The Providence Service Corporation

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The Providence Service Corporation

5524 East 4th Street
Tucson, Arizona 85711
U.S.A.
Telephone: (520) 747-6600
Toll Free: (800) 489-0064
Fax: (520) 747 9787
Web site: http://www.provcorp.com

Public Company
Incorporated: 1997
Employees: 1,721
Sales: $59.27 million (2003)
Stock Exchanges: NASDAQ
Ticker Symbol: PRSC
NAIC: 624110 Child and Youth Services; 624190 Other Individual and Family Services

The Providence Service Corporation provides and manages government-sponsored social services, offering community-based services as an alternative to programs involving institutional care. Providence provides care to individuals who are eligible for government assistance, collecting its revenues from contracts with state and local governments, government intermediaries, and not-for-profit organizations. The company does not own or operate any hospitals, institutions, or similar facilities. Instead, it employs social workers, mental health professionals, and counselors who offer their services in the client's home or community. Providence operates in 18 states, serving nearly 13,000 clients.

1980s Origins

Providence was started by three individuals well versed the provision of social services and health care. The group was led by Fletcher J. McCusker, who founded his first company, Century Healthcare, in 1983. McCusker led Century Healthcare, a mental health care company, for nearly a decade, presiding over its development until 1992, when it was acquired by Columbia Healthcare. Next, McCusker served as the chief executive officer of Introspect Healthcare Corporation, a company that operated as a behavioral health provider. McCusker led Introspect from September 1992 until July 1995, when he left the organization to become the executive vice-president of Youth Services International, Inc. Youth Services operated as publicly traded company that provided private institutional care for at-risk youth.

It was during his tenure at Youth Services that McCusker came up with the idea of Providence. Part of his job responsibilities at Youth Services required McCusker to broker deals with agencies that dispensed state funds for social services. He negotiated with these state payer entities and, if successful in his discussions, signed contracts with them. More often than not, McCusker was successful. He developed working relationships with agencies in 38 states, which kept him in contact with what government entities desired in terms of social-service practices. In the course of his discussions with the agencies, he was asked frequently to develop community-based programs as an alternative to the conventional institutionally based programs that forced at-risk juveniles to receive care outside their home communities. McCusker wanted to respond to what the agencies wanted, but at institutionally oriented Youth Services he was unable to develop a community-based program to replace the prevailing out-of-state programs. McCusker decided to start his own company and answer the need he perceived to be unfulfilled. He left Youth Services in December 1996, less than a year and a half after joining the company, and founded Providence.

To assist him in running Providence, McCusker, a Tucson, Arizona, native, turned to two individuals with a wealth of experience in Arizona's health care industry, William B. Dover and Mary J. Shea. In his lengthy professional career, Dover held numerous executive positions, including serving as director of the Arizona Department of Health, a title he held for one year beginning in 1986. Between 1988 and 1991, Dover worked as the assistant director for the Arizona Department of Behavioral Health before starting his own company, Dover Consulting, which specialized in juvenile justice, child welfare, and child and adult mental health. In 1993, he served as vice-president for program development of Arizona Health Care Contract Management Services, Inc. In 1995, Dover began a two-year stint as executive director of Desert Hills, an in-patient facility serving children and adolescents in Tucson. Dover left Desert Hills in January 1997 and joined McCusker's fledgling Providence the following month, hired as the company's president. Mary Shea joined Providence in February 1997 as well, when she was appointed president of the company's Arizona operation. Before joining Providence, Shea served as a supervisor for the State of Arizona and Arizona Center for Clinical Management, working in that capacity from 1990 to 1995. In October 1995, Shea joined Introspect, three months after McCusker vacated his post as chief executive officer. She served as the director of case management at Introspect, leaving the company to join McCusker and Dover at Providence.

McCusker organized Providence to reflect the essence of the company's motto "human services without walls." Providence did not own any facilities, a condition of its strategy to provide services in the client's own environment, rather than in hospitals, institutions, or correctional facilities. The company employed a staff of counselors, social workers, and mental health professionals who provided individual and family counseling in a client's own home. Providence's clients were eligible for government assistance for a variety of reasons, including emotional/educational disabilities, income level, or a court order. The company's paying customers included public schools, state-level agencies in charge of Medicaid programs for the poor, and government departments such as those dealing with welfare, child welfare, and justice. Providence's contracts with these entities typically stipulated an hourly fee for the services provided by the company.

