ModivCare Inc - Quarter Report: 2015 September (Form 10-Q)

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		September 30,				December 31,
		2015				2014
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents (Note 14)		$	106,724			$	135,258
Accounts receivable, net of allowance of $5,665 in 2015 and $2,735 in 2014			186,038				107,565
Other receivables			10,242				5,314
Prepaid expenses and other			30,045				43,134
Restricted cash			3,897				3,234
Deferred tax assets			1,859				4,148
Current assets of discontinued operations held for sale			75,854				75,993
Total current assets			414,659				374,646
Property and equipment, net			51,349				42,648
Goodwill			340,854				342,297
Intangible assets, net			295,602				323,904
Other assets			29,713				18,812
Restricted cash, less current portion			15,553				14,764
Non-current assets of discontinued operations held for sale			48,823				51,863
Total assets		$	1,196,553			$	1,168,934
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term obligations		$	31,000			$	24,588
Note payable to related party			-				65,500
Accounts payable			31,961				46,557
Accrued expenses			105,681				99,273
Accrued transportation costs			79,118				55,492
Deferred revenue			28,140				10,743
Reinsurance liability reserve			15,337				11,077
Current liabilities of discontinued operations held for sale			24,222				26,228
Total current liabilities			315,459				339,458
Long-term obligations, less current portion			451,035				484,525
Other long-term liabilities			27,509				25,974
Deferred tax liabilities			88,765				96,928
Non-current liabilities of discontinued operations held for sale			854				635
Total liabilities			883,622				947,520
Commitments and contingencies (Note 11)
Mezzanine equity
Convertible preferred stock, net: Authorized 10,000,000 shares; $0.001 par value; 805,000 and 0 issued and outstanding; 5.5%/8.5% dividend rate			77,719				-
Stockholders' equity
Common stock: Authorized 40,000,000 shares; $0.001 par value; 17,136,574 and 16,870,285 issued and outstanding (including treasury shares)			17				17
Additional paid-in capital			273,862				261,155
Accumulated deficit			(6,067	)			(13,366	)
Accumulated other comprehensive loss, net of tax			(14,335	)			(8,756	)
Treasury shares, at cost, 1,029,638 and 1,014,108 shares			(18,424	)			(17,686	)
Total Providence stockholders' equity			235,053				221,364
Non-controlling interest			159				50
Total stockholders' equity			235,212				221,414
Total liabilities and stockholders' equity		$	1,196,553			$	1,168,934

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		Three months ended								Nine months ended
		September 30,								September 30,
		2015				2014				2015				2014
Service revenue, net		$	432,450			$	309,474			$	1,270,517			$	767,902
Operating expenses:
Service expense			390,878				280,444				1,128,984				690,752
General and administrative expense			21,324				20,326				59,084				40,439
Depreciation and amortization			13,370				6,256				39,614				11,805
Total operating expenses			425,572				307,026				1,227,682				742,996
Operating income			6,878				2,448				42,835				24,906
Other expenses:
Interest expense, net			3,809				795				12,734				3,439
Loss on equity investment			4,465				-				8,008				-
Gain on foreign currency translation			(736	)			(164	)			(1,131	)			(63	)
Income (loss) from continuing operations before income taxes			(660	)			1,817				23,224				21,530
Provision for income taxes			3,120				565				16,267				8,966
Income (loss) from continuing operations, net of tax			(3,780	)			1,252				6,957				12,564
Discontinued operations, net of tax			(1,791	)			(986	)			342				660
Net income (loss)		$	(5,571	)		$	266			$	7,299			$	13,224
Net income (loss) available to common stockholders (Note 9)		$	(6,687	)		$	266			$	3,093			$	13,224
Basic earnings (loss) per common share:
Continuing operations		$	(0.30	)		$	0.08			$	0.17			$	0.87
Discontinued operations			(0.11	)			(0.06	)			0.02				0.05
Basic earnings (loss) per common share		$	(0.41	)		$	0.02			$	0.19			$	0.92
Diluted earnings (loss) per common share:
Continuing operations		$	(0.30	)		$	0.08			$	0.17			$	0.85
Discontinued operations			(0.11	)			(0.06	)			0.02				0.05
Diluted earnings (loss) per common share		$	(0.41	)		$	0.02			$	0.19			$	0.90
Weighted-average number of common shares outstanding:
Basic			16,130,421				14,955,773				16,068,455				14,450,248
Diluted			16,130,421				15,176,105				16,220,747				14,723,360

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		Three months ended								Nine months ended
		September 30,								September 30,
		2015				2014				2015				2014
Net income (loss)		$	(5,571	)		$	266			$	7,299			$	13,224
Other comprehensive loss:
Foreign currency translation adjustments, net of tax			(6,290	)			(7,559	)			(5,579	)			(5,182	)
Comprehensive income (loss)		$	(11,861	)		$	(7,293	)		$	1,720			$	8,042

