UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2014

OR

For the transition period from            to            

Commission File Number 001-34221

The Providence Service Corporation

(Exact name of registrant as specified in its charter)

(520) 747-6600

(Registrant’s telephone number, including area code)

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 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) 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 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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes    ☒  No

As of November 5, 2013,May 6, 2014, there were outstanding 13,504,35213,961,932 shares (excluding treasury shares of 952,776)973,564) of the registrant’s Common Stock, $0.001 par value per share.

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION

The Providence Service Corporation

Condensed Consolidated Balance Sheets

(in thousands except share and per share data)

See accompanying notes to unaudited condensed consolidated financial statements

The Providence Service Corporation

Unaudited Condensed Consolidated Statements of Income

(in thousands except share and per share data)

See accompanying notes to unaudited condensed consolidated financial statements

The Providence Service Corporation

Unaudited Condensed Consolidated Statements of Comprehensive Income

(in thousands)

See accompanying notes to unaudited condensed consolidated financial statements

The Providence Service Corporation

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

See accompanying notes to unaudited condensed consolidated financial statements

The Providence Service Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

September 30, 2013March 31, 2014

(in thousands except share and per share data)

1. Basis of Presentation and Description of Business and New Accounting Pronouncements

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements (the “consolidated financial statements”) include the accounts of The Providence Service Corporation and its wholly-owned subsidiaries, including its foreign wholly-owned subsidiary WCG International Ltd. (“WCG”). Unless the context otherwise requires, references to the “Company”, “our”,Company,” “our,” “we” and “us” mean The Providence Service Corporation) and its wholly-owned subsidiaries.

The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of recurring accruals) considered necessary for fair presentation have been included. In order to conform to the current year presentation, prior year amounts have been reclassified to show human services revenues as one line item.item, and interest expense and interest income as interest expense, net. Additionally, prior year management fee receivables have been included in other receivables for comparable presentation purposes.

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 these consolidated financial statements in conformity with GAAP. Actual results could differ from those estimates. Operating results for the three and nine months ended September 30, 2013March 31, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2013.2014. Management has evaluated events and transactions that occurred after the balance sheet date and through the date these consolidated financial statements were issued, and considered the effect of such events in the preparation of these consolidated financial statements.

The consolidated balance sheet at December 31, 20122013 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. The consolidated financial statements contained herein should be read in conjunction with the audited financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.2013.

Description of Business

The Company is aprovides and manages government outsourcing privatization company.sponsored human services and non-emergency transportation services. The Company operates in the following two segments: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 vision of the Human Services business, and to better describe the broad spectrum of services it provides. TheIn our Human Services segment, respondsour counselors, social workers and behavioral health professionals work with clients who are eligible for government assistance due to governmental privatization initiativesincome level, emotional/educational disabilities or court order. We provide human services primarily in adult and juvenile justice, corrections, social services, welfare systems, education and workforce development by providingthe client’s home and community-based services and foster care services to at-risk families and children.or community. The NET Services segment provides non-emergencymanages transportation managementnetworks and arranges for client transportation to health care related facilities and services primarily tofor state or regional Medicaid agencies, managed care organizations (“MCOs”) and Medicare beneficiaries.commercial insurers. As of September 30, 2013,March 31, 2014, the Company operated in 4344 states and the District of Columbia in the United States and in British Columbia and Alberta,three provinces in Canada.

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 2013-05 and ASU 2013-12. 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%78.5% and 81%81.0% of the Company’s revenue for the ninethree months ended September 30,March 31, 2014 and 2013, and 2012, 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. Restricted Cash

The Company had approximately $18.0 million and $12.7 million of restricted cash at September 30, 2013 and December 31, 2012, respectively, as follows (in thousands):

		September 30, 2013				December 31, 2012
Collateral for letters of credit - Contractual obligations		$	243			$	243
Contractual obligations			953				698
Subtotal restricted cash for contractual obligations			1,196				941
Collateral for letters of credit - Reinsured claims losses			3,033				5,634
Escrow/Trust - Reinsured claims losses			13,806				6,165
Subtotal restricted cash for reinsured claims losses			16,839				11,799
Total restricted cash			18,035				12,740
Less current portion			3,837				1,787
		$	14,198			$	10,953

Of the restricted cash amount at September 30, 2013 and December 31, 2012:

     •      $243,000 in both periods served as collateral for irrevocable standby letters of credit that provide financial assurance that the Company will fulfill certain contractual obligations;