McCusker's close contact with state and local government agencies during his stint at Youth Services enabled him to sense the first stirrings of what would become a national trend. This trend—the search for alternative ways of providing government-sponsored social services—was propelled by economic considerations rather than purely out of concern for the welfare of the individuals who benefited from government-funded programs. It was a trend whose development was fueled by the privatization of the government's social-service business, a process that took time and, consequently, held Providence's financial growth in check. When McCusker set about organizing Providence in December 1996, social-service agencies were just beginning to respond to government initiatives geared toward privatization, spawning McCusker's visionary perspective on the development of the government-sponsored social services. Because of McCusker's pioneering role in the industry, Providence did not experience widespread demand for its services until the trend toward non-institutional care and social-service privatization became a national policy.

Although McCusker was early into the game, his perception of the coming demand for alternative social services was correct. Within 30 days of its inception, Providence secured its first contract, legitimizing the company's "human services without walls" strategy. During its first year, Providence accumulated 1,333 clients, all located in Arizona. The company added to its client roster exponentially and greatly extended its geographic reach as the alternative-care trend developed into a movement and as the range of its services increased. To a lesser extent, the company grew by acquiring other companies, a means of expansion first explored in February 1997, the same month William Dover and Mary Shea arrived to assist McCusker.

Acquisitions in the Late 1990s

The acquisitions completed during Providence's formative years were not large in scope, but the additions did enable the company to add new services and new markets. The company acquired smaller versions of itself, completing its first "tuckin" acquisition on February 5, 1997. On that date, Providence purchased Parents and Children Together, Inc. (PACT), an acquisition that provided the basis of Providence's business. A Tucson-based provider of home-based and school-based services to troubled youths and their families, PACT gave McCusker his first asset with which to build Providence into a going enterprise. PACT represented the genesis of Providence's home-and community-based services, the source of its only revenue during its first several years in business and reason the company was able to secure more than 1,300 clients in Arizona during its first year of business.

Following the acquisition of PACT, Providence completed its first geographic leap, establishing a presence outside Arizona for the first time. At the end of November 1997, the company acquired Family Preservation Services, Inc. for $3.1 million, a purchase price that was reduced to $2.2 million in 1999. Although the acquisition of Family Preservation represented a modest capital outlay, the strategic importance of the acquisition was considerable. Family Preservation offered home-based counseling for children, operating six locations in Virginia. The deal also included the acquisition of the rights to a management agreement with Family Preservation Services of South Carolina, Inc., a not-for-profit social-service organization. Together, the acquisitions gave Providence a foothold in the eastern United States, a region that played a major role in sustaining the company's operations in the coming years. The company used its six locations in Virginia as a springboard for expansion into other states, eventually adding Family Preservation offices in Maine, Florida, North Carolina, and West Virginia.

Company Perspectives:

Providence's mission is to ensure the provision of accessible, effective, high quality community-based counseling and social services as an alternative to traditional institutional care. Providence is dedicated to ensuring that all clients have access to professional community-based care, proven treatment methods and comprehensive service planning. Providence offers a wide variety of programs across the country, and all share a primary commitment to provide care that builds upon clients' strengths and responds to their concerns.

The two acquisitions completed in 1997 were fundamentally important to Providence's transformation from an idea by McCusker into a financially viable business. The addition of PACT and Family Preservation gave Providence a foundation to build upon, something the company did during the late 1990s, as it relied on organic means of expansion to fuel its growth. New Services and new markets were added to the company's operations, providing a modest rate of growth. At the end of Providence's fiscal year in June 1998, revenues totaled $8.5 million. The following year, the company registered a $5 million increase, generating $12.5 million in sales. Not long after releasing its annual financial statement for 1999, Providence began to benefit from increased national demand for alternative methods of providing social services, an interest that was noted by McCusker. In a November 11, 2003 interview with The Wall Street Transcript, McCusker explained the discernible change in the mindset of those agencies charged with allotting government funds. "Texas and other states that were very hard on the criminal element with mandatory sentences and those kinds of things made it hard for us to get in and even make our pitch because they were perfectly satisfied with the institutional alternative. In about 2000 though," McCusker continued, "when state budgets began to experience deficits, even the unenlightened states began to approach us."