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		Nine months ended September 30,
		2015				2014
Operating activities
Net income		$	7,299			$	13,224
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			15,287				8,938
Amortization			29,157				7,968
Provision for doubtful accounts			2,018				1,770
Stock based compensation			8,822				5,375
Deferred income taxes			(7,811	)			(3,814	)
Amortization of deferred financing costs			1,611				607
Excess tax benefit upon exercise of stock options			(2,364	)			(2,835	)
Asset impairment charge			1,593				-
Loss on equity investment			8,008				-
Other non-cash charges			(433	)			(465	)
Changes in operating assets and liabilities:
Accounts receivable			(87,823	)			(17,296	)
Other receivables			1,177				1,470
Restricted cash			43				168
Prepaid expenses and other			12,719				85
Reinsurance liability reserve			5,174				3,995
Accounts payable and accrued expenses			(10,556	)			13,475
Accrued transportation costs			23,626				6,328
Deferred revenue			17,896				628
Other long-term liabilities			248				(5,249	)
Net cash provided by operating activities			25,691				34,372
Investing activities
Purchase of property and equipment			(23,834	)			(11,623	)
Acquisition of businesses, net of cash acquired			(3,433	)			(59,666	)
Equity investments			(13,785	)			-
Net increase in short-term investments			(14	)			(14	)
Restricted cash for reinsured claims losses			(1,452	)			(3,812	)
Net cash used in investing activities			(42,518	)			(75,115	)
Financing activities
Proceeds from issuance of preferred stock, net of issuance costs			80,667				-
Preferred stock dividends			(2,814	)			-
Repurchase of common stock, for treasury			(738	)			(501	)
Proceeds from common stock issued pursuant to stock option exercise			4,490				10,880
Excess tax benefit upon exercise of stock options			2,364				2,835
Proceeds from long-term debt			-				115,000
Repayment of long-term debt			(92,938	)			(47,500	)
Payment of contingent consideration			(7,496	)			-
Debt financing costs			(287	)			(728	)
Other			113				36
Net cash (used in) provided by financing activities			(16,639	)			80,022
Effect of exchange rate changes on cash			(463	)			(1,376	)
Net change in cash			(33,929	)			37,903
Cash at beginning of period			160,406				98,995
Cash at end of period		$	126,477			$	136,898
Supplemental cash flow information:
Cash included in current assets of discontinued operations held for sale		$	19,753			$	26,899
Cash paid for interest		$	12,922			$	3,930
Cash paid for income taxes		$	16,600			$	15,714
Significant noncash investing activities:
Unfunded future equity investment capital contributions		$	8,501			$	-

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1. Basis of Presentation, Description of Business and Recent Accounting Pronouncements

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements (the “consolidated financial statements”) include the accounts of The Providence Service Corporation (“Providence,” “the Company,” “our,” “we” and “us”), its wholly-owned subsidiaries and entities in which the Company has a voting controlling interest. Investments in non-consolidated entities over which the Company exercises significant influence but does not control are accounted for under the equity method.

 

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 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 service revenue as one line item, service expense as one line item, and loss on foreign currency translation as a component of other expenses. Additionally, the Company’s legacy workforce development businesses have been reclassified from the Human Services segment to the Workforce Development Services segment.

 

During the quarter ended September 30, 2015, the Human Services segment met the criteria for held-for-sale classification due to the execution of an agreement to sell the segment as of September 3, 2015. Since the disposition will result in a strategic shift, that will have a major effect on the Company’s operations and financial results, it is required to be accounted for as a discontinued operation. The assets and liabilities of the Human Services segment are classified as held for sale in the Condensed Consolidated Balance Sheets for all periods presented. Additionally, the operating results of this segment are reported as discontinued operations, net of tax in the Condensed Consolidated Statements of Income for all periods presented.

 

The Company has made estimates relating to the reporting of assets and liabilities, revenues and expenses and certain disclosures 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, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2015. 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, 2014 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, 2014.

 

Description of Business

 

The Company provides and manages health and human services through non-emergency transportation, community and behavioral health, workforce development and health assessment offerings. The Company historically operated in four segments, Non-Emergency Transportation Services (“NET Services”), Human Services, Workforce Development Services (“WD Services”) and Health Assessment Services (“HA Services”). As further discussed below, the Company completed the sale of the Human Services segment effective November 1, 2015.

 

 

The NET Services segment manages transportation networks and arranges for client transportation to health care related facilities and services for state or regional Medicaid agencies, managed care organizations (“MCOs”) and commercial insurers. The WD Services segment provides outsourced employability and legal offender rehabilitation case management services, primarily to the eligible participants in government sponsored programs. The HA Services segment primarily provides comprehensive health assessments (“CHAs”) for members enrolled in Medicare Advantage (“MA”) health plans, in patient’s homes.

 

In the Human Services segment, which has been presented as a discontinued operation, counselors, social workers and behavioral health professionals work with clients, primarily in the client’s home or community, who are eligible for government assistance due to income level, disabilities or court order.

 

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers: Topic 606 (“ASU 2014-09”). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: 

 

 

	●	Step 1: Identify the contract(s) with a customer.
	●	Step 2: Identify the performance obligations in the contract.
	●	Step 3: Determine the transaction price.
	●	Step 4: Allocate the transaction price to the performance obligations in the contract.
	●	Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

 

 

 Publicly held entities must apply the new revenue standard for annual reporting periods (including interim periods within those annual periods) beginning after December 15, 2017. Early adoption of the standard is permitted, but not before annual periods beginning after December 15, 2016. The Company is currently evaluating the impact ASU 2014-09 will have on its consolidated financial statements.

