UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2008.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ___________
Commission file number | 1-33323 |
PHC, INC.
(Exact name of registrant as specified in its charter)
Massachusetts |
| 04-2601571 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
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200 Lake Street, Suite 102, Peabody MA |
| 01960 |
(Address of principal executive offices) |
| (Zip Code) |
978-536-2777
(Registrant’s telephone number)
_____________________________________________________________________________________________
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No___
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer __________ |
| Accelerated filer __________ |
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Non accelerated filer __________ |
| Smaller reporting company X |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ____ No X
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Number of shares outstanding of each class of common equity as of November 4, 2008:
Class A Common Stock | 19,374,250 |
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Class B Common Stock | 775,080 |
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PHC, Inc.
PART I. | FINANCIAL INFORMATION |
Item 1. | Condensed Consolidated Financial Statements |
Condensed Consolidated Balance Sheets – September 30, 2008 (unaudited) and June 30, 2008
Condensed Consolidated Statements of Operations (unaudited) - Three months ended September 30, 2008 and September 30, 2007
Condensed Consolidated Statements of Cash Flows (unaudited) – Three months ended September 30, 2008 and September 30, 2007
Notes to Condensed Consolidated Financial Statements
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Item 3. | Quantitative and Qualitative Disclosure About Market Risk |
Item 4T. | Controls and Procedures |
PART II. | OTHER INFORMATION |
Item 2. | Repurchase of Treasury Stock |
Item 6. | Exhibits |
| Signatures |
PART I. FINANCIAL INFORMATION |
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Item 1. Financial Statements |
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PHC, INC. AND SUBSIDIARIES | ||||
CONDENSED CONSOLIDATED BALANCE SHEETS | ||||
|
| September 30, |
| June 30, |
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| 2008 |
| 2008 |
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| (unaudited) | ||
ASSETS |
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Current assets: |
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Cash and cash equivalents | $ | 1,830,255 | $ | 3,142,226 |
Accounts receivable, net of allowance for doubtful accounts of $2,288,252 at September 30, 2008 and $2,230,371 at June 30, 2008 |
|
6,916,012 |
|
6,439,733 |
Other receivables- third party |
| 170,633 |
| -- |
Prepaid expenses |
| 297,771 |
| 491,503 |
Prepaid income taxes |
| 436,354 |
| 269,074 |
Other receivables and advances |
| 869,840 |
| 623,295 |
Deferred income tax asset - current |
| 967,999 |
| 967,999 |
Assets held for sale - Pivotal |
| 5,693,594 |
| 5,313,993 |
Total current assets |
| 17,182,458 |
| 17,247,823 |
Accounts receivable, non-current |
| 35,000 |
| 35,000 |
Other receivables |
| 66,712 |
| 71,889 |
Property and equipment, net |
| 4,656,828 |
| 4,382,421 |
Deferred income tax asset – non-current |
| 528,840 |
| 528,840 |
Deferred financing costs, net of amortization of $326,541 and $286,413 at September 30, 2008 and June 30, 2008 |
|
445,700 |
|
470,829 |
Goodwill |
| 969,098 |
| 969,098 |
Other assets |
| 2,843,077 |
| 2,784,965 |
Total assets | $ | 26,727,713 | $ | 26,490,865 |
LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable | $ | 1,832,588 | $ | 1,318,421 |
Current maturities of long-term debt |
| 652,411 |
| 651,379 |
Revolving credit note |
| 1,119,705 |
| 977,203 |
Current portion of obligations under capital leases |
| 137,329 |
| 170,285 |
Accrued payroll, payroll taxes and benefits |
| 1,636,183 |
| 1,528,640 |
Accrued expenses and other liabilities |
| 1,549,728 |
| 1,434,983 |
Liabilities held for sale - Pivotal |
| 910,124 |
| 1,128,470 |
Total current liabilities |
| 7,838,068 |
| 7,209,381 |
Long-term debt, net of current maturities |
| 395,208 |
| 393,705 |
Obligations under capital leases |
| 210,284 |
| 229,274 |
Total liabilities |
| 8,443,560 |
| 7,832,360 |
Stockholders’ equity: |
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Preferred Stock, 1,000,000 shares authorized, none issued or outstanding |
| -- |
| -- |
Class A common stock, $.01 par value, 30,000,000 shares authorized, 19,813,540 and 19,806,147 shares issued at September 30, 2008 and June 30, 2008, respectively |
|
198,135 |
|
198,061 |
Class B common stock, $.01 par value, 2,000,000 shares authorized, 775,080 and 775,672 issued and outstanding at September 30, 2008 and June 30, 2008, respectively, each convertible into one share of Class A common stock |
|
7,751 |
|
7,757 |
Additional paid-in capital |
| 27,406,664 |
| 27,388,821 |
Treasury stock, 414,290 and 387,698 shares of Class A common stock at September 30, 2008 and June 30, 2008, respectively, at cost |
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(745,476) |
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(685,916) |
Accumulated deficit |
| (8,582,921) |
| (8,250,218) |
Total stockholders’ equity |
| 18,284,153 |
| 18,658,505 |
Total liabilities and stockholders’ equity | $ | 26,727,713 | $ | 26,490,865 |
See Notes to Condensed Consolidated Financial Statements
PHC, INC. AND SUBSIDIARIES |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
(Unaudited) |
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| Three Months Ended | ||
|
| September 30, | ||
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| 2008 |
| 2007 |
Revenues: |
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Patient care, net | $ | 10,559,496 | $ | 10,155,217 |
Contract support services |
| 1,132,409 |
| 1,127,984 |
Total revenues |
| 11,691,905 |
| 11,283,201 |
Operating expenses: |
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Patient care expenses |
| 6,158,157 |
| 5,296,074 |
Cost of contract support services |
| 827,779 |
| 802,648 |
Provision for doubtful accounts |
| 445,814 |
| 422,226 |
Administrative expenses |
| 4,694,974 |
| 3,609,936 |
Total operating expenses |
| 12,126,724 |
| 10,130,884 |
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Income (loss) from operations |
| (434,819) |
| 1,152,317 |
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Other income (expense): |
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Interest income |
| 51,269 |
| 32,535 |
Other income |
| 30,854 |
| 14,099 |
Interest expense |
| (81,642) |
| (113,899) |
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Total other income (expenses), net |
| 481 |
| (67,265) |
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Income (loss) before for taxes |
| (434,338) |
| 1,085,052 |
Income tax (benefit) provision |
| (39,419) |
| 461,257 |
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Income (Loss) from continuing operations |
| (394,919) |
| 623,795 |
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Discontinued operations ��� net of tax provision - Pivotal |
| 62,216 |
| 176,216 |
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Net income (loss) applicable to common shareholders |
$ |
(332,703) |
$ |
800,011 |
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Basic net income (loss) per common share |
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Continuing operations | $ | (0.02) | $ | 0.03 |
Discontinued operations |
| 0.00 |
| 0.01 |
| $ | (0.02) | $ | 0.04 |
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Basic weighted average number of shares outstanding |
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20,178,087 |
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20,136,781 |
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Diluted net income (loss) per common share |
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Continuing Operations |
| (0.02) |
| 0.03 |
Discontinued operations |
| 0.00 |
| 0.01 |
| $ | (0.02) | $ | 0.04 |
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Diluted weighted average number of shares outstanding |
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20,178,087 |
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20,601,828 |
See Notes to Condensed Consolidated Financial Statements.