     •     approximately $953,000 and $698,000, respectively, was held to fund the Company’s obligations under arrangements with various governmental agencies through the correctional services business;

    •      approximately $3.0 million and $5.6 million, respectively, served as collateral for irrevocable standby letters of credit to secure any reinsured claims losses under the Company’s workers’ compensation reinsurance;

    •     approximately $5.1 million in both periods was restricted and held in trust for historical reinsurance claims losses under the Company’s general and professional liability reinsurance program;

    •      approximately $750,000 and $1.1 million, respectively, was restricted for our historical auto liability program; and

     •        approximately $8.0 million was restricted and held in a trust at September 30, 2013 for reinsurance claims losses under the Company’s workers’ compensation, general and professional liability and auto liability reinsurance programs.

4. Prepaid Expenses and Other

Prepaid expenses and other were comprised of the following (in thousands):

		September 30, 2013				December 31, 2012
Prepaid payroll		$	295			$	2,494
Prepaid insurance			7,111				3,739
Prepaid taxes			2,881				1,358
Prepaid rent			1,531				1,067
Prepaid bus tokens and passes			1,254				1,224
Prepaid maintenance agreements and copier leases			1,135				723
Interest receivable - certificates of deposit			702				679
Other			4,668				3,523
Total prepaid expenses and other		$	19,577			$	14,807

5. Goodwill and Intangibles

Goodwill

In accordance with ASC 350,“Intangibles-Goodwill and Other” (“ASC 350”), the Company applies a fair value-based impairment test to the net book value of goodwill and indefinite-lived intangible assets on an annual basis and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis. The analysis of potential impairment of goodwill requires a two-step process. The first step is the estimation of fair value. If step one indicates that an impairment potentially exists, the second step is performed to measure the amount of impairment, if any. Goodwill impairment exists when the estimated fair value of goodwill is less than its carrying value.

          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 some or all of their services. Management expects that due to this change in funding, the not-for-profit entities will not be able to maintain the level of business they historically experienced, which is expected to result in the decrease, or elimination of, services provided by Rio 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 $492,000 in its Human Services operating segment to eliminate the carrying value of goodwill acquired in connection with its acquisition of Rio. This charge was included in “Asset impairment charge” in the accompanying condensed consolidated statements of income for the nine months ended September 30, 2013.

Intangible Assets

During the 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 enjoyed 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 the value of the customer relationships obtained through the acquisition of WCG was impaired as of September 30, 2012. Consequently, the Company recorded a non-cash charge of approximately $2.5 million in its Human Services operating segment to reduce the carrying value of customer relationships acquired in connection with its acquisition of WCG 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 was included in “Asset impairment charge” in the accompanying condensed consolidated statements of income for the three and nine month periods ending September 30, 2012.

6.3.    Accrued Expenses

Accrued expenses consisted of the following (in thousands):following:

		September 30, 2013				December 31, 2012
Accrued compensation		$	20,418			$	18,438
NET Services contract adjustments			12,767				3,119
Other			15,581				11,419
		$	48,766			$	32,976

7. Long-Term Obligations

           The Company’s long-term obligations consisted of the following (in thousands):

		September 30, 2013				December 30, 2012
6.5% convertible senior subordinated notes, interest payable semi-annuallybeginning May 2008 with principal due May 2014 (the "Notes")		$	47,500			$	47,500
$40,000 revolving loan, LIBOR plus 2.75% that was terminated in August 2013			0				0
$100,000 term loan, LIBOR plus 2.75% with principal and interest payableat least once every three months that was terminated in August 2013			0				82,500
$165,000 revolving loan, LIBOR plus 1.75% - 2.50% (effective rate of 2.43% atSeptember 30, 2013) through August 2018 with interest payable at least once every three months			16,000				0
$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				0
			123,500				130,000
Less current portion			47,500				14,000
		$	76,000			$	116,000

   The carrying amount of the long-term obligations approximated their fair value at September 30, 2013 and December 31, 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.

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 $225.0 million, comprised of a $60.0 million term loan facility and a $165.0 million revolving credit facility. There is an option to increase the amount of the term loan facility and/or the revolving credit facility by an aggregate amount of up to $75.0 million, as described below. 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, the Company borrowed the entire amount available under the term loan facility and $16.0 million 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 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 $75.0 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. 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 $2.1 million 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 $849,000 will continue to be deferred and amortized and approximately $525,000 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 was deferred and will be amortized to interest expense and approximately $254,000 was expensed in the quarter ending September 30, 2013.