 

In November 2014, the FASB issued ASU No 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share is More Akin to Debt or to Equity (“ASU 2014-16”). This update requires an entity to determine the nature of the host contract by considering the economic characteristics and risks of the entire hybrid financial instrument issued in the form of a share, including the embedded derivative feature that is being evaluated for separate accounting from the host contract when evaluating whether the host contract is more akin to debt or equity. In evaluating the stated and implied substantive terms and features, the existence or omission of any single term or feature does not necessarily determine the economic characteristics and risks of the host contract. Although an individual term or feature may weigh more heavily in the evaluation on the basis of facts and circumstances, an entity should use judgment based on an evaluation of all the relevant terms and features. ASU 2014-16 is effective for publicly held business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company adopted ASU 2014-16 effective January 1, 2015 and applied the literature to determine the accounting for its convertible preferred stock issued in 2015. The adoption of ASU 2014-16 did not impact the Company’s existing financial instruments.

 

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. For publicly held business entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of the amendments is permitted for financial statements that have not been previously issued. The amendments should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Subsequent to the issuance of ASU 2015-03 the SEC staff made an announcement regarding the presentation of debt issuance costs associated with line-of-credit arrangements, which was codified by the FASB in ASU 2015-15. The SEC staff guidance is effective upon adoption of ASU 2015-03. This ASU will impact the Company’s financial statements, as the Company has approximately $2,533 of debt issuance costs, not related to line-of-credit agreements, at September 30, 2015 that are classified as “Other assets” in the accompanying condensed consolidated balance sheet. The result of the application of this guidance would be to reduce the “Other assets” balance, with a corresponding reduction to “Long-term obligations, less current portion” in the condensed consolidated balance sheet. The Company expects to adopt ASU 2015-03 on January 1, 2016.

 

 

In September 2015 the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”) which eliminates the requirement for an acquirer to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. The ASU is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2015, early adoption is permitted. The Company expects to adopt ASU 2015-16 on January 1, 2016. The adoption of the ASU will impact the Company’s accounting and disclosures related to future business acquisitions.

 

2. Concentrations

 

Domestic service revenue, net, from continuing operations, totaled 77.2% and 85.2% of service revenue, net for the nine months ended September 30, 2015 and 2014, respectively. Foreign service revenue, net, from continuing operations, totaled 22.8% and 14.8% of service revenue, net for the nine months ended September 30, 2015 and 2014, respectively.

 

Contracts with domestic governmental agencies and other domestic entities that contract with governmental agencies accounted for approximately 54.6% and 73.7% of the Company’s domestic revenue from continuing operations for the nine months ended September 30, 2015 and 2014, respectively. Contracts with foreign governmental agencies and other foreign entities that contract with governmental agencies accounted for approximately 95.3% and 84.1% of the Company’s foreign revenue from continuing operations for the nine months ended September 30, 2015 and 2014, respectively. Additionally, approximately 42.3% and 57.3% of our WD Services revenue for the nine months ended September 30, 2015 and 2014, respectively, was generated from one foreign payer.

 

At September 30, 2015, approximately $31,667, or 14.8%, of the Company’s net assets from continuing operations were located in countries outside of the US. At December 31, 2014, approximately $40,213, or 33.4%, of the Company’s net assets from continuing operations were located in countries outside of the US.

 

3. Equity Investment

 

The Company entered into a joint venture agreement in November 2014 to form Mission Providence Pty Ltd (“Mission Providence”). Mission Providence delivers employment services in Australia. The Company has a 60% ownership in Mission Providence, and has rights to 75% of Mission Providence’s distributions of cash or profit surplus twice per calendar year. The Company provided and will continue to provide capital contributions to Mission Providence in exchange for its equity interests.

 

The Company determined it has a variable interest in Mission Providence. However, it does not have unilateral power to direct the activities that most significantly impact Mission Providence’s economic performance, which include budget approval, business planning, the appointment of key officers and liquidation and distribution of share capital. As a result, the Company is not the primary beneficiary of Mission Providence. The Company accounts for this investment under the equity method of accounting and the Company’s share of Mission Providence’s losses are recorded as “Loss on equity investment” in the accompanying condensed consolidated statements of income. Cash contributions made to Mission Providence in exchange for its equity interests are included in the Condensed Consolidated Statements of Cash Flows as “Equity Investments”.

 

 

The following table summarizes the carrying amounts of the assets and liabilities included in the Company’s condensed consolidated balance sheet and the maximum loss exposure related to the Company’s interest in Mission Providence at September 30, 2015:

 

 

 

Under the terms of the joint venture agreement, the Company will be required to make future financial contributions. These future expected contributions are included in “Other Assets” and “Accrued Expenses” in the table above.

 

4. Fair Value Measurements

 

The Company determines the fair value of its financial instruments based on the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Below are the three levels of inputs that may be used to measure fair value:

 

Level 1 – Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The Company may be required to pay additional consideration under certain acquisition agreements based on the achievement of certain earnings targets by the acquired businesses. Acquisition-related contingent consideration is initially measured and recorded at fair value as an element of consideration paid in connection with an acquisition with subsequent adjustments recognized in other operating expenses in the condensed consolidated statements of income. The Company determines the fair value of acquisition-related contingent consideration, and any subsequent changes in fair value using a discounted probability-weighted approach. This approach takes into consideration Level 3 unobservable inputs including probability assessments of expected future cash flows over the period in which the obligation is expected to be settled and applies a discount factor that captures the uncertainties associated with the obligation. Changes in these unobservable inputs could significantly impact the fair value of the obligation recorded in the accompanying condensed consolidated balance sheets and operating expenses in the condensed consolidated statements of income. The fair value of the Company’s contingent consideration was $2,380 at September 30, 2015, which is included in “Other long-term liabilities” in the condensed consolidated balance sheets. The fair value of the Company’s contingent consideration was $10,549 at December 31, 2014, of which $7,767 was included in “Accrued expenses” and $2,782 was included in “Other long-term liabilities” in the condensed consolidated balance sheets. The decrease in the contingent consideration since December 31, 2014 is attributable to payments totaling $7,496 made in the first quarter of 2015 and changes in the foreign currency translation rate.

