UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant x Filed by a Party other than the Registrant ¨
Check the appropriate box:
| ¨ | Preliminary Proxy Statement |
| ¨ | Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) |
| ¨ | Definitive Proxy Statement |
| x | Definitive Additional Materials |
| ¨ | Soliciting Material Pursuant to §240.14a-12 |
The Providence Service Corporation
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
| x | No fee required. |
| ¨ | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. |
| (1) | Title of each class of securities to which transaction applies: |
| (2) | Aggregate number of securities to which transaction applies: |
| (3) | Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): |
| (4) | Proposed maximum aggregate value of transaction: |
| (5) | Total fee paid: |
| ¨ | Fee paid previously with preliminary materials. |
| ¨ | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. |
| (1) | Amount Previously Paid: |
| (2) | Form, Schedule or Registration Statement No.: |
| (3) | Filing Party: |
| (4) | Date Filed: |
 NASDAQ:
PRSC Spring 2009 |
 2
Cautionary Note about Forward-Looking Statements Certain statements made in this presentation, such as any statements about Providence's confidence or strategies or its expectations about revenues, results of operations, profitability, earnings per share, contracts, collections, award of contracts, acquisitions and related growth, growth resulting from initiatives in certain
states, effective tax rate or market opportunities, constitute "forward-looking
statements" within the meaning of the private Securities Litigation Reform Act of
1995. Such forward-looking statements involve a number of known and unknown
risks, uncertainties and other factors which may cause Providence's actual results or
achievements to be materially different from those expressed or implied by such forward-looking statements. These factors include, but are not limited to, reliance on
government-funded contracts, risks associated with government contracting, risks
involved in managing government business, legislative or policy changes, challenges
resulting from growth or acquisitions, adverse media and legal, economic and other
risks detailed in Providence's filings with the Securities and Exchange Commission.
Words such as "believe," "demonstrate," "expect," "estimate,"
"anticipate," "should" and "likely" and similar expressions
identify forward-looking statements. Readers are cautioned not to place undue
reliance on those forward-looking statements, which speak only as of the date the
statement was made. No inference should be drawn that Providence undertakes any
obligation to update any forward-looking statement contained herein. Forward-Looking Statements |
 3
Leading provider of home and community based social services and non- emergency transportation (NET) services management to government beneficiaries, funded largely by Medicaid Serves children, adolescents and families who are eligible due to income level, emotional/educational disabilities Provide cost savings for government programs Not-for-profit Managed Services Home and Community Based Counseling Home based counseling Intensive home based counseling Substance abuse treatment services School support services Correctional services Workforce development Foster Care Foster care Therapeutic foster care Administrative support Informational technology Accounting, payroll services Intake, assessment, referral Monitoring services Case management Customer, trip authorization Call-center management Utilization management and data collection Quality assurance Billing and claims Network credentialing NET Services |
 4
PRSC’s Expanded National Footprint Social Services Only Strong Potential for Geographic Growth NET Services Only Both Social Services and NET Services Canada Hawaii Locations Employees: 6,271 Direct 4,202 Managed |
 5
PRSC Overview Strong Business with Track Record of Success Positioned to Benefit from Trend toward Home and Community Based Care and Away from Institutional Care Continued Commitment to Best Practices, Innovation and Results; 97% Client Satisfaction According to Vanderbilt University Surveys Long-Term Payer Relationships; Substantially All Contracts Renewed over 10 Years Solid Organic Growth Rate |
 6
202 312 527 868 958 1,039 2003 2004 2005 2006 2007 2008 Contracts Track Record of Success 18 21 25 36 38 44 2003 2004 2005 2006 2007 2008 States Served CAGR 64% CAGR 39% CAGR 46% CAGR 20% * * Includes District of Columbia * * $59 $97 $146 $192 $285 $692 2003 2004 2005 2006 2007 2008 Revenues ($ in millions) 13,371 29,066 35,646 71,134 76,195 87,314 2003 2004 2005 2006 2007 2008 Clients * Excludes approx. 6 million eligible NET clients |