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PHC, INC. AND SUBSIDIARIES |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
(Unaudited) |
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| For the Three Months Ended September 30, | ||
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| 2008 |
| 2007 |
Cash flows from operating activities: |
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Net (loss) income |
| (332,703) |
| 800,011 |
Net income from discontinued operations |
| 62,216 |
| 176,216 |
Net (loss) income from continuing operations | $ | (394,919) | $ | 623,795 |
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: |
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Depreciation and amortization |
| 263,936 |
| 199,568 |
Non-cash interest expense |
| 43,011 |
| 38,479 |
Deferred income tax expense |
| -- |
| 418,204 |
Earnings of unconsolidated subsidiary |
| (14,203) |
| -- |
Non-cash stock based compensation |
| 2,133 |
| 62,705 |
Provision for doubtful accounts |
| 445,814 |
| 422,226 |
Changes in: |
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Accounts receivable and other reeivable |
| (1,334,094) |
| (677,370) |
Prepaid expenses and other current assets |
| 26,452 |
| 4,463 |
Other assets |
| (133,829) |
| (2,712) |
Accounts payable |
| 514,167 |
| 48,599 |
Accrued expenses and other liabilities |
| 222,288 |
| (234,142) |
Net cash (used in) provided by continuing operations |
| (359,244) |
| 903,815 |
Net cash (used in) provided by discontinued operations |
| (310,275) |
| 436,234 |
Net cash (used in) provided by operations |
| (669,519) |
| 1,340,049 |
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Cash flows from investing activities: |
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Acquisition of property and equipment |
| (486,522) |
| (259,430) |
Equity investment in unconsolidated subsidary | 38,100 | -- | ||
Construction in progress |
| - |
| (26,919) |
Net cash used in investing activities of continuing operations |
| (448,422) |
| (286,349) |
Net cash used in investing activities of discontinued operations |
| (33,188) |
| (1,915) |
Net cash used in investing activities |
| (481,610) |
| (288,264) |
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Cash flows from financing activities: |
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Revolving debt, net |
| 142,502 |
| (956,246) |
Principal payments on long-term debt |
| (67,294) |
| (82,331) |
Proceeds from issuance of common stock, net |
| 15,778 |
| -- |
Purchase of treasury stock |
| (59,560) |
| (394,515) |
Net cash provided by (used in) financing continuing operations |
| 31,426 |
| (1,433,092) |
Net cash used in financing discontinued operations |
| (192,268) |
| (192,435) |
Net cash used in financing activities |
| (160,842) |
| (1,625,527) |
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Net decrease in cash and cash equivalents continuing operations |
| (776,240) |
| (815,626) |
Net decrease in cash and cash equivalents discontinued Operations |
| (535,731) |
| 241,884 |
Net decrease in cash and cash equivalents |
| (1,311,971) |
| (573,742) |
Beginning cash and cash equivalents |
| 3,142,226 |
| 3,307,892 |
Ending cash and cash equivalents | $ | 1,830,255 | $ | 2,734,150 |
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SUPPLEMENTAL CASH FLOW INFORMATION: |
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Cash paid during the period for: |
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Interest | $ | 52,957 | $ | 78,141 |
Income taxes |
| 127,860 |
| 256,094 |
See Notes to Condensed Consolidated Financial Statements
PHC, INC. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2008
Note A - The Company
PHC, Inc. (the “Company”) is incorporated in the state of Massachusetts. The Company is a national health care company, which operates subsidiaries specializing in behavioral health services including the treatment of substance abuse, which includes alcohol and drug dependency and related disorders and the provision of psychiatric services. The Company also operates help lines for employee assistance programs, call centers for state and local programs, provides management, administrative and online behavioral health services and conducts pharmaceutical research studies. The Company primarily operates under four business segments:
Behavioral health treatment services, including two substance abuse treatment facilities: Highland Ridge Hospital, located in Salt Lake City, Utah, which also treats psychiatric patients, and Mount Regis Center, located in Salem, Virginia, and ten psychiatric treatment locations which include Harbor Oaks Hospital, a 73-bed psychiatric hospital located in New Baltimore, Michigan, Detroit Behavioral Institute, a 50-bed psychiatric hospital dedicated to adjudicated juveniles located in Detroit, Michigan, Seven Hills Hospital, a 55-bed psychiatric hospital located in Las Vegas, Nevada and eight outpatient behavioral health locations (one in Monroeville, Pennsylvania operating as Wellplace, one in Chesterfield Township, Michigan operating in conjunction with Harbor Oaks Hospital, three in Las Vegas, Nevada operating as Harmony Healthcare and three locations operating as Pioneer Counseling Center in the Detroit, Michigan metropolitan area);
Call center and help line services (contract services), including two call centers: one operating in Midvale, Utah and one in Detroit, Michigan. The Company provides help line services through contracts with major railroads, a smoking cessation contract with a government contractor and a call center contract with the State of Michigan. The call centers both operate under the brand name Wellplace;
Behavioral health administrative services, including delivery of management and administrative and online services. The parent company provides management and administrative services for all of its subsidiaries and online services for its behavioral health treatment subsidiaries and its call center subsidiaries. It also provides behavioral health information through its website Wellplace.com; and
Pharmaceutical study services, including three clinical study sites: two in Arizona, in Peoria and Mesa, and one in Midvale, Utah. These research sites conduct studies of the effects of specified pharmaceuticals on a controlled population through contracts with major manufacturers of the pharmaceuticals. All of the Company’s research sites operate as Pivotal Research Centers. This segment is under a Letter of Intent and is expected to be sold in the near future, and as such, assets and liabilities of this division are listed on the accompanying balance sheet as assets and liabilities held for sale and the results of operations are listed on the statement of operations as discontinued operations.