 

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5. Long-Term Obligations and Note Payable to Related Party

 

          The Company’s long-term obligations from continuing operations as of September 30, 2015 and December 31, 2014 were as follows:

 

 

In connection with the recent amendment to the Company’s credit facility on September 3, 2015, the Company determined that the terms of its long-term obligations are at current market rates. Therefore, the Company believes that the carrying amount of the long-term obligations approximated the fair values at September 30, 2015 and December 31, 2014.

 

Amendment to Credit Facility

 

On September 3, 2015, the Company entered into the Third Amendment and Consent to the Amended and Restated Credit and Guaranty Agreement (the “Third Amendment”) amending its Amended and Restated Credit and Guaranty Agreement, previously amended by that certain First Amendment dated May 28, 2014 and Second Amendment dated October 23, 2014 (“Credit Agreement”). Pursuant to the Third Amendment, the lenders under the Credit Agreement consented to the Company’s sale of the Human Services segment, provided that a minimum amount equal to 50% of the net cash proceeds of the sale, as defined in the Credit Agreement, is applied pro rata to the prepayment of revolving loans and swingline loans under the Credit Agreement. Further, the lenders consented to providing the Company the ability to use 50% of the net cash proceeds of the sale to make restricted payments to repurchase common stock pursuant to the Company’s stock repurchase program.

 

Related party unsecured subordinated bridge note

 

On October 23, 2014, the Company issued to Coliseum Capital Management, LLC and certain of its affiliates (“Coliseum”), a related party, a 14.0% Unsecured Subordinated Note in aggregate principal amount of $65,500 (the “Note”) due September 30, 2018. The Note was repaid in full on February 11, 2015, with the proceeds from a registered rights offering of convertible preferred stock (“Rights Offering”) and a related standby purchase agreement.

6. Stock-Based Compensation Arrangements

 

           The Company issues both option awards and restricted stock to employees and non-employee directors. Option awards and restricted stock vest commensurate with the respective award agreements. The fair value expense of option awards was estimated on the date of grant using the Black-Scholes option pricing formula and amortized over the option’s vesting periods, and the fair value expense of restricted stock grants was determined based on the closing market price of the Company’s common stock on the date of grant and is recognized as stock based compensation expense over the vesting period. The following table summarizes the stock option activity:

 

 

 

 

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

 

 

 

 

On August 6, 2015 (the “Award Date”), the Compensation Committee of the Board of Directors of Providence adopted the 2015 Holding Company LTI Program (the “HoldCo LTI Program”) under the Providence 2006 Long-Term Incentive Plan. The HoldCo LTI Program is designed to provide long term performance based awards to certain executive officers of Providence. Under the program, executives will receive shares of Providence common stock based on the shareholder value created in excess of an 8.0% compounded annual return between the Award Date (calculated on the basis of the Providence stock price equal to the volume weighted average of the common share price over a 90 day period ending on the Award Date) and December 31, 2017 (calculated on the basis of a similar 90 day volume weighted average) (the “Extraordinary Shareholder Value”). A pool for use in the allocation of awards will be created equal to 8.0% of the Extraordinary Shareholder Value. Participants in the HoldCo LTI Program will receive a percentage allocation of any such pool and, following determination of the size of the pool, will be entitled to a number of shares equal to their pro rata portion of the pool divided by the volume weighted average of the Company’s per share price over the 90 day period ending on December 31, 2017. Of the shares allocated, 60% will be issued to the participant on or shortly following determination of the pool, 25% will vest and be issued on the one year anniversary of such determination date, subject to continued employment, and the remaining 15% will be issued on the second anniversary of the determination date, subject to continued employment. As of September 30, 2015, 75% of the award pool had been granted to executives and approximately $478 of expense is included in “General and administrative expense” in the condensed consolidated statements of income for the three and nine months ended September 30, 2015. These awards are equity classified and the fair value of the awards was calculated using a Monte-Carlo simulation valuation model.

 

7. Convertible Preferred Stock, Net

 

The Company completed a rights offering, on February 5, 2015, providing all of the Company’s existing common stock holders the non-transferrable right to purchase their pro rata share of $65,500 of convertible preferred stock at a price equal to $100 per share. The convertible preferred stock is convertible into shares of Providence’s common stock at a conversion price equal to $39.88 per share, which was the closing price of the Company’s common stock on the NASDAQ Global Select Market on October 22, 2014.