 7
Diverse, Balanced Business Mix 2008 Total Revenue by Service Social Services Transportation 55.1% Home and Community Based Services 37.3% Foster Care Services 4.7% Management Fee Income 2.9% |
 8
Revenue increased 143% from 2007 – Social services revenue up 18.4% Home based organic growth of 10% Foster care organic growth of 8% Adjusted EBITDA of $39.1 million – Excluding impairment charge and expense for accelerated vesting – Margins impacted by a few states rationing care Increase in both direct and managed client census – Direct client census up 20% in 2008; up 29% in fourth quarter 2008 over fourth quarter 2007 Positive cash flow – positioned for growth – Cash of $29.4 million after repayment of $8.7 million of long-term debt – Net cash from operating activities of $12.4 million Strong 2008 in the Face of a Challenging Economic Environment |
 9
Board and Management Respond to 2008 Challenges In mid 2008, certain payers began to see increasing pressure on state budgets
and a reduction in tax based revenue. States’ legal requirement to balance budgets led to unprecedented payer behavior in the second half of 2008. In response, the Providence Board announced strategic initiatives in November 2008 to combat external challenges and enhance stockholder value – Focus on growing core social services business – Reduce corporate and client service costs – Explore the sale of non-strategic assets – Delever the Company’s debt |
 10
Actions Taken to Enhance Stockholder Value Concrete actions taken to implement Board’s strategic initiatives and enhance stockholder value – Implemented operating efficiencies Reduced total workforce and other overhead expenses Adjusted certain states’ cost structures to reduce number of fixed salaried personnel in favor of hourly staff - better aligning revenue and costs (no reduction in rate taken and no concessions accepted) Company-wide salary freeze; reduced vacation, holiday and sick leave 80% of management’s annual incentive bonus potential suspended for 2009, a potential savings this year of up to $1 million Approved health plan benefit modifications to reduce benefits and/or increase employee contribution effective in July 2009 Suspended executive salary parity plan for 2009 and accelerated outstanding unvested options and restricted stock awards company-wide, reducing 2009’s operating expenses by approximately $5 million – Executed credit agreement amendment related to senior term loan resetting covenant targets for the fourth quarter of 2008 and for all of 2009, providing significant operating flexibility |
 11
Actions Taken to Enhance Stockholder Value (cont.) Providence already seeing positive results – Operating expense reduction increasing profitability – Increased social service direct client
census (March 2009 was 7.9% higher than March 2008) – Entered into three significant social services contracts, and increased the total number of social services contracts by nine, in first quarter of 2009 |
 12
Improvements beginning to be seen with government payers Increases in client census and rate, combined with operating efficiencies and expense reductions, contributed to record earnings Revenue of $187 million, up 7.5% from prior year period EPS of $0.44 (up over 50% from prior year period) – Includes non-recurring expenses of approximately $2.1 million related to amended credit agreement, dissident’s now abandoned consent solicitation and banking and transaction related services – for a total of $0.09 per share Exceptional First Quarter 2009 |
 13
Medicaid Improvements Create Opportunities Medicaid expenditures on benefits are expected to increase at an average annual rate of 7.9% to $673.7 billion by 2017, compared to a projected growth
rate of 4.8% in the general economy (1) Economic recovery package signed into law in February 2009 includes an approximately $87 billion temporary increase in the share of Medicaid paid by
the federal government (10/1/08 – 12/31/10) (2) Home and community based spending is anticipated to grow at an average annual rate of 11.9% through 2017 (1) The current economy has caused an expected increase in Medicaid enrollment to 50.0 million beneficiaries, a 2.1% increase from 2007 to 2008 (3) Medicaid enrollment is expected to continue to increase during 2009, a direct
result of U.S. poverty population rising between 7.5 million to 10.3 million (4) PRSC believes new beneficiaries are more in need of services than ever –