As it entered the 21st century, Providence began to experience a surge in growth that stemmed from the financial benefits of "human services without walls." In his interview with The Wall Street Transcript, McCusker expressed his understanding of why Providence was succeeding, even if the reason for the company's success was not at the heart of its mission. "Demand is now being driven more by the economics than by any program value," he explained. "We believe we can also demonstrate that our clients function better and do better in community-based programs compared to the institutional alternative. Instinctively, you can see that someone who is treated in their own home is going to have a better long-term outcome than someone that's in an institution, but they're still coming to us because of the pure economics. If you look at our growth, it's really been since 2000 that we've taken off in terms of the number of contracts and the number of states that we currently work with."

As Providence pressed ahead in a climate increasingly receptive to its market approach, the company was able to leverage its financial success toward becoming a more sophisticated, mature corporation. In March 2002, the company completed a $10.3 million acquisition, purchasing Camelot Care Corporation. The acquisition of Camelot served as Providence's entry into providing foster care services. Camelot provided foster care services in Tennessee, Illinois, Indiana, Nebraska, Ohio, and Florida to roughly 1,700 children when it became part of Providence's operations.

Providence in the 21st Century

Profitability and fast-paced revenue growth described Providence's progress during the early 2000s. After recording a net loss totaling more than $2.6 million during its first three years of business, the company posted its first annual profit in 2001, registering $394,000 in net income. The following year, Providence generated $1.3 million in net income. After this rise in profits, coupled with sales growth that saw Providence post $27.7 million in revenue for the fiscal year ended in June 2002, the business press took note of the company's achievements. In the fall of 2002, Inc. magazine selected Providence as one of the 500 fastest growing, privately held companies in the United States. It was an honor Providence ensured it would not receive the following year. In early 2003, McCusker began to make plans for Providence's initial public offering (IPO) of stock.

After delays in meeting reporting obligations mandated by the Securities and Exchange Commission (SEC), Providence filed for its IPO in June 2003. The Company wanted to offer as much as $60 million worth of stock, intending to use this revenue to pay down $17.3 million in long-term debt and to continue expanding its services and its geographic reach. Providence completed its IPO in August 2003, selling 4.3 million shares at $12 per share. After paying for expenses incurred while completing the IPO, the company raised approximately $30 million.

In the wake of its IPO, Providence stood positioned to expand in earnest. Financially, the company exuded a level of strength unprecedented in its existence. At the end of 2003 (Providence changed its fiscal year to coincide with the calendar year), the company recorded a 42 percent increase in revenue to $59.3 million, while its net income, excluding expenses related to the IPO, totaled $3.3 million. As the company prepared for the future, it was expected to augment its organic expansion by completing acquisitions of companies similar to itself, although McCusker did not expect acquisitions to be the driving force of the company's expansion strategy. "There's not a whole lot of providers out there like us," he said in an August 19, 2003 interview with Knight Ridder/Tribune Business News. Nevertheless, Providence completed two acquisitions in the first half of 2004, perhaps indicating a more active posture on the acquisition front than McCusker articulated. In January, the company acquired Dockside Services, Inc., an Indiana-based provider of services to children, youth, and families. In May, Providence acquired Pottsville Behavioral Counseling Group, a Pennsylvania-based provider of screening and assessment services to children and adolescents.

Principal Subsidiaries

Family Preservation Services, Inc.; Camelot Community Care, Inc.; Pottsville Behavioral Counseling Group; Parents and Children Together, Inc.; Cypress Management Services, Inc.

Principal Competitors

Maximus, Inc.; National Mentor, Inc.; Cornell Companies, Inc.; Res-Care, Inc.; Psychiatric Solutions, Inc.; The Devereaux Foundation.

Key Dates:

1996:
Fletcher J. McCusker forms Providence.: 1997:
Providence acquires Parents and Children Together, Inc., and Family Preservation Services, Inc.: 2002:
Providence acquires Camelot Care Corporation.: 2003:
Providence completes its initial public offering of stock.: 2004:
Providence acquires Dockside Services, Inc., and Pottsville Behavioral Counseling Group.