Note B - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The balance sheet at June 30, 2008 has been derived from the audited consolidated balance sheet at that date. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending June 30, 2009. The accompanying financial statements should be read in conjunction with the June 30, 2008 consolidated financial statements and footnotes thereto included in the Company’s 10-K filed on September 30, 2008.
Estimates and assumptions
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Such estimates include patient care billing rates, realizability of receivables from third-party payors, rates for Medicare and Medicaid and the realization of deferred tax benefits.
Revenue Recognition
The Company bills for its behavioral healthcare services at its inpatient and outpatient facilities using the same software platform for each type of service. All charges are contractually adjusted at the time of billing using adjustment factors based on agreements or contracts with the insurance carriers and the specific plans held by the individuals. This method may still require additional adjustment based on ancillary services provided and deductibles and copays due from the individuals, which are estimated at the time of admission based on
information received from the individual. Adjustments to these estimates are recognized as adjustments to revenue during the period identified, usually when payment is received.
The Company’s policy is to collect estimated co-payments and deductibles at the time of admission. Payments are made by way of cash, check or credit card. If the patient does not have sufficient resources to pay the estimated co-payment in advance, the Company’s policy is to allow payment to be made in three installments - one third due upon admission, one third due upon discharge and the balance due 30 days after discharge. At times the patient is not physically or mentally stable enough to comprehend or agree to any financial arrangement. In this case the Company will make arrangements with the patient once his or her condition is stabilized. At times, this situation will require the Company to extend payment arrangements beyond the three payment method previously outlined. Whenever extended payment arrangements are made, the patient, or the individual who is financially responsible for the patient, is required to sign a promissory note to the Company, which includes interest on the balance due.
Pharmaceutical study revenue is recognized only after a pharmaceutical study contract has been awarded and the patient has been selected and accepted based on study criteria and billable units of service are provided. Where a contract requires completion of the study by the patient, no revenue is recognized until the patient completes the study program. All revenues and receivables from our research division are derived from pharmaceutical companies with no related bad debt allowance.
Contract support service revenue is a result of fixed fee contracts to provide telephone support. Revenue for these services is recognized ratably over the service period. All revenues and receivables from our contract services division are based on a prorated monthly allocation of the total contract amount and usually paid within 30 days of the end of the month.
Note C- Stock Based Compensation
The Company has three active stock plans: a stock option plan, an employee stock purchase plan and anon-employee directors’ stock option plan.
The stock option plan provides for the issuance of a maximum of 1,900,000 shares of Class A common stock of the Company pursuant to the grant of incentive stock options to employees or nonqualified stock options to employees, directors, consultants and others whose efforts are important to the success of the Company. Subject to the provisions of this plan, the compensation committee of the Board of Directors has the authority to select the optionees and determine the terms of the options including: (i) the number of shares, (ii) option exercise terms, (iii) the exercise or purchase price (which in the case of an incentive stock option will not be less than the market price of the Class A common stock as of the date of grant), (iv) type and duration of transfer or other restrictions and (v) the time and form of payment for restricted stock upon exercise of options.
The employee stock purchase plan provides for the purchase of Class A common stock at 85 percent of the fair market value at specific dates, to encourage stock ownership by all eligible employees. A maximum of 500,000 shares may be issued under this plan.
The non-employee director’s stock option plan provides for the grant of non-statutory stock options automatically at the time of each annual meeting of the Board. Under the plan a maximum of 350,000 shares may be issued. Each outside director is granted an option to purchase 20,000 shares of Class A common stock annually at fair market value on the date of grant, vesting 25% immediately and 25% on each of the first three anniversaries of the grant and expiring ten years from the grant date.
The Company follows the provisions of SFAS No. 123 (revised 2004, “Share Based Payment”) (SFAS No. 123R). Under the provisions of SFAS No. 123R, the Company recognizes the fair value of stock compensation in net income, over the requisite service period of the individual grantees, which generally equals the vesting period. All of the Company’s stock compensation is accounted for as an equity instrument and there have been no liability awards granted. Any income tax benefit related to stock compensation will be shown under the financing section of the Cash Flow Statement. Based on the Company’s historical voluntary turnover rates for individuals in the positions who received options in the period, there was no forfeiture rate assumed. It is assumed these options will remain outstanding for the full term of issue. Under the true-up provisions of SFAS 123R, a recovery of prior expense will be recorded if the actual forfeiture is higher than estimated.
Under the provisions of SFAS 123R, the Company recorded $33,782 and $55,305 of stock-based compensation on its consolidated condensed statement of income for the three months ended September 30, 2008 and 2007. In addition, the Company recorded a recovery of previously charged compensation of $47,797 for the three months ended September 30, 2008.
The Company had the following activity in its stock option plans for the three months ended September 30, 2008:
|
Number Of Shares |
| Weighted-Average Exercise Price Per Share |
| Intrinsic Value At September 30, 2008 |
Balance – June 30, 2008 | 1,247,000 | $ | 2.17 |
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Granted | -- |
| -- |
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Exercised | -- |
| -- |
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Expired | -- |
| -- |
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Balance – September 30, 2008 | 1,247,000 | $ | 2.17 | $ | 261,870 |
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Exercisable | 880,117 | $ | 1.93 | $ | 396,053 |
There were no options exercised during the three months ended September 30, 2008.
The following summarizes the activity of the Company’s stock options that have not vested for the three months ended September 30, 2008.
| Number Of Shares |
|
Weighted- Average Fair Value |
|
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|
Non-vested at July 1, 2008 | 418,758 | $ | .64 |
Granted | -- |
| -- |
Expired | -- |
| -- |
Vested | 51,875 | $ | .31 |
Non-vested at September 30, 2008 | 366,883 | $ | .66 |
The compensation cost related to the fair value of these shares of approximately $178,500 will be recognized as these options vest over the next three years.