direct victims of foreclosures and unemployment (1) Centers for Medicare and Medicaid Services (2) Center on Budget and Policy Priorities – February 2009 (3) Kaiser Commission on Medicaid Facts – November 2008 (4) Center on Budget and Policy Priorities – November 2008 |
 14
Management focus on growing the core social services business Growing home/community based care in PA should be driven by Mercer recommendations Longer term opportunity in NC as payer consolidation takes place School based services in VA being well received Medicaid stimulus package to replenish state coffers Growing demand from anticipated increase in Medicaid enrollment, SCHIP reauthorization Potential for acquisitions Providence – Positioned for Growth |
 15
Continually Recognized by Leading Business Publications Forbes – Providence ranked 98th on annual list of America’s 200 Best Small Companies -- October 2008 – Providence ranked 17th on annual list of America’s 200 Best Small Companies -- October 2006 FORTUNE Small Business (FSB) – Providence ranked 82nd on the annual FSB 100 list of the fastest growing small companies in America -- July/August 2007. Business Week – Providence ranked 71st on annual list of top 100 “Hot Growth” Companies -- May 2006 |
 16
The Providence Board Continues to Deliver Value for Stockholders For first quarter 2009, revenue grew to $187 million, an increase of 7.5% from $174 million for first quarter 2008 and an increase of 5% from $178 million for fourth quarter 2008 In Q1 2009, Providence was the biggest percentage gainer in the Russell 3000 index As of May 26, 2009, Providence’s stock is up more than 676% since the beginning of the year, compared to the Russell 2000 Index which is up approximately 0.2% and the NASDAQ Health Care Index which is down approximately 6.2% for the same period |
 17
The Providence Board Continues to Deliver Value for Stockholders Providence has substantially outperformed the
Russell 2000 and the NASDAQ Health Care indices in 2009 -100% 0% 100% 200% 300% 400% 500% 600% 700% 12/31/2008 1/31/2009 2/28/2009 3/31/2009 4/30/2009 5/26/2009 % CHANGE Providence NASDAQ Health Care Russell 2000 |
 18
Historic Outperformance; Rapid Recovery From 2008 Recession -100% 0% 100% 200% 300% 400% 500% 600% 700% 12/31/2008 1/31/2009 2/28/2009 3/31/2009 4/30/2009 5/22/2009 Providence Peer Composite -100% -80% -60% -40% -20% 0% 20% % CHANGE Providence Peer Composite Peer Composite includes AMED, AVCA, CHS, CRN, CXW, GTW, HS, HWAY, LHCG, MMS, ODSY, RSCR, SUNH
|
 19
Independent and Experienced Board Fletcher Jay McCusker. Chairman of the Board and Chief Executive Officer since founding Providence in 1996 – Experience includes executive vice president of Nasdaq listed Youth Services International, Inc., which provided private institutional care for
at- risk youth; chief executive officer of Introspect Healthcare
Corporation, a large multi-state behavioral health provider;
co-founder of mental health care company, Century Healthcare, which was
sold to NYSE listed Columbia Healthcare in 1992 Terence J. Cryan. Director since 2009 – President and Chief Executive Officer of Medical Acoustics, LLC, a privately-held company that designs and develops medical devices employing acoustic technologies for diagnostic and therapeutic medical applications. Co-founded and continues to serve as Managing Director of
Concert Energy Partners, an investment banking and private equity firm
based in New York City. Also Director, Chairman of the Finance Committee, member of the Executive Committee and former Interim President of Trickle Up, a non-profit organization that empowers people around the world to take the first steps out of poverty, providing them with
resources to build micro-enterprises for a better quality of life
|
 20
Independent and Experienced Board (cont.) Kristi L. Meints. Director since 2003. Chairperson of audit
committee – Vice president and chief financial officer of Chicago Systems Group, Inc., a technology consulting firm, and has served as a finance executive at SmithKline Beecham Corporation and Avery Dennison Corporation Warren S. Rustand. Director since May 2005. Lead director; Chairperson of compensation committee – Managing Director of SC Capital Partners, an investment banking group which includes: corporate advisory services, a private equity fund, capital sourcing, with a focus on the microcap market. He has served on the Board of over 40 public, private, and not-for-profit organizations Hunter Hurst, III. Director since 1996. Chairperson of nominating and corporate governance committee – Retired Director of the National Center for Juvenile Justice, the leading resource for juvenile justice research and statistics in the western hemisphere |