8. Business Segments

The Company operates in two reportable segments, and differentiates the segments based on the nature of the services they offer and the criteria in FASBAccounting Standards Codification Topic 280, “Segment Reporting”. The following describes each of the Company’s segments and its corporate services area.

Human Services. Human Services includes government sponsored social services consisting of home and community based, foster care and not-for-profit management services. 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.

NET Services. NET Services is comprised primarily of managing the delivery of non-emergency transportation services to Medicaid and Medicare beneficiaries. The entities that pay for non-emergency medical transportation services are primarily state Medicaid programs, health maintenance organizations and commercial insurers. Most of the Company’s non-emergency transportation services are delivered under capitated contracts where the Company assumes the responsibility of meeting the Medicaid covered benefit transportation needs of a specific geographic population.

The basis of segmentation and measurement of segment profit or loss has not changed from that disclosed in the Company’s audited financial statements and notes included in its Annual Report on Form 10-K for the year ended December 31, 2012.

The following table sets forth certain financial information (in thousands) attributable to the Company’s business segments for the three and nine months ended September 30, 2013 and 2012. In addition, none of the segments have significant non-cash items in operating income other than depreciation, amortization and asset impairment charges.

9.4. Stock-Based Compensation Arrangements

           The Company issues both option awards and restricted stock to employees and non-employee directors. Option awards and restricted stock generally vest in three equal installments on the first, second and third anniversaries of the date of grant. The fair value expense of option awards was estimated on the date of grant using the Black-Scholes-Merton option-pricingBlack-Scholes option pricing formula and amortized over the option’s vesting periods, and the fair value of unvested restricted stock grants was determined based on the closing market price of the Company’s common stock on the date of grant. The following table summarizes the stock option activity:

 

		For the nine months ended September 30, 2013
		Number of Shares Under Option				Weighted-average Exercise Price
Balance at beginning of period			1,724,421			$	19.48
Exercised			(551,601	)			16.76
Forfeited or expired			(251,875	)			24.29
Outstanding at September 30, 2013			920,945			$	19.80

The following table summarizes the activity of the shares and weighted-average grant date fair value of the Company’s unvested restricted common stock:

		For the nine months ended September 30, 2013
		Shares				Weighted-average Grant Date Fair Value
Non-vested balance at beginning of period			225,744			$	15.25
Granted			63,407				23.73
Vested			(89,055	)			15.32
Forfeited or cancelled			(19,350	)			15.50
Non-vested at September 30, 2013			180,746			$	17.59

10.5. Stockholders’ Equity

The following table reflects changes in common stock, additional paid-in capital, treasury stock and accumulated other comprehensive loss for the ninethree months ended September 30, 2013 (in thousands except share data):March 31, 2014:

		Common Stock								Additional Paid-In				Treasury Stock								Accumulated Other Comprehensive
		Shares				Amount				Capital				Shares				Amount				Loss
Balance at December 31, 2012			13,785,947			$	14			$	180,778				928,478			$	(15,094	)		$	(893	)
Stock-based compensation			0				0				2,402				0				0				0
Exercise of employee stockoptions, including net tax windfall of $123			551,601				0				9,367				0				0				0
Restricted stock issued			89,055				0				0				24,298				(454	)			0
Foreign currency translationadjustments			0				0				0				0				0				(262	)
Balance at September 30, 2013			14,426,603			$	14			$	192,547				952,776			$	(15,548	)		$	(1,155	)

On March 27, 2014, the Company entered into an Amendment and Termination of Rights Agreement (“Amendment”) with Computershare Trust Company, N.A. (“Rights Agent”), which amended the Amended and Restated Rights Agreement (“Rights Agreement”), dated as of December 9, 2011, by and between the Company and the Rights Agent. The Amendment accelerated the expiration date of the Rights Agreement from December 9, 2014 to March 27, 2014, such that, as of March 27, 2014, the preferred share purchase rights, each representing the right to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock of the Company expired and were no longer outstanding, and the Rights Agreement was terminated. Following the termination of the Rights Agreement, the Company filed a Certificate of Elimination with the Secretary of State of the State of Delaware eliminating the Preferred Shares.