The Company utilizes the Black-Scholes valuation model for estimating the fair value of the stock compensation granted. There were no options granted under the stock option plans for the three months ended September 30, 2008 or September 30, 2007.
Note D- Discontinued Operations
During the quarter ended September 30, 2008, the Company signed a Letter of Intent to sell the research division of the Company to a prominent research company. The Company is currently completing the Purchase and Sale agreement and expects the transaction will be completed in the near future. The subsidiary is expected to continue its normal operations through the date of the sale. The Company does not expect to have any continuing involvement or receive cash flows or revenue from this business after the completion of the sale. Based on this, and in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long Lived Assets”, the assets and liabilities of the research division are reported as assets held for sale and liabilities held for sale on the accompanying balance sheets and the results of operations of the division are reported as discontinued operations on the statements of operations.
| The following table summarizes the discontinued operations for the periods presented: |
| For the three months ended September 30, | |||
|
| 2008 |
| 2007 |
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Revenue | $ | 1,295,453 | $ | 1,420,965 |
Operating Expenses | $ | 1,193,818 | $ | 1,199,130 |
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Income before taxes | $ | 101,635 | $ | 221,835 |
Provision for taxes | $ | 39,419 | $ | 45,619 |
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Net income from discontinued operations | $ | 62,216 | $ | 176,216 |
The following table summarizes the Assets and Liabilities held for sale as presented:
| As of | |||
|
| September 30, 2008 |
| June 30, 2008 |
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Cash | $ | 219,715 | $ | 190,162 |
Accounts Receivable |
| 2,545,456 |
| 2,102,347 |
Property and Equipment |
| 107,502 |
| 74,314 |
Intangible assets |
| 2,748,277 |
| 2,748,277 |
Other assets |
| 72,644 |
| 198,893 |
Total Assets held for sale | $ | 5,693,594 | $ | 5,313,993 |
|
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Accounts Payable | $ | 85,542 | $ | 162,660 |
Deferred Revenue |
| 108,149 |
| 54,242 |
Accrued expenses |
| 233,463 |
| 197,846 |
Other Liabilities |
| 482,970 |
| 713,722 |
Total Liabilities held for sale | $ | 910,124 | $ | 1,128,470 |
Note E – Reclassification
Certain September 30, 2007 amounts have been reclassified to be consistent with the September 30, 2008 presentation.
Note F – Business Segment Information
The Company’s behavioral health treatment services have similar economic characteristics, services, patients and clients. Accordingly, all behavioral health treatment services are reported on an aggregate basis under one segment. The Company’s segments are more fully described in Note A above. Residual income and expenses from closed facilities are included in the administrative services segment. The following summarizes the Company’s segment data:
|
| Treatment Services |
| Discontinued Operations |
| Contract Services |
| Administrative Services |
|
Eliminations |
|
Total |
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For the three months ended September 30, 2008 |
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Revenue–external Customers |
$ |
10,559,496 |
$ | -- |
$ |
1,132,409 |
$ |
-- |
$ |
-- |
$ |
11,691,905 |
Revenues – intersegment |
| 688,450 |
| -- |
| -- |
| 1,353,700 |
| (2,042,150) |
| -- |
Segment net income (loss) |
| 351,798 |
| 62,216 |
| 304,666 |
| (1,051,383) |
| -- |
| (332,703) |
Capital expenditures |
| 474,449 |
| -- |
| 3,863 |
| 8,210 |
| -- |
| 486,522 |
Depreciation & amortization |
|
192,303 |
| -- |
|
26,402 |
|
45,231 |
|
-- |
|
263,936 |
Interest expense |
| 40,816 |
| -- |
| - |
| 40,826 |
| -- |
| 81,642 |
Income tax benefit |
| -- |
| -- |
| -- |
| (39,419) |
| -- |
| (39,419) |
Identifiable assets |
| 13,335,766 |
| 5,693,594 |
| 659,476 |
| 7,038,877 |
| -- |
| 26,727,713 |
Goodwill and intangible assets |
|
969,098 |
| -- |
|
-- |
|
-- |
|
-- |
|
969,098 |
Note F – Business Segment Information (Continued)
|
| Treatment Services |
| Discontinued Operations |
| Contract Services |
| Administrative Services |
|
Eliminations |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue–external customers |
$ | 10,155,217 | $ | -- | $ | 1,127,984 | $ | -- | $ | -- | $ | 11,283,201 |
Revenues – intersegment |
| 86,900 |
| -- |
| -- |
| 1,044,600 |
| (1,131,500) |
| -- |
Segment net income (loss) |
| 1,507,100 |
| 176,216 |
| 291,681 |
| (1,174,986) |
| -- |
| 800,011 |
Capital expenditures |
| 224,087 |
| -- |
| 2,800 |
| 59,462 |
| -- |
| 286,349 |
Depreciation & amortization |
|
128,208 |
| -- |
|
28,574 |
|
42,786 |
|
-- |
|
199,568 |
Interest expense |
| 64,107 |
| -- |
| 1,144 |
| 48,648 |
| -- |
| 113,899 |
Income tax expense |
| 390,295 |
| -- |
| 35,481 |
| 35,481 |
| -- |
| 461,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets |
| 11,903,346 |
| 5,313,993 |
| 504,705 |
| 8,768,821 |
| -- |
| 26,490,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and intangible assets |
|
969,098 |
| -- |
|
-- |
|
-- |
|
-- |
| 969,098 |
Note G – Debt covenants
For the quarter ended September 30, 2008, the Company was not in compliance with its long term debt covenants related to Earnings before Interest, Taxes, Depreciation, and Amortization. These covenants are based on the Company’s projections using an equally distributed average of the Company’s annual projections, which we failed to meet for the quarter ended September 30, 2008, primarily as a result of the start-up of Seven Hills and Capstone Academy and high utilization under our capitated contracts. CapitalSource, the Company’s lender, has provided the Company with a waiver of the covenants for the period.
