $220 and $231, respectively.of the transaction. No director is to participate in the approval of a related person transaction for which he or she is a related person or otherwise has a direct or indirect interest.
The Audit Committee is also to review and assess ongoing related person transactions, if any, on at least an annual basis to determine whether any such transactions remain appropriate or should be modified or terminated.
Each year our directors and officers complete Directors’ and Officers’ Questionnaires, which, among other things, are designed to elicit certain information relating to transactions with the Company in which the officer or director or any immediate family member of such officer or director has a direct or indirect interest. These questionnaires are reviewed by our General Counsel and any such transactions or other related person transactions are brought to the attention of the Audit Committee as appropriate. We believe that our arrangements with CBIZ Benefits and Insurance Services, Inc. and VWP McDowell, LLC referred to below are no less favorable to us than those available to us from other entities providing such services.
Transaction with CBIZ Benefits and Insurance Services, Inc.
Providence uses CBIZ Benefits and Insurance Services, Inc., or CBIZ, a subsidiary of CBIZ, Inc., to administer and consult on its self-insured employee health benefits, 401(k) and deferred compensation plans. For 2013, CBIZ and its subsidiaries received fees paid by Providence of approximately $441,000 and commissions of approximately $160,000 paid by third parties related to business with Providence. Eric Rustand, Mr. Rustand's son, works for CBIZ. Eric Rustand, Senior Benefits Consultant for CBIZ, is the lead consultant on the employee health benefits plans for Providence. For 2013, Eric Rustand received approximately $105,000 in compensation from CBIZ related to CBIZ's business with Providence. The business relationship between Providence and CBIZ existed prior to Mr. Rustand becoming a member of the Board and will continue in 2014.
Transaction with VWP McDowell, LLC
LogistiCare (our wholly-owned subsidiary) operates a call center in Phoenix, Arizona. The building in which the call center is located is currently leased to the Companyby LogistiCare from VWP McDowell, LLC, (“McDowell”)or McDowell, under a five yearan amended five-year lease that expires in 2014. UnderFor 2013, LogistiCare paid approximately $442,000 in lease payments (including taxes and common area maintenance charges) to McDowell. The lease terms provide a schedule of rental payments due to McDowell over the entire term of the lease. Logisticare entered into a new lease on the building commencing on July 1, 2014, with a termination date of June 30, 2024. For 2014, the monthly rental amounts due under the lease agreement, as amended,approximate $36,000. Steven Schwarz, Gregory Schwarz and Barry Schwarz, Mr. Schwarz’s brothers, each own 0.9%, 1.3% and 3.3% interest in McDowell, respectively. Michael Schwarz, Mr. Schwarz’s father is the Company may terminate the lease withtrustee of MER Trust of which Mr. Schwarz and his brothers are beneficiaries and which has a six month prior written notice. Certain immediate family members of Herman Schwarz, Chief Executive Officer of LogistiCare, have a partial6.6% ownership interest in McDowell. In the aggregate these family members own an approximately 13%addition, Steven Schwarz owns a 50% interest in Via West Properties which is the managing member of McDowell. Via West Properties owns a 1.0% interest in McDowell. The original leasing arrangement between LogistiCare and McDowell directly and indirectly throughexisted prior to Mr. Schwarz becoming a trust. For 2013, 2012 and 2011,Named Executive Officer of 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. Company.