 

 

Stockholders exercised subscription rights to purchase 130,884 shares of the Company's convertible preferred stock. Pursuant to the terms and conditions of the Standby Purchase Agreement (the “Standby Purchase Agreement”) between Coliseum Capital Partners, L.P., Coliseum Capital Partners II, L.P., Coliseum Capital Co-Invest, L.P. and Blackwell Partners, LLC (collectively, the "Standby Purchasers") and the Company, the remaining 524,116 shares of the Company's preferred stock were purchased by the Standby Purchasers at the $100 per share subscription price. The Company received $65,500 in aggregate gross proceeds from the consummation of the Rights Offering and Standby Purchase Agreement. Additionally, on March 12, 2015, the Standby Purchasers exercised their right to purchase an additional 150,000 shares of the Company’s convertible preferred stock, at a purchase price of $105 per share, of the same series and having the same conversion price as the convertible preferred stock sold in the Rights Offering.

 

The Company may pay a noncumulative cash dividend on each share of convertible preferred stock, when, as and if declared by its Board of Directors, at the rate of five and one-half percent (5.5%) per annum on the liquidation preference then in effect. On or before the third business day immediately preceding each fiscal quarter, the Company must determine its intention whether or not to pay a cash dividend with respect to that ensuing quarter and will give notice of its intention to each holder of convertible preferred stock as soon as practicable thereafter.

 

In the event the Company does not declare and pay a cash dividend, the Company will pay paid in kind (“PIK”) dividends by increasing the liquidation preference of the convertible preferred stock to an amount equal to the liquidation preference in effect at the start of the applicable dividend period, plus an amount equal to the liquidation preference then in effect multiplied by eight and one-half percent (8.5%) per annum, computed on the basis of a 365-day year and the actual number of days elapsed from the start of the applicable dividend period to the applicable date of determination. As of September 16, 2015, all holders of the Company’s preferred stock are able to convert their preferred stock to shares of common stock at a rate of approximately 2.51 shares of common stock for each share of preferred stock.

 

Cash dividends are payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year, commencing on April 1, 2015, and, if declared, will begin to accrue on the first day of the applicable dividend period. PIK dividends, if applicable, will accrue and be cumulative on the same schedule as set forth above for cash dividends and will also be compounded at the applicable annual rate on each applicable subsequent dividend date. Cash dividends totaling $594, $1,104 and $1,116 were paid to preferred stockholders on April 1, 2015, July 1, 2015, and October 1, 2015, respectively.

 

The convertible preferred stock is accounted for as mezzanine equity as it could be redeemed upon certain change in control events that are not solely in the control of the Company. Dividends are recorded in stockholders equity and consist of the 5.5%/8.5% dividend.

 

Convertible preferred stock, net at September 30, 2015 consisted of the following:

 

 

 

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8. Stockholders’ Equity

 

The following table reflects changes in common stock, additional paid-in capital, accumulated deficit, accumulated other comprehensive loss and treasury stock for the nine months ended September 30, 2015:

 

 

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9. Earnings Per Share

 

           The following table details the computation of basic and diluted earnings per share:

 

 

 

For the three and nine months ended September 30, 2015, 805,000 and 665,220 shares of convertible preferred stock, respectively, were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive. For the three and nine months ended September 30, 2014, employee stock options to purchase 65,217 and 21,978 shares of common stock, respectively, were not included in the computation of diluted earnings per share as the exercise prices of these options were greater than the average fair value of the common stock for the period and, therefore, the effect of these options would have been antidilutive. For the three months ended September 30, 2015 employee stock options to purchase 144,051 shares of common stock were not included in the computation of diluted earnings as the Company recorded a net loss available to common stockholders for this period and as such, all potentially dilutive securities were anti-dilutive.

 

The accretion of convertible preferred stock discount in the table above related to a beneficial conversion feature of the Company’s convertible preferred stock that was fully amortized as of June 30, 2015. Income allocated to participating securities is calculated by allocating a portion of net income less dividends on convertible stock and amortization of convertible preferred stock discount to the convertible preferred stock holders on a pro-rata basis; however, the convertible preferred stockholders are not required to absorb losses.

 

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10. Income Taxes

 

The Company’s effective tax rate from continuing operations for the three months ended September 30, 2015 exceeded 100% and the effective tax rate from continuing operations for the nine months ended September 30, 2015 was 70.0%. The effective tax rate for these periods exceeded the United States federal statutory rate of 35% primarily due to foreign net operating losses (including equity investment losses) for which the future income tax benefit currently cannot be recognized, state income taxes, and certain non-deductible expenses. The Company recognized an income tax provision for the three months ended September 30, 2015 despite having a loss from continuing operations before income taxes because of these factors. The Company’s effective tax rate from continuing operations for the three and nine months ended September 30, 2014 was 31.1% and 41.6%, respectively.

 

11. Commitments and Contingencies

 