Note H - Recent accounting pronouncements
| Recently Adopted Standards |
Effective July 1, 2008, we implemented SFAS No. 157 Fair Value Measurement for our financial assets and liabilities that are remeasured and reported at fair value at each reporting period-end date, and non-financial assets and liabilities that are remeasured and reported at fair value at least annually. In accordance with the provisions of Financial Accounting Standard Board ("FASB") Staff Position No FAS 157-2. Effective date of FASB Statement No. 157, we have elected to defer implementation of SFAS No. 157 as it relates to our non-financial assets and non-financial liabilities that are recognized and disclosed at fair value in the financial statements on a nonrecurring basis until January 1, 2009. We are evaluating the impact, if any, this Standard will have on our non-financial assets and liabilities. The adoption of SFAS No 157 to our financial assets and liabiliites and non-financial assets and liabilities that are remeasured and reported at fair value at least annually did not have an impact on our financial results.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”(“SFAS No. 159”), including an amendment of FASB Statement No. 115. SFAS No. 159 allows companies to choose to elect to measure eligible financial instruments and certain other items at fair value that are not required to be measured at fair value. SFAS No. 159 requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company adoption of SFAS No. 159 had no impact on the Company’s financial position and results of operations as no Financial Assets or Financial Liabilities of the company are measured at fair value.
Note I – Income Taxes
In June 2006, the FASB issued FIN 48, which prescribes a comprehensive model for the financial statement recognition, measurement, presentation, and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. The Company adopted the provisions of FIN 48 on July 1, 2007. It required that a change in judgment related to prior years’ tax positions be recognized in the quarter of the change. As a result of the implementation of FIN 48, the Company recognized no material adjustment in the liability for unrecognized tax benefits.
We recognize interest and penalties related to uncertain tax positions in general and administrative expense. As of September 30, 2008, we have not recorded any provisions for accrued interest and penalties related to uncertain tax positions. The adoption of FIN 48 did not have a material impact on our financial reporting or our disclosure requirements.
Tax years 2004-2007 remain open to examination by the major taxing authorities to which we are subject.
Note J - Basic and diluted income (loss) per share:
Income per share is computed by dividing the income applicable to common shareholders by the weighted average number of shares of both classes of common stock outstanding for each fiscal year. Class B common stock has additional voting rights. All dilutive common stock equivalents are included in the calculation of diluted earnings per share; however, since the Company experienced a net loss for the three months ended September 30, 2008, no additional common stock equivalents related to options or warrants were included since they would have been anti-dilutive. For the three months ended September 30, 2007, all dilutive common stock equivalents were included in the calculation of diluted earnings per share using the treasury stock method.
The weighted average number of common shares outstanding used in the computation of earnings (loss) per share is summarized as follows:
| Three months ended September 30, | ||
| 2008 |
| 2007 |
Weighted average shares outstanding – basic |
20,178,087 |
|
20,136,781 |
Employee stock options | -- |
| 444,603 |
Warrants | -- |
| 20,444 |
|
|
|
|
Weighted average shares outstanding – fully diluted |
20,178,087 |
|
20,601,828 |
For the quarater ended September 30, 2008, 230,197 options were excluded from this earings per share calculation that would have been dilitive if the Company's operations had resulted in income for the period instead of a loss.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
In addition to historical information, this report contains statements relating to future events or our future results. These statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended (the "Exchange Act") and are subject to the Safe Harbor provisions created by the statute. Generally words such as "may", "will", "should", "could", "anticipate", "expect", "intend", "estimate", "plan", "continue", and "believe" or the negative of or other variation on these and other similar expressions identify forward-looking statements. These forward-looking statements are made only as of the date of this report. We do not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements are based on current expectations and involve risks and uncertainties and our future results could differ significantly from those expressed or implied by our forward-looking statements.
Overview
The Company presently provides behavioral health care services through two substance abuse treatment centers, two psychiatric hospitals, a residential treatment facility and eight outpatient psychiatric centers (collectively called "treatment facilities"). The Company’s revenue for providing behavioral health services through these facilities is derived from contracts with managed care companies, Medicare, Medicaid, state agencies, railroads, gaming industry corporations and individual clients. The profitability of the Company is largely dependent on the level of patient census and the payor mix at these treatment facilities. Patient census is measured by the number of days a client remains overnight at an inpatient facility or the number of visits or encounters with clients at outpatient clinics. Payor mix is determined by the source of payment to be received for each client being provided billable services. The Company’s administrative expenses do not vary greatly as a percentage of total revenue but the percentage tends to decrease slightly as revenue increases. The Company’s research division, Pivotal Research Centers, Inc., contracts with major manufacturers of pharmaceuticals to assist in the study of the effects of certain pharmaceuticals in the treatment of specific illnesses through its clinics in Utah and Arizona. The Company has signed a letter of intent to sell all the assets of its research division and is currently drafting a purchase and sale agreement that would provide for the completion of the sale in the next few months. Since the sale is expected to be complete in the near future, the assets and liabilities of the research division are reported as held for sale on the accompanying balance sheet and the results of operations are shown as discontinued operations on the statement of operations.
The healthcare industry is subject to extensive federal, state and local regulation governing, among other things, licensure and certification, conduct of operations, audit and retroactive adjustment of prior government billings and reimbursement. In addition, there are on-going debates and initiatives regarding the restructuring of the health care system in its entirety. The extent of any regulatory changes and their impact on the Company’s business is unknown. The current administration has put forth proposals to mandate equality in the benefits available to those individuals suffering from mental illness (The Parity Act). This Act was passed during the current quarter but the target date for full implementation has not yet been determined. This legislation will improve access to the Company’s programs but its total effect on behavioral health providers has not yet been assessed. Managed care has had a profound impact on the Company's operations, in the form of shorter lengths of stay, extensive certification of benefits requirements and, in some cases, reduced payment for services.
Critical Accounting Policies
The preparation of our financial statements in accordance with accounting principles generally accepted in the United States of America, requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an on-going basis, we evaluate our estimates and assumptions, including but not limited to those related to revenue recognition, accounts receivable reserves, income tax valuation allowances, and the impairment of goodwill and other intangible assets. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Revenue recognition and accounts receivable:
Patient care revenues and accounts receivable are recorded at established billing rates or at the amount realizable under agreements with third-party payors, including Medicaid and Medicare. Revenues under third-party payor agreements are subject to examination and contractual adjustment, and amounts realizable may change due to periodic changes in the regulatory environment. Provisions for estimated third party payor settlements are provided in the period the related services are rendered. Differences between the amounts provided and subsequent settlements are recorded in operations in the year of settlement. Amounts due as a result of cost report settlements is recorded and listed separately on the consolidated balance sheets as “Other receivables”. The provision for contractual allowances is deducted directly from revenue and the net revenue amount is recorded as accounts receivable. The allowance for doubtful accounts does not include the contractual allowances.