18. Quarterly Results (Unaudited) Independence of the Board
Quarter ended | ||||||||||||||||
March 31, 2012 | June 30, 2012 | September 30, 2012 | December 31, 2012 | |||||||||||||
Revenues | $ | 260,147 | $ | 278,937 | $ | 280,286 | $ | 286,519 | ||||||||
Operating income | 6,593 | 4,370 | 4,982 | 8,256 | ||||||||||||
Net income | 3,041 | 1,418 | 1,158 | 2,865 | ||||||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | 0.23 | $ | 0.11 | $ | 0.09 | $ | 0.22 | ||||||||
Diluted | $ | 0.23 | $ | 0.11 | $ | 0.09 | $ | 0.22 |
The Board believes that independence depends not only on our director’s individual relationships, but also on the Board’s overall attitude. Providing objective, independent judgment is at the core of the Board’s oversight function. Under our corporate governance guidelines, the Board, with the assistance of legal counsel and the Nominating and Governance Committee of the Board, uses the current standards for “independence” established by The Nasdaq Stock Market LLC, referred to in this Form 10-K/A as “NASDAQ”, to evaluate any material relationship a director may have with Providence to determine director independence. A director is not considered “independent” unless the Board affirmatively determines that the director has no material relationship with Providence or any subsidiary in the consolidated group other than as a director of another Board of Directors. Any relationship that falls below a threshold set forth by the standards for “independence” established by NASDAQ and our corporate governance guidelines, or is not required to be disclosed under Item 404(a) of SEC Regulation S-K, is automatically deemed to be an immaterial relationship. Our Board has affirmatively determined that all of the directors are independent except for Mr. Rustand, who is employed by Providence.
Quarter ended | ||||||||||||||||
March 31, 2013 | June 30, 2013 | September 30, 2013 | December 31, 2013 | |||||||||||||
Revenues | $ | 281,487 | $ | 287,637 | $ | 276,713 | $ | 276,845 | ||||||||
Operating income | 13,105 | 11,453 | 7,976 | 6,100 | (1) | |||||||||||
Net income | 6,678 | 5,876 | 3,527 | 3,357 | (1)(2) | |||||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | 0.51 | $ | 0.44 | $ | 0.26 | $ | 0.24 | ||||||||
Diluted | $ | 0.49 | $ | 0.43 | $ | 0.25 | $ | 0.24 |
Item 14.Principal Accounting Fees and Services.
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Fees of Independent Registered Public Accounting Firm
Fees for professional services provided by KPMG, the Company’s independent registered public accounting firm, for the fiscal years ended December 31, 2013 and 2012 in each of the following categories were:
Fiscal Year Ended December 31, | ||||||||
2013 | 2012 | |||||||
Audit fees | $ | 1,096,212 | $ | 1,182,641 | ||||
Audit related fees | $ | 116,178 | $ | - | ||||
Tax fees | $ | 6,942 | $ | 6,863 | ||||
All other fees | $ | 63,346 | $ | 45,016 | ||||
Total | $ | 1,282,678 | $ | 1,234,520 |
Audit Fees. Audit fees consisted of amounts incurred for services performed in association with the annual financial statement audit (including required quarterly reviews), the audit of the Company’s internal control over financial reporting, and other procedures normally required by the independent auditor in order to be able to form an opinion on the Company’s consolidated financial statements. Other procedures included consultations relating to the audit or quarterly reviews, and services performed by KPMG in connection with SEC registration statements, periodic reports and other documents filed with the SEC or other documents issued in connection with securities offerings.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.Audit Related Fees.
None.
Item 9A. Controls and Procedures.Audit related fees consisted of amount incurred for the stand alone audit of one of the Company’s subsidiaries.
(a) EvaluationTax Fees. Tax fees consisted of disclosure controlsamounts incurred for professional services rendered by KPMG for tax compliance and procedurestax consulting in 2013 and 2012.
All Other Fees. Other fees consisted of fees incurred for services rendered by KPMG in 2013 and 2012 for the audit of information technology security and internal control over protected client health information related to our non-emergency transportation management services operating segment.
The Company, under the supervisionAudit Committee has considered 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 concludeddetermined that the Disclosure Controls are effective in reaching a reasonable level of assurance that (i) information required to be disclosedservices provided 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 controlsKPMG were compatible with KPMG maintaining their independence.