On June 15, 2015, a putative stockholder class action derivative complaint was filed in the Court of Chancery of the State of Delaware, (the “Court”), captioned Haverhill Retirement System v. Kerley et al., C.A. No. 11149-VCL.  The complaint names Richard A. Kerley, Kristi L. Meints, Warren S. Rustand, Christopher Shackelton (the “Individual Defendants”) and Coliseum Capital Management, LLC (“Coliseum”) as defendants, and the Company as a nominal defendant.  The complaint purported to allege that the dividend rate increase term originally in the Company’s outstanding convertible preferred stock was an impermissibly coercive measure that impaired the voting rights of the Company’s stockholders in connection with the vote on the removal of certain voting and conversion caps previously applicable to the preferred stock (the “Caps”), and that the Individual Defendants breached their fiduciary duties by approving the dividend rate increase term and attempting to coerce the stockholder vote relating to the Company’s preferred stock, and by failing to disclose all material information necessary to allow the Company’s stockholders to cast an informed vote on the Caps. The complaint also purports to allege derivative claims alleging that the Individual Defendants breached their fiduciary duties to the Company by entering into the subordinated note and standby agreement with Coliseum, and granting Coliseum certain stock options.  The complaint further alleges that Coliseum has aided and abetted the Individual Defendants in breaching their fiduciary duties and that demand on the Board is excused as futile.  The complaint sought, among other things, an injunction prohibiting the stockholder vote relating to the dividend rate increase, a finding that the Individual Defendants are liable for breaching their fiduciary duties to the Company and the Company’s stockholders, a finding that Coliseum is liable for aiding and abetting the Individual Defendant’s breaches of their fiduciary duties, a finding that Coliseum is liable for unjust enrichment, a finding that demand on the Board is excused as futile, a revision or rescission of the terms of the subordinated note and preferred stock as necessary and/or appropriate, a requirement for the Company to reform its corporate governance profile to protect against future misconduct similar to that alleged by the putative stockholder class, a certification of the putative stockholder class, compensatory damages, together with pre- and post-judgment interest, costs and disbursements (including expenses, attorneys’ and experts’ fees), and any other and further relief as is just and equitable.

 

On August 31, 2015, after arms’ length negotiations, the parties reached an agreement in principle and executed a memorandum of understanding providing for the settlement of claims concerning the dividend rate increase term and stockholder vote and related disclosure. The Memorandum of Understanding stated that the Defendants have entered into the partial settlement of the litigation solely to eliminate the distraction, burden, expense, and potential delay of further litigation involving claims that have been settled. Pursuant to the partial settlement, the Company agreed to supplement the disclosures in its definitive proxy statement on Schedule 14A (“Definitive Proxy Statement”), Coliseum and certain of its affiliates and the Company entered into an amendment to the Exchange Agreement dated as of February 11, 2015 described in the Definitive Proxy Statement, and the Board of Directors of the Company agreed to adopt a policy related to the Board’s determination each quarter as to whether the Company should pay cash dividends or allow dividends to be paid in the form of PIK dividends on the preferred stock, as further described in the supplemental proxy disclosures. On September 2, 2015, Providence issued supplemental disclosures through a Supplement to the Proxy Statement. On September 16, 2015, Providence stockholders approved the removal of the Caps.

 

The settlement provides for, among other things, the release of any claims based on alleged coercion and disclosure related to the stockholder vote on the removal of the Caps. The settlement is subject to court approval. No settlement has been reached as to the derivative claims related to the underlying subordinated note and standby purchase agreement and the options.

 

 

On September 18, 2015, a former client of Ingeus filed a complaint in the Birmingham County Court, United Kingdom, against Ingeus and two other defendants.  The complaint alleges collusion in the wrongful withholding of a jobseeker’s welfare allowance, discrimination in violation of the Human Rights Act, and harassment.  On October 15, 2015, the plaintiff was awarded a default judgment against Ingeus due to Ingeus’s failure to respond to the complaint within 14 days of the court’s incorrect deemed date of notice.  On October 19, 2015, Ingeus filed an Application notice to have the default judgment set aside because the Birmingham County Court made procedural errors when serving the complaint and did not provide Ingeus with the ability to respond timely to the complaint before the default judgment was made.  On November 2, 2015, the Birmingham County Court set aside the default judgment providing Ingeus with 14 days to file a defense against the plaintiff’s claim against Ingeus of approximately $775.  The Company has not accrued a liability for the plaintiff’s claim as of September 30, 2015 because it believes there are no reasonable grounds for bringing the complaint against Ingeus.

  

The Company is involved in other 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 $1,398 and $1,432 at September 30, 2015 and December 31, 2014, respectively.

 

12. Transactions with Related Parties

 

On October 23, 2014, the Company issued to Coliseum, a related party, a 14.0% Unsecured Subordinated Note in aggregate principal amount of $65,500. Interest from the issuance date to, but excluding, the 120th day after the issuance date, was paid in cash in the amount of $3,015 on the issuance of the Note. Coliseum held approximately 15% of our outstanding common stock as of October 23, 2014 and is the Company’s largest shareholder. Additionally, Christopher Shackelton, who serves as the Company’s Chairman of the Board of Directors and from June 1, 2015 through August 6, 2015 served as interim Chief Executive Officer of the Company, is also a Managing Partner at Coliseum Capital Management, LLC.

 

The Note was repaid in full on February 11, 2015, with the proceeds from a registered rights offering and related standby purchase commitment described above, which allowed all of the Company’s existing common stockholders the non-transferrable right to purchase their pro rata share of $65,500 of convertible preferred stock at a price of $100 per share, as further described above.

 

In connection with the anticipated Rights Offering, on October 23, 2014, the Company entered the Standby Purchase Agreement with the Standby Purchasers, pursuant to which the Standby Purchasers agreed to purchase, substantially simultaneously with the completion of the Rights Offering, in the aggregate, all of the available preferred stock not otherwise sold in the Rights Offering following the exercise of the subscription privileges of holders of the Company’s common stock. As consideration for entering into the Standby Purchase Agreement, on October 23, 2014, the Company paid the Standby Purchasers a fee of $2,947, which is included in “Convertible Preferred Stock, Net” in the condensed consolidated balance sheet at September 30, 2015. In addition, the Standby Purchasers had the right, exercisable within 30 days following the completion of the Rights Offering, to purchase additional preferred stock valued at $15,000 at a price per share of $105 which was exercised on March 12, 2015. Preferred stock dividends earned by Coliseum during the nine months ended September 30, 2015 totaled $2,678.