 21
Independent and Experienced Board (cont.) Colonel Richard Singleton. Director since 1998 – Retired United States Army colonel. One of the founders of Youth Services International, Inc., a Nasdaq listed company that provided private institutional care for at-risk youth. Additional experience includes superintendent of Boys School for the Department of Juvenile Justice State of Florida, Regional Director of operations for Three Springs, Inc., responsible for operations and management of juvenile justice facilities in the State of Georgia Craig A. Norris. Director since November 2008. Chief operating officer since April 2004; president, eastern division since 1998 – Experience includes chief operating officer of Parents and Children Together, Inc., a home based counseling provider; psychotherapist for the Arizona Department of Health; treatment coordinator for the Arizona Center for Clinical Management |
 22
Strong Focus on Corporate Governance Providence has a strong independent Board – More than two-thirds of Board members are independent
directors (5 out of 7 directors) – Key Board committees are comprised solely of independent directors Strong corporate governance practices – Stockholders may call special meetings – Stockholders may act by written consent – No supermajority vote required for stockholders to amend bylaws Active and engaged Board – Frequent meetings and discussions – 12 full Board meetings in 2008 – All directors attended at least 75% of the Board meetings held during the period for which he or she was a director All directors have extensive management and/or leadership experience |
 23
Strong Focus on Corporate Governance (cont.) Recent bylaw amendments enacted to enhance corporate governance – Implemented majority voting in the election of directors in uncontested elections – Made it easier for stockholders to call a special meeting of stockholders and nominate candidates for election at Providence’s annual meetings Adoption of “stockholder-friendly” rights plan – Three-year term – Annual review by committee of independent directors – 20% trigger for flip-in or flip-over – Subject to being redeemed by stockholders in the event of a “qualified offer” – No dead-hand, slow-hand, no-hand or similar feature that limits the
ability of a future board to redeem the pill |
 24
Avalon’s Agenda Not in Best Interests of ALL Providence Stockholders The members of the Avalon Group have no significant or relevant experience in delivering social services – All of the members of the dissident group soliciting proxies at the 2009 Annual
Meeting in support of their two nominees are affiliates of Avalon Correctional
Services, Inc. – Avalon Correctional Services, a publicly-traded company on the pink sheets,
operates correctional facilities for governmental payers in 3 states, OK, WY
and TX, and has no significant or relevant experience in delivering social
services. It also has no experience working with government payers in most
of the 42 states in which Providence operates. Avalon Corrections Services has a history of substandard corporate governance practices – In 2005, Donald Smith, the controlling stockholder and sole director of Avalon
Correctional Services, voluntarily delisted it from Nasdaq (after it was
threatened with delisting for lack of any independent directors and failure to
comply with other Nasdaq requirements). – Donald Smith also unilaterally terminated the registration of Avalon’s shares
with the SEC in order to avoid being legally required to comply with the
SEC’s reporting requirements and the corporate governance and other
provisions of Sarbanes-Oxley |
 25
Avalon’s Agenda Not in Best Interests of ALL Providence Stockholders (Cont.) Avalon actions suggest undisclosed agenda to obtain substantial influence and effective control over Providence – Shortly after acquiring their PRSC stake, the Avalon Group made a transaction proposal to Providence that would have enabled them to: substantially increase their PRSC ownership interest in a manner dilutive, unfair and economically disadvantageous to other stockholders, and acquire PRSC voting rights disproportionate to their economic investment – Since first meeting with Providence in November 08, Avalon has sought to have their hand-picked and unqualified candidates added to the Providence Board – Avalon unequivocally rejected Providence’s offer to instead add mutually