The principal executive officerAudit Committee has adopted a policy that requires advance approval of all audit, audit-related, tax services and principal financial officer also conducted an evaluationother services performed by the independent auditor. The policy provides for pre-approval by the Audit Committee of specifically defined audit and non-audit services. Unless the specific service has been previously pre-approved with respect to that year, the Audit Committee must approve the permitted service before the independent auditor is engaged to perform it. The Audit Committee pre-approved all of the Company’s internal control over financial reporting (“Internal Control”)foregoing services provided 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 limitationsby KPMG in a cost-effective control system, misstatements due to error or fraud may occurfiscal years 2013 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.2012.
Item 9B. Other Information.
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
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.
PART IV
Item 15.Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements
The following consolidated financial statements including footnotes are included in Item 8.
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| Consolidated Balance Sheets at December 31, 2013 and 2012; |
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| Consolidated Statements of Income for the years ended December 31, 2013, 2012 and 2011; |
• | Consolidated Statements of Comprehensive Income for the years ended December 31, 2013, 2012 and 2011; | ||
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| Consolidated Statements of Stockholders’ Equity at December 31, 2013, 2012 and 2011; and |
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| 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)
Balance at | Charged to | Charged to | Balance at | |||||||||||||||||||||||||||||||||||||
Additions | beginning of | costs and | other | end of | ||||||||||||||||||||||||||||||||||||
Balance at beginning of period | Charged to costs and expenses | Charged to other accounts | Deductions | Balance at end of period | period | expenses | accounts | Deductions | period | |||||||||||||||||||||||||||||||
Year Ended December 31, 2013: | ||||||||||||||||||||||||||||||||||||||||
Allowance for doubtful accounts | $ | 3,685 | $ | 2,991 | $ | 3,467 | (1) | $ | 5,925 | (2) | $ | 4,218 | $ | 3,685 | $ | 2,991 | $ | 3,467 | (1) | $ | 5,925 | (2) | $ | 4,218 | ||||||||||||||||
Deferred tax valuation allowance | 629 | 185 | - | - | 814 | 629 | 185 | - | - | 814 | ||||||||||||||||||||||||||||||
Year Ended December 31, 2012: | ||||||||||||||||||||||||||||||||||||||||
Allowance for doubtful accounts | $ | 5,835 | $ | 2,856 | $ | 2,741 | (1) | $ | 7,747 | (2) | $ | 3,685 | $ | 5,835 | $ | 2,586 | $ | 2,741 | (1) | $ | 7,747 | (2) | $ | 3,685 | ||||||||||||||||
Deferred tax valuation allowance | 448 | 181 | - | - | 629 | 448 | 181 | - | - | 629 | ||||||||||||||||||||||||||||||
Year Ended December 31, 2011: | ||||||||||||||||||||||||||||||||||||||||
Allowance for doubtful accounts | $ | 5,252 | $ | 3,314 | $ | 3,003 | (1) | $ | 5,734 | (2) | $ | 5,835 | $ | 5,252 | $ | 3,314 | $ | 3,003 | (1) | $ | 5,734 | (2) | $ | 5,835 | ||||||||||||||||
Deferred tax valuation allowance | 865 | (417 | ) | - | - | 448 | 865 | (417 | ) | - | - | 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.
(3) Exhibits
Exhibit Number |
| Description | |
3.1(1) |
| 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) |
| Registration Rights Agreement, dated November 13, 2007, by and among The Providence Service Corporation and the Purchasers named therein. | |
10.6(13) | 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. | ||
10.7(13) | 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. | ||
10.8(13) | 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. | ||
+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. | ||
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| Statement re Computation of Ratios of Earnings to Fixed Charges. | |
*21.1 |
| Subsidiaries of the Registrant. | |
*23.1 |
| Consent of KPMG LLP. | |
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| 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 | Certification pursuant to 18 | ||
*32.2 | Certification pursuant to 18 | ||
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+ | Management contract or compensatory plan or arrangement. |
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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. |
(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 |
SIGNATURES
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.
THE PROVIDENCE SERVICE CORPORATION | ||
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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.
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| By: |
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Warren S. Rustand Chief Executive Officer (Principal Executive Officer) | ||||
| By: |
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Robert E. Wilson Chief Financial Officer | ||||
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