 

13. Acquisitions

 

On October 23, 2014, the Company acquired all of the outstanding equity of CCHN Group Holdings, Inc. (“Matrix”), the parent company of Community Care Health Network, Inc. (dba Matrix Medical Network ), pursuant to an Agreement and Plan of Merger, dated as of September 17, 2014. The purchase price of Matrix is calculated as follows:

 

 

 

The table below presents Matrix’s net assets based upon the final estimate of the respective fair values:

 

 

(1) The fair value of trade accounts receivable acquired in this transaction was determined to be approximately $21,546. The gross amount due with respect to these receivables is approximately $22,745, of which approximately $1,199 is expected to be uncollectible.
(2) The goodwill was allocated to the Company's HA Services segment. Goodwill totaling $995 is expected to be deductible for tax purposes. Goodwill includes the value of the purchased assembled workforce.

 

 

The fair value of intangible assets is as follows:  

*Weighted-average amortization period for intangible assets with definite lives

 

 

Pro forma information

 

Revenue and net income attributable to Ingeus Limited and its wholly-owned subsidiaries (“Ingeus”), which the Company acquired on May 30, 2014, and Matrix included in the Company’s condensed consolidated statements of income for the three and nine months ended September 30, 2015 and 2014, and the pro forma revenue and net income of the combined entity had these acquisitions occurred as of January 1, 2014, are as follows:

 

 

 

 

 

The pro forma information above for the three and nine months ended September 30, 2014 includes the elimination of acquisition related costs, adjustments for compensation and stock-based compensation expense related to employment agreements effective upon consummation of the acquisitions, additional interest expense on the debt issued to finance the acquisitions, amortization and depreciation expense based on the estimated fair value and useful lives of intangible assets and property and equipment and related tax effects. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transactions been consummated on January 1, 2014.

 

14. Discontinued Operations

 

On September 3, 2015, the Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”), pursuant to which the Company agreed to sell all of the membership interests in Providence Human Services, LLC and Providence Community Services, LLC, comprising the Company’s Human Services segment, in exchange for cash proceeds of approximately $200,000, prior to adjustments for estimated working capital, certain seller transaction costs, debt assumed by the Buyer, and a cash payment for the Providence Human Services cash and cash equivalents on hand at closing. See additional discussion of the sale of the Human Services segment in Note 16.

 

The Company’s cash and cash equivalents of $106,724 and $135,258 at September 30, 2015 and December 31, 2014 exclude $19,753 and $25,148, respectively, of cash and cash equivalents pertaining to the Human Services segment which are classified as “Current assets of discontinued operations held for sale” in the Condensed Consolidated Balance Sheets. In accordance with the Purchase Agreement, the amount of the Human Services segment cash and cash equivalents on hand as of the closing date are to remain in the Human Services segment entities as a closing accommodation. The buyer will pay the Company for the Human Services segment cash and cash equivalents at closing in addition to the net cash sale proceeds (see Note 16 - Subsequent Events).

 

In accordance with ASC 205-20, Presentation of Financial Statements-Discontinued Operations, a component of an entity is reported in discontinued operations after meeting the criteria for held-for-sale classification if the disposition represents a strategic shift that has (or will have) a major effect on the entity's operations and financial results. The Company analyzed the quantitative and qualitative factors relevant to the Human Services segment disposition and determined that those held for sale conditions for discontinued operations presentation have been met. As such, the historical financial results of the Human Services segment and the related income tax effects have been reclassified into discontinued operations for all periods presented in the accompanying condensed consolidated financial statements.

 

 

The following table summarizes the results of operations classified as discontinued operations, net of tax, for the three and nine months ended September 30, 2015 and 2014:

 

 

 

In connection with classifying the Human Services segment as a discontinued operation, the Company was required to compare the estimated fair values of each reporting unit of the underlying disposal group, less the costs to sell, to the respective carrying amount. As a result of this analysis, the Company recorded a non-cash goodwill impairment charge of $1,593 during the three and nine months ended September 30, 2015, which is included in Asset impairment charge in the table above. The impairment charge was related to the Company’s Maple Star reporting unit.

 

We estimated the fair value of each reporting unit within the Human Services segment based on both a market-based valuation approach and an income-based valuation approach. The valuation methodology applied was consistent with our methodology for the 2014, 2013 and 2012 annual goodwill impairment assessments. Under the market approach, the fair value of the reporting unit is determined using one or more methods based on current values in the market for similar businesses. Under the income approach, the fair value of the reporting unit is based on the cash flow streams expected to be generated by the reporting unit over an appropriate time 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.

 

The Company allocated interest expense to discontinued operations based on the portion of the revolving line of credit that was required to be paid with the proceeds from the sale of the Human Services segment. The total allocated interest expense was $805 and $2,461, respectively, for the three and nine months ended September 30, 2015, and $589 and $810, respectively, for the three and nine months ended September 30, 2014, and is included in Interest expense, net in the table above.