The Company currently has two “at-risk” contracts. The contracts call for the Company to provide for all of the inpatient and outpatient behavioral health needs of the insurance carrier’s enrollees in Nevada for a fixed monthly fee per member per month. Revenues are recorded monthly based on this formula and the expenses related to providing the services under these contracts are recorded as incurred. The Company provides most of the care directly and, through utilization review, monitors closely, and pre-approves all inpatient and outpatient services not provided directly. The contracts are considered “at-risk” because the payments to third-party providers for services rendered could equal or exceed the total amount of the revenue recorded.
All revenues reported by the Company are shown net of estimated contractual adjustment and charity care provided. When payment is made, if the contractual adjustment is found to have been understated or overstated, appropriate adjustments are made in the period the payment is received in accordance with the AICPA “Audit and Accounting Guide for Health Care Organizations.” Net Contractual adjustments recorded in the quarter ended September 30, 2008 for revenue booked in prior years resulted in a decrease in net revenue of approximately $3,990. Net contractual adjustments recorded in fiscal 2008 for revenue booked in prior years resulted in an increase in net revenue for the year of approximately $48,504.
During the fiscal year ended June 30, 2008, a Medicare cost report settlement of $360,588 was received. No cost report settlements were received or recorded during the three months ended September 30, 2008.
Our accounts receivable systems are capable of providing an aging based on responsible party or payor. This information is critical in estimating our required allowance for bad debts. Below is revenue by payor for the quarters ended September 30, 2008 and 2007 and the fiscal year ended June 30, 2008 and accounts receivable aging information as of September 30, 2008 and June 30, 2008, for our treatment services segment.
Net Revenue by Payor (in thousands) |
For the Three Month Ended September 30 | For the Fiscal Year Ended June 30, | |||||||||
|
| 2008 | 2007 | 2008 | ||||||
|
|
| $ | % |
| $ | % |
| $ | % |
|
|
|
|
|
|
|
|
|
|
|
| Private Pay | $ | 538 | 5 | $ | 469 | 5 | $ | 1,893 | 5 |
| Commercial |
| 7,142 | 68 |
| 6,753 | 66 |
| 27,229 | 66 |
| Medicare * |
| 306 | 3 |
| 373 | 4 |
| 1,263 | 3 |
| Medicaid | $ | 2,573 | 24 | $ | 2,560 | 25 | $ | 10,471 | 26 |
|
|
|
|
|
|
|
|
|
|
|
Net Revenue | $ | 10,559 | $ | 10,155 | $ | 40,856 |
* Includes Medicare settlement revenue as noted above
Accounts Receivable Aging (Net of allowance for bad debts- in thousands)
| As of September 30, 2008 |
Payor |
|
Current |
| Over 30 |
| Over 60 |
| Over 90 |
| Over 120 |
| Over 150 |
| Over 270 |
| Over 360 |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Pay | $ | 647 | $ | 84 | $ | 139 | $ | 103 | $ | 58 | $ | 215 | $ | 30 | $ | 258 | $ | 1,534 |
Commercial |
| 1,572 |
| 1,004 |
| 705 |
| 158 |
| 141 |
| 184 |
| 37 |
| 19 |
| 3,820 |
Medicare |
| 71 |
| 8 |
| 10 |
| 16 |
| -- |
| -- |
| 2 |
| -- |
| 107 |
Medicaid |
| 1,344 |
| 99 |
| 29 |
| 16 |
| 1 |
| 1 |
| -- |
| -- |
| 1,490 |
Total | $ | 3,634 | $ | 1,195 | $ | 883 | $ | 293 | $ | 200 | $ | 400 | $ | 69 | $ | 277 | $ | 6,951 |
As of June 30, 2008
Payor |
|
Current |
| Over 30 |
| Over 60 |
| Over 90 |
| Over 120 |
| Over 150 |
| Over 270 |
| Over 360 |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private Pay | $ | 544 | $ | 72 | $ | 45 | $ | 58 | $ | 56 | $ | 235 | $ | 107 | $ | 263 | $ | 1,380 |
Commercial |
| 1,382 |
| 985 |
| 746 |
| 194 |
| 228 |
| 183 |
| 10 |
| 60 |
| 3,788 |
Medicare |
| 38 |
| -- |
| -- |
| 1 |
| -- |
| -- |
| -- |
| -- |
| 39 |
Medicaid |
| 1,140 |
| 98 |
| 5 |
| -- |
| -- |
| 25 |
| -- |
| -- |
| 1,268 |
Total | $ | 3,104 | $ | 1,155 | $ | 796 | $ | 253 | $ | 284 | $ | 443 | $ | 117 | $ | 323 | $ | 6,475 |
The Company’s days sales outstanding (“DSO”) are significantly different for each type of service and each facility based on the payors for each service. Overall, the DSO for the combined operations of the Company were 61 days for the three months ended September 30, 2008 and 68 days the fiscal year ended June 30, 2008. The table below shows the DSO by segment for the same periods.
Period |
| Treatment |
| Contract |
End |
| Services |
| Services |
|
|
|
|
|
09/30/2008 |
| 58 |
| 56 |
06/30/2008 |
| 59 |
| 43 |
Contract Services DSO’s fluctuate dramatically by the delay in payment of a few days for any of our large contracts. A delay in payment from our major contract was experienced at September 30, 2008 when payment was not received until October 6, 2008.
Pharmaceutical study revenue is recognized only after a pharmaceutical study contract has been awarded and the patient has been selected and accepted based on study criteria and billable units of service are provided. Where a contract requires completion of the study by the patient, no revenue is recognized until the patient completes the study program. All revenues and receivables from our research division are derived from pharmaceutical companies with no related bad debt allowance.
Contract support service revenue is a result of fixed fee contracts to provide telephone support. Revenue for these services is recognized ratably over the service period. Revenues and receivables from our contract services division are based on a prorated monthly allocation of the total contract amount and usually paid within 30 days of the end of the month.