11.6. Earnings Per Share

           The following table details the computation of basic and diluted earnings per share (in thousands except share and per share data):share:

		Three months ended September 30,								Nine months ended September 30,
		2013				2012				2013				2012
Numerator:
Net income available to common stockholders		$	3,527			$	1,158			$	16,081			$	5,617
Denominator:
Denominator for basic earnings per share --weighted-average shares			13,674,467				13,263,826				13,411,204				13,277,191
Effect of dilutive securities:
Common stock options and restricted stock awards			340,665				78,788				279,032				111,164
Performance-based restricted stock units			34,197				0				20,888				0
Denominator for diluted earnings per share -- adjustedweighted-average shares assumed conversion			14,049,329				13,342,614				13,711,124				13,388,355
Basic earnings per share		$	0.26			$	0.09			$	1.20			$	0.42
Diluted earnings per share		$	0.25			$	0.09			$	1.17			$	0.42

The effect of issuing 1,139,145 shares of common stock on an assumed conversion basis related to the Notesconvertible senior subordinated notes (“Senior Notes”) was excluded in the computation of diluted earnings per share for the three and nine months ended September 30, 2013 as it would have been antidilutive. The effect of issuing 1,182,989 and 1,193,618 shares of common stock on an assumed conversion basis related to the Notes was not included in the computation of diluted earnings per share for the three and nine months ended September 30, 2012, respectively,March 31, 2014 and 2013 as it wouldthey have been antidilutive.a dilutive effect. For the three and nine months ended September 30,March 31, 2014 and 2013, and 2012, employee stock options to purchase 202,054, 497,075, 1,567,027198,261 and 1,577,081880,010 shares of common stock, respectively, 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 antidilutive.

12.7. Income Taxes

           The Company’s effective tax rate from continuing operations for the three and nine months ended September 30,March 31, 2014 and 2013 was 36.7%40.1% and 39.8%41.2%, respectively. These rates wereFor both periods, the Company’s effective tax rate was higher than the United States federal statutory rate of 35.0%, due primarily to state income taxes andas well as non-deductible stock option expense, which were partially offset by the impact of disqualifying dispositions of incentive stock options.

The Company’s effective tax rate from continuing operations for the three and nine months ended September 30, 2012 was 61.6% and 45.2%, respectively. These rates were higher than the United States federal statutory rate of 35.0% due to state income taxes, non-deductible stock option expense and lower projected income before income taxes, which was primarily due to the $2.5 million intangible impairment charge recorded in the third quarter of 2012. Additionally, the tax rate for the nine months ended September 30, 2012 was favorably impacted by the final determination of the tax benefits related to certain liabilities assumed as a result of a 2011 acquisition.expense.

13.8. Commitments and Contingencies

The Company is involved in various claims and legal actions arising in the ordinary course of business, many of which are covered in whole or in part by insurance. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.

The Company has two deferred compensation plans for management and highly compensated employees. These deferred compensation plans are unfunded; therefore, benefits are paid from the general assets of the Company. The total of participant deferrals, which is reflected in “Other long-term liabilities” in the accompanying condensed consolidated balance sheets, was approximately $1.4 million$1,426 and $1.2 million$1,485 at September 30, 2013March 31, 2014 and December 31, 2012,2013, respectively.

14.9. Transactions with Related Parties

Upon the Company’s acquisition of Maple Services, LLC in August 2005, the Company’s former Chief Executive Officer, former Chief Financial Officer, and Chief Executive Officer of Human Services, became members of the board of directors of the non-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.’s board of directors. The Company provided management services to Maple Star Colorado, Inc. under a management agreement for consideration in the amount of approximately $225,000 and $188,000 for the nine months ended September 30, 2013 and 2012, respectively. Amounts due to the Company from Maple Star Colorado, Inc. for management services provided to it by the Company at September 30, 2013 and December 31, 2012 were approximately $208,000 and $231,000, respectively.

The Company operates a call center in Phoenix, Arizona. The building in which the call center is located is currently leased by the Company from VWP McDowell, LLC (“McDowell”) under a five year lease that expires in June 2014. The Company may terminate theA new lease has been executed with McDowell with a six-month prior written notice.commencement date of July 1, 2014 and termination date of June 30, 2024. Certain immediate family members of Herman M. Schwarz (the chief executive officer of the Company’s NET Services segmentnon-emergency transportation services and an executive officer of the Company) have a partial ownership interest in McDowell. In the aggregate, these immediate family members ownhave an approximateownership interest of approximately 13% interest in McDowell directly and indirectly through a trust. For the ninethree months ended September 30,March 31, 2014 and 2013, and 2012, the Company expensed approximately $312,000, each year,$105 and $102, respectively, in lease payments to McDowell. Future minimum lease payments due under the amendedcurrent and new lease agreements totaled approximately $534,000$4,886 at September 30,March 31, 2014.