acceptable independent director with industry expertise who could enhance
the Board’s composition and represent ALL stockholders No member of the Avalon Group has ever identified any suggestions for operational improvements or other initiatives to enhance stockholder value |
 Avalon Could
Actually Jeopardize Providence’s Momentum and Success 26 |
 27
We Do Not Believe Avalon’s Nominees Would Add Value to the Providence Board Avalon’s two nominees have: No relevant experience with a company of Providence’s scale and complexity Never served on the board of directors of a public company. No or limited experience serving in a senior leadership position at a public reporting company. No relevant experience in delivering social services or non-emergency transportation services and no understanding of Providence’s industries Like the Avalon Group, provided no business plan or strategic insights |
 28
Closing Remarks 2009 is off to a strong start Providence is committed to its plan to continuing to deliver value for all stockholders, reduce its debt and grow the company The Company’s management team and Board are comprised of proven executives and leaders with a deep understanding of the social services industry and broad expertise in public company leadership, finance, accounting and overall executive management – areas that are critical to Providence’s overall success Providence has well-established and long-standing relationships with government payers across the country and its programs are highly rated Recent corporate governance enhancements are designed to increase accountability of the Providence Board to stockholders and to increase the opportunity of stockholders to participate in the governance of Providence |
 29
Proxy Statement Disclosure Important Information The Providence Service Corporation (the “Company”) and its directors and certain executive officers and other employees are deemed participants in the solicitation of proxies from stockholders in connection with the 2009 Annual Meeting of Stockholders (the “2009 Annual Meeting”). The Company has filed a Definitive Proxy Statement with the Securities and Exchange Commission (the “SEC”) relating to the 2009 Annual Meeting. Information regarding the interests of such participants is included in the Definitive Proxy Statement. WE URGE INVESTORS TO READ THE DEFINITIVE PROXY STATEMENT (INCLUDING ANY SUPPLEMENTS THERETO) AND ANY OTHER RELEVANT DOCUMENTS THAT THE COMPANY WILL FILE WITH THE SEC WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. Stockholders will be able to obtain, free of charge, copies of the Definitive Proxy Statement and any other documents filed by the Company with the SEC in connection with the 2009 Annual Meeting at the SEC’s website at
http://www.sec.gov. and the Company’s website at http://www.provcorp.com. |
 30
Adjusted EBITDA Reconciliation 2008 2007 Adjusted EBITDA 39,088 $ 30,701 $ Subtract: Interest expense (income), net 18,599 1,601 Income taxes (12,311) 9,722 Depreciation and amortization 12,722 4,989 Impairment charge (A) 169,930 - Acceleration of stock based compensation
(B) 5,753 - Net income (loss) (155,605) $ 14,389 $ (A) (B) On December 30, 2008, the Compensation Committee of the Company's Board of
Directors approved the acceleration of the vesting dates of all
unvested stock options and restricted stock previously awarded
to eligible employees, directors and consultants, including
stock options and restricted stock granted to executive officers and non-employee directors, under the Company's 2006
Long-Term Incentive Plan, effective on that day. In
approving this vesting acceleration, the Compensation Committee
considered, among other things, the anticipated boost to
employee moral expected to result from such action and that such acceleration would eliminate the Company's recognition of any stock compensation expense
with respect to these options and awards in future
periods. The Providence Service Corporation Reconciliation of Non-GAAP Financial Measures Adjusted EBITDA (in thousands) Due to the significant and sustained decline in the Company's market
capitalization and the uncertainty in the state payer environment as
well as the impact of related budgetary decisions on the
Company's earnings during the six months ended December 31,
2008, the Company recorded asset impairment charges totaling
approximately $169.9 million related to its goodwill and other intangible assets for the year ended December 31, 2008.
|