Allowance for doubtful accounts:
The provision for bad debts is calculated based on a percentage of each aged accounts receivable category beginning at 0-5% on current accounts and increasing incrementally for each additional 30 days the account remains outstanding until the account is over 360 days outstanding, at which time the provision is 80-100% of the outstanding balance. These percentages vary by facility based on each facility’s experience in and expectations for collecting older receivables. The Company compares this required reserve amount to the current “Allowance for doubtful accounts” to determine the required bad debt expense for the period. This method of determining the required “Allowance for doubtful accounts” has historically resulted in an allowance for doubtful accounts of 20% or greater of the total outstanding receivables balance.
Income Taxes:
The Company follows the liability method of accounting for income taxes, as set forth in SFAS No. 109, “Accounting for Income Taxes”. SFAS No. 109 prescribes an asset and liability approach, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of the assets and liabilities. The Company’s policy is to record a valuation allowance against deferred tax assets unless it is more likely than not that such assets will be realized in future periods. The Company made a provision for taxes against the net income of discontinued operations and recorded an equal tax benefit on continuing operations as a loss was recorded in the quarter.
On July 1, 2007 the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN48”), “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement 109”. In accordance with FIN 48, we may establish reserves for tax uncertainties that reflect the use of the comprehensive model for the recognition and measurement of uncertain tax positions. Tax authorities periodically challenge certain transactions and deductions reported on our income tax returns. We do not expect the outcome of these examinations, either individually or in the aggregate, to have a material adverse effect on our financial position, results of operations, or cash flows.
Valuation of Goodwill and Other Intangible Assets
Goodwill and other intangible assets are initially created as a result of business combinations or acquisitions. The Company makes significant estimates and assumptions, which are derived from information obtained from the management of the acquired businesses and the Company’s business plans for the acquired businesses in determining the value ascribed to the assets acquired. Critical estimates and assumptions used in the initial valuation of goodwill and other intangible assets include, but are not limited to: (i) future expected cash flows from services to be provided, (ii) customer contracts and relationships, and (iii) the acquired market position. These estimates and assumptions may be incomplete or inaccurate because unanticipated events and circumstances may occur. If estimates and assumptions used to initially value goodwill and intangible assets prove to be inaccurate, ongoing reviews of the carrying values of such goodwill and intangible assets may indicate impairment which will require the Company to record an impairment charge in the period in which the Company identifies the impairment.
In the fiscal year ended June 30, 2008, the Company recorded an impairment loss on the intangible assets of the Company’s research segment of $1,771,000 based on the annual review and valuation of intangible assets. The Company determined the impairment during the routine annual review of intangible assets of the Company. The impairment represents the difference between the Company’s carrying value of goodwill and its fair value at June 30, 2008. The fair value was determined using a combination of approaches including trading multiple, acquisition multiple and the income approach.
Results of Operations
The following table illustrates our consolidated results of operations for the three months ended September 30, 2008 and 2007 (in thousands):
| For the Three Months Ended |
| September 30, |
| 2008 | 2007 |
| (in thousands) |
Statements of Operations Data: |
|
Amount |
|
% |
|
Amount |
|
% |
|
|
|
|
|
|
|
|
|
Revenue | $ | 11,692 |
| 100.0 | $ | 11,283 |
| 100.0 |
Cost and Expenses: |
|
|
|
|
|
|
|
|
Patient care expenses |
|
6,158 |
|
52.7 |
|
5,296 |
|
46.9 |
Contract expenses |
|
827 |
|
7.0 |
|
803 |
|
7.1 |
Administrative expenses |
|
4,695 |
|
40.2 |
|
3,610 |
|
32.0 |
Provision for bad debts |
|
446 |
|
3.8 |
|
422 |
|
3.8 |
Interest expense |
|
82 |
|
0.7 |
|
114 |
|
1.0 |
Other (income) expenses, net |
|
(82) |
|
(0.7) |
|
(47) |
|
(0.4) |
|
|
|
|
|
|
|
|
|
Total expenses |
| 12,126 |
| 103.7 |
| 10,198 |
| 90.4 |
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
(434) |
|
(3.7) |
|
1,085 |
|
9.6 |
|
|
|
|
|
|
|
|
|
Income tax (benefit) provision |
|
(39) |
|
(0.3) |
|
461 |
|
4.1 |
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
(395) |
|
(3.4) |
|
624 |
|
5.5 |
|
|
|
|
|
|
|
|
|
Discontinued Operations |
|
62 |
|
0.5 |
|
176 |
|
1.6 |
|
|
|
|
|
|
|
|
|
Net Income (loss) | $ | (333) |
| (2.8) | $ | 800 | $ | 7.1 |
Results of Operations
Total net revenue from operations increased 3.6% to $11,691,905 for the three months ended September 30, 2008 from $11,283,201 for the three months ended September 30, 2007.
Net patient care revenue increased 4.0% to $10,559,496 for the three months ended September 30, 2008 from $10,155,217 for the three months ended September 30, 2007. This increase in revenue is due primarily to the opening of Seven Hills Hospital in Las Vegas in May 2008 partially offset by a decline in census at our Michigan facility.
Two key indicators of profitability of inpatient facilities are patient days, or census, and payor mix. Patient days is the product of the number of patients times length of stay. Increases in the number of patient days result in higher census, which coupled with a more favorable payor mix (more patients with higher paying insurance contracts or paying privately) will usually result in higher profitability. Therefore, patient census and payor mix are monitored very closely.
Contract support services revenue provided by Wellplace remained relatively stable at $1,132,409 for the three months ended September 30, 2008 compared to $1,127,984 for the three months ended September 30, 2007. The Company expects to increase this revenue through new contracts for EAP (Employee Assistance Programs) and Smoking Cessation programs.
Patient care expenses in our treatment centers increased 16.3% to $6,158,157 for the three months ended September 30, 2008 from $5,296,074 for the three months ended September 30, 2007. This increase in expenses is due to the opening of the Seven Hills Hospital in Las Vegas, pre-opening expenses of Capstone Academy and higher utilization under the capitated contracts with the majority of the increases in expenses directly related to the patient care expenses. Payroll and service related expenses increased 19.7% to $4,454,829 for the three months ended September 30, 2008 from $3,723,163 for the same period a year ago. Payroll tax expenses increased 22.6% to $263,640 for the three months ended September 30, 2008 from $214,961 for the same period a year ago. Contract expenses related to the capitated contracts increased 60.3% to $1,225,925 for the three months ended September 30, 2008 from $764,922 for the same period a year ago. Food expenses increased 19.9% to 249,346 for the three months ended September 30, 2008 from $207,896 for the same period a year ago. Pharmacy expense increased 34.2% to $236,838 for the three months ended September 30, 2008 from $176,519 for the same period a year ago. All of these increases are a result of the new hospital and the comparisons quarter over quarter are expected to reflect similar increases.