 

 

The following table summarizes the carrying amounts of the major classes of assets and liabilities held for sale in the condensed consolidated balance sheet as of September 30, 2015 and December 31, 2014:

 

 

(a)   In accordance with the Purchase Agreement, the amount of the Human Services segment cash and cash equivalents on hand as of the closing date are to remain in the Human Services segment entities as a closing accommodation. The buyer will pay the Company for the Human Services segment cash and cash equivalents at closing in addition to the net cash sale proceeds (see Note 16 - Subsequent Events).

 

 

The following table presents depreciation, amortization, capital expenditures, and significant operating noncash items of the discontinued operations for the nine months ended September 30, 2015 and 2014:

 

 

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15. Business Segments

 

The Company’s operations are organized and reviewed by management along its service lines. The Company has historically operated in four segments, NET Services, Human Services, WD Services and HA Services. Effective November 1, 2015, the Company sold the Human Services segment as further discussed in Note 16. NET Services includes managing the delivery of non-emergency transportation services. WD Services primarily includes workforce development, legal offender rehabilitation case management and outsourced employability programs. HA Services primarily includes the provision of CHAs for MA health plans in enrolled members’ homes.

 

Prior to January 1, 2015, the Company reported its segment activities under a full absorption method, where all corporate direct and indirect costs were allocated to the reporting segments. Beginning on January 1, 2015, the Company began analyzing the results of the segments exclusive of the allocation of indirect corporate costs. Corporate costs that represent a direct expense of a segment continue to be allocated to the respective segment. The segment results for the three and nine months ended September 30, 2014 have been recast to reflect management’s current internal method of segment reporting. The Corporate and Other column includes certain general and administrative costs that are not directly attributable to a specific segment, such as executive, accounting, technology, legal and other costs, as well as consolidation and elimination amounts and the activities of the Company’s wholly-owned captive insurance subsidiary. Additionally, beginning January 1, 2015, oversight of the Company’s legacy workforce development businesses (those that existed prior to the acquisition of Ingeus) was transferred to the management of the WD Services segment. The financial results of these legacy workforce development businesses have been reclassified from the Human Services segment to the WD Services segment in the table below for the three and nine months ended September 30, 2015 and 2014. These legacy workforce development businesses were not sold in connection with the Company’s sale of the Human Services segment.

 

 

The following table sets forth certain financial information attributable to the Company’s business segments (excluding the Human Services segment which has been classified to discontinued operations) for the three and nine months ended September 30, 2015 and 2014.

 

 

 

 

 

 

16. Subsequent Events

 

On October 14, 2015, the Company entered into amendments to the Agreement and Plan of Merger and related Escrow Agreement that governed its acquisition of Matrix (the “Amendments”). The Amendments call for the release from escrow by October 21, 2015 of the 946,723 shares of Providence common stock issued to the former stockholders and option holders of Matrix. One half of the escrowed shares were originally to be released on October 23, 2015 with the remaining shares to be released on October 23, 2016. The escrowed shares were placed in escrow to secure indemnification obligations related to certain representations made to Providence regarding healthcare billing and compliance with the Privacy, Security, Breach Notification and Enforcement Rules, known as HIPAA. The Amendments terminated these indemnification obligations effective October 14, 2015.

 

 

On October 14, 2015, the Company entered into an agreement to repurchase 707,318 of its common stock held by former stockholders of Matrix for an aggregate purchase price of $29,000 (or $41.00 per share). The Company funded this purchase through a combination of borrowing on its revolving credit facility and cash on hand. The purchase of these shares was completed on October 30, 2015.

 

Effective November 1, 2015, the sale of the Human Services segment was completed. The Company received approximately $198,377 in net proceeds (including $10,000 held in an indemnity escrow) representing the $200,000 purchase price net of an estimated working capital adjustment, estimated seller transaction costs, debt assumed by the Buyer, and excluding a $24,525 cash payment received for the Providence Human Services cash and cash equivalents on hand at closing. Approximately $6,158 of total estimated seller transaction costs of $8,589 were contingent upon the completion of the sale and, therefore, were expensed subsequent to September 30, 2015. The Company was required to use 50% of the net cash proceeds from the sale to fund a repayment on the revolving loan under its existing credit facility. However, in November 2015, the Company used the full amount of the net proceeds plus the cash payment received for the Providence Human Services cash and cash equivalents on hand at closing to fund a $206,000 repayment on the revolving loan under its existing credit facility.

 

On October 15, 2015, the Company and two executives of Ingeus entered into Settlement Deeds whereby these executives’ employment was terminated by mutual agreement. The termination of the employees’ employment agreements caused the Company to recognize approximately $16,070 in stock compensation expense as of October 15, 2015 related to deferred consideration payable to these two executives in connection with the Share Sale Agreement for the purchase of Ingeus on May 30, 2014. The Company expects to receive approximately $4,866 from escrow representing the non-vested portion of cash that the Company placed into escrow for the payment of estimated income taxes related to the vesting of the common stock deferred consideration while these two executives were employees of the Company.

 

On November 4, 2015, the Company’s Board of Directors authorized the Company to engage in a common stock repurchase program to repurchase up to $70,000 in aggregate value of the Company’s common stock during the twelve-month period following November 4, 2015. Purchases under the common stock repurchase program may be made from time-to-time through a combination of open market repurchases (including Rule 10b5-1 plans), privately negotiated transactions, and accelerated share repurchase transactions, at the discretion of the Company’s officers, and as permitted by securities laws, covenants under existing bank agreements, and other legal requirements.

  

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