10. 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. All corporate costs have been allocated to the Human Services and NET Services operating segments.

The following table sets forth certain financial information attributable to the Company’s business segments for the three months ended March 31, 2014 and 2013.

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes for the three and nine months ended September 30,March 31, 2014 and 2013, and 2012, as well as our consolidated financial statements and accompanying notes and management’s discussion and analysis of financial condition and results of operations included in our Form 10-K for the year ended December 31, 2012.2013. For purposes of “Management’s Discussion and Analysis of Financial Condition and Results of Operations”,Operations,” references to Q3Q1 2014 and Q1 2013 and Q3 2012 mean the three months ended September 30, 2013March 31, 2014 and the three months ended September 30, 2012, respectively. In addition, references to YTDMarch 31, 2013, and YTD 2012 mean the nine months ended September 30, 2013 and the nine months ended September 30, 2012, respectively.

Overview of our business

We are a direct provider ofprovide government sponsored human services, and a manager of not-for-profit organizations under contracts that deliver government sponsored social services. In addition, we brokerarrange for and manage Medicaid funded non-emergency transportation services. As a result of, and in response to, the large and growing population of eligible beneficiaries of government sponsored services, increasing pressure on governments to control costs and increasing acceptance of privatized human services and managed care solutions, we have grown both organically and by making strategic acquisitions.

We are focusedcontinue to focus on drivingimproving operating efficiencies, organic and acquisitive growth, improving operating efficiencies, and developing performance management systems that willdesigned to enhance and leverage our people and processes.core competencies. Our core competencies include:

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Enduring relationships with payers, clients and referral sources;

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Geographic reach, breadth of services and experience;

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Management of the transportation and human service needs of defined populations;

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Management of provider networks and contract bidding infrastructure;

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Managed care contracting experience; and

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Technology platform development.

include our enduring customer relationships, geographic reach, breadth of services and experience, management of the health related needs of defined covered lives populations, management of 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 coordinated and integrated healthcare, which includes providing services to individuals who are eligible for both Medicaid and continuedMedicare benefits. Further, by managing more populations eligible to receive our services, and outsourcing transportation management, we believe we can reduce the cost of transportation management.care.

WeWhile we believe we are well positioned to benefit from healthcare reform legislation by offeringand to offer our services to a growing population of individuals eligible to receive our services. However,services, there can be no assurances that programs under which we provide our services will receive continued or increased funding. Additionally, it is not clear when the healthcare reform legislation will be fully implemented or when, and if, we will see any positive impact.

While weWe also believe we are positioned to potentially benefit from recent trends that favor our in-home and community-based provision of human services,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 September 30, 2013,March 31, 2014, we were providing human services directly to approximately 55,70057,400 unique clients, and had approximately 16.017.6 million individuals eligible to receive services under our non-emergency transportation services contracts. We provided services to these clients from approximately 390385 locations in 4344 states, and the District of Columbia, and 3 provinces in Canada as of March 31, 2014.

Recent Developments

On March 31, 2014, the Company entered into a Share Sale Agreement (the “Sale Agreement”) to purchase all of the outstanding equity of Ingeus Limited (“Ingeus”), and an Australian Share Sale Agreement Side Deed (the “Side Deed”) pursuant to which, effective as of the closing, the Company will guarantee the obligations of Ingeus Europe Limited in its purchase of the share capital of Ingeus UK Limited from Deloitte LLP. Ingeus, based in Australia, is a distributed work force development company and market leader in outsourced employability programs, operating in the United States,social improvement, employment and British Columbia and Alberta, Canada.

welfare services markets.

Pursuant to the Sale Agreement and the Side Deed, the Company will pay a purchase price comprised of (i) a cash payment of GBP £35.0 million at closing, (ii) the issuance at closing of restricted shares of Company common stock and payment of cash with a combined value of GBP £14.3 million , subject to a vesting schedule of 25% per year over a four year period and (iii) contingent consideration of up to GBP £75 million, payable over a five year period, based on the achievement of certain levels of Ingeus’ earnings before interest, taxes, depreciation and amortization and other defined criteria.

The Sale Agreement contains customary representations and warranties of the parties and customary covenants regarding the conduct of business by Ingeus prior to the closing and other typical matters. Following the closing, the Company will have certain rights to indemnification for breaches of representations and warranties and other matters, subject to defined caps and time and other limitations. The acquisition is expected to close in the second quarter of 2014, subject to customary regulatory approvals and closing conditions, including the performance by the parties of their obligations under the Sale Agreement and the material accuracy of each party’s representations.

Critical accounting estimates and policies

As of September 30, 2013,March 31, 2014, there has been no change in our accounting policies or the underlying assumptions or methodologies used to fairly present our financial position, results of operations and cash flows for the periods covered by this report.

For further discussion of our critical accounting policies see management’s discussion and analysis of financial condition and results of operations contained in our Form 10-K for the year ended December 31, 2012.2013.

Results of operations

Segment reporting.    Our financial operating results are organized and reviewed by our chief operating decision maker as two reportable segments−segments, Human Services (formerly our Social Services segment) and NETNon-emergency Transportation (“NET”) Services. We operate these reportable segments as separate divisions and differentiate the segments based on the nature of the services they offer as more fully described in our Form 10-K for the year ended December 31, 2012. During Q3 2013, the Company changed the name of its Social Services segment to Human Services. The name change was made as part of a rebranding effort to reflect the future vision of the Human Services business, and to fully better describe the broad spectrum of services it provides.2013.

Consolidated Results. The following table sets forth the percentage of consolidated total revenues represented by items in our unaudited condensed consolidated statements of income for the periods presented:

Overview of trends of our results of operations for YTD 2013Q1 2014

Our Human Services revenues for YTD 2013 as compared to YTD 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 YTD 2013 as compared to YTD 2012 due to the impact of a reorganization of the service delivery system in British Columbia and increased competition in this market, which began in early 2012. Partially offsetting decreases in these revenues for YTD 2013 as compared to YTD 2012 was the implementation of new programs in certain of our markets. Client service expenses also decreased from YTD 2012 to YTD 2013 by 0.7% or $1.5 million due to personnel and client expenses which were eliminated as a result of contract terminations and changes.

Our NET Services revenues for YTD 2013Q1 2014 as compared to YTD 2012Q1 2013 were favorably impacted by thenew contracts and 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.certain markets. The results of operations for YTD 2013Q1 2014 as compared to YTD 2012Q1 2013 included an increase in revenue of 6.0%2.6% due to new business, while the cost of transportation increaseddecreased by 3.0%0.8% during this period, contributing to improved margins for Q1 2014.

Our Human Services revenues for Q1 2014 as compared to Q1 2013 increased 3.4% and were favorably impacted by contracts that began in 2013 and were fully implemented by the quarter. While we believe that changesend of the first quarter of 2014. However, client service expense increased in utilizationQ1 2014 from Q1 2013 by 12.2%. This increase included severance-related expenses for an executive officer, higher than expected foster care expenses and increased payroll and related costs due to an increase in the number of transportation services will continue to be a factor which may impact the results of our operations for the remainder of 2013, we expect continued positive revenue impact from new contracts implemented in 2012 and from negotiated rate adjustments in select programs.employees.

We believe the industry trend away from the more expensive out-of-home service providersfacility-based care services in favor of clinically appropriate home and community basedcommunity-based delivery systems likesuch as ours will continue. In addition, weWe 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 socialhuman 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.

Q3 2013 compared to Q3 2012

Revenues

Human services.Human services revenues are comprised of the following:

		(in thousands) Three months ended September 30,								Percent
		2013				2012				change
Home and community based services		$	74,640			$	72,259				3.3	%
Foster care services			9,282				8,394				10.6	%
Management fees			780				3,297				-76.3	%
Total human services revenues		$	84,702			$	83,950				0.9	%

Home and community based services. Our new workforce development program in Wisconsin, as well as an increase in school based revenues due to schools starting earlier in 2013 as compared to 2012, resulted in increased revenues for Q3 2013 as compared to Q3 2012. These increases were partially offset by the impact of certain other contract losses and changes in program requirements in Florida.

Foster care services.Our foster care services revenues increased during Q3Q1 2014 compared to Q1 2013 from Q3 2012 primarily as a result of expanding services into rural areas in Tennessee, which began in the second half of 2012.

Management fees.RevenuesFees for management services provided to certain not-for-profit organizations under management services agreements decreased due to the termination of, and changes to, certain management service agreements during 2013.

Non-emergency transportation services. NET Services revenues were as follows (in thousands):