Contract support services expenses increased 3.1% to $827,779 for the three months ended September 30, 2008 from $802,648 for the three months ended September 30, 2007. This increase is marginal and is a result of general increases in the cost of operations such as insurance, employee benefits, telephone and maintenance expenses. We normally expect these expenses to increase with new contracts and changes in contracts.
Administrative expenses increased 30.1% to $4,694,974 for the quarter ended September 30, 2008 from $3,609,936 for the quarter ended September 30, 2007. These changes are a result of the increased administrative payroll and employee benefits related to Seven Hills Hospital. Administrative payroll increased 13.3%. In addition depreciation increased 33.5% as we opened the hospital and began depreciation of fixed assets purchased and the cost of the build out of Seven Hills when it was opened in May 2008. Rent expense increased 113.3% due to the start of the Seven Hills lease and the lease related to the new location in Detroit, Capstone Academy, which is expected to open later this year. Utilities increased approximately 69.1% which was also related to the new operations mentioned above.
Provision for doubtful accounts increased 5.6% to $445,814 for the three months ended September 30, 2008 from $422,226 for the three months ended September 30, 2007. The Company’s policy is to maintain reserves based on the age of its receivables. This increase in the provision for doubtful accounts is largely attributable to the increase in receivables related to Seven Hills.
Interest income increased 57.6% to $51,269 for the three months ended September 30, 2008 from $32,535 for the three months ended September 30, 2007. This increase is a result of interest being charged on patient accounts unpaid after ninety days.
Other income / expense increased 118.8% to $30,854 for the three months ended September 30, 2008 from $14,099 for the three months ended September 30, 2007. This increase is primarily due to the earnings recorded by Seven Hills from its interest in the Seven Hills Psych Center, LLC.
Interest expense decreased 28.3% to $81,642 for the three months ended September 30, 2008 from $113,899 for the three months ended September 30, 2007. This decrease is primarily due to the general decrease in interest rates as the interest rate on all of our long term debt is tied to the Prime rate.
Since the Company experienced a significant loss from continuing operations, the Company recorded a tax benefit equal to the tax provision recorded for discontinued operations. During the quarter ended September 30, 2007, the Company’s provision for taxes was $461,257 related to continuing operations and $45,619 related to discontinued operations. If tax estimates are found to be high or low, adjustments will be made in the period of the determination.
There are no trends that the Company expects will have a material impact on the Company’s revenues or net income; however, general economic conditions have caused the Company to pursue receivables collections even more aggressively than usual.
Liquidity and Capital Resources
The Company’s net cash used in operating activities was $669,519 for the three months ended September 30, 2008 compared to cash provided by operations of $1,340,049 for the three months ended September 30, 2007. Cash flow used in operations in the three months ended September 30, 2008 consists of net loss of $332,703 plus depreciation and amortization of $263,936, non–cash interest expense of $43,011, non-cash equity based charges of $2,133, non-cash earnings from the unconsolidated subsidiary of $14,203, the provision for doubtful accounts of $445,814, an increase in accounts receivable of $1,334,094, an increase in other assets of $133,829 and cash used in discontinued operations of $310,275, offset by a $26,452 decrease in prepaid expenses, a $514,167 increase in accounts payable and a $222,288 increase in accrued expenses and other liabilities.
Cash used in investing activities in the three months ended September 30, 2008 consisted of $486,522 in capital expenditures, $38,100 cash distribution on our unconsolidated subsidiary investment. and cash used in discontinued operations of $33,188 compared to $286,349 in capital expenditures and cash used in discontinued operations of $1,915 during the same period last year.
Cash used in financing activities of $160,842 in the three months ended September 30, 2008 was the result of the purchase of 26,592 shares of treasury stock at $59,560, proceeds from the issuance of common stock under the employee stock purchase plan of $15,778, an increase in the Company’s revolving credit line of $142,502, repayment of $67,294 on the Company’s long-term debt and cash used in discontinued operations of $192,268 compared to $394,515 used to purchase treasury stock, $956,246 reduction in Company's revolving credit line, $82,331 reduction in long term debt and cash used in discontinued operations of $192,435 during the same period last year.
A significant factor in the liquidity and cash flow of the Company is the timely collection of its accounts receivable. As of September 30, 2008, accounts receivable from patient care, net of allowance for doubtful accounts, increased 7.4% to $6,951,012 from $6,474,733 on June 30, 2008. This increase is a result of increased revenue and the opening of the Seven Hills Hospital. The Company monitors increases in accounts receivable closely and, based on the aging of the receivables outstanding, is confident that the increase is not indicative of a payor problem. Over the years, we have increased staff, standardized some procedures for determining insurance eligibility and collecting receivables and established a more aggressive collection policy. The increased staff has allowed the Company to concentrate on current accounts receivable and resolve any issues before they become uncollectible. The Company’s collection policy calls for earlier contact with insurance carriers with regard to payment, use of fax and registered mail to follow-up or resubmit claims and earlier employment of collection agencies to assist in the collection process. Our collectors will also seek assistance through every legal means, including the State Insurance Commissioner’s office, when appropriate, to collect claims. In light of the current economy the Company has redoubled its efforts to collect accounts early. The Company has implemented the Meditech software at all non-residential facilities and begun the implementation process at the Michigan residential facility. The system is designed to fully integrate the admissions, billing and collections process. It will assist staff in the timely billing and collection of receivables. At the same time, the Company will continue to closely monitor reserves for bad debt based on potential insurance denials and past difficulty in collections.
The Company expects to experience continued cash used in operating activities over the next quarter until Seven Hills completes Joint Commission and CMS accreditation and Capstone Academy is opened for admissions.
Contractual Obligations
The Company’s future minimum payments under contractual obligations related to capital leases, operating leases and term notes as of September 30, 2008 are as follows (in thousands):
YEAR ENDING September 30, |
| TERM NOTES | CAPITAL LEASES | OPERATING LEASES | TOTAL* | |||||||
|
| Principal |
| Interest |
| Principal |
| Interest |
|
|
|
|
2009 | $ | 652 | $ | 19 | $ | 137 | $ | 28 | $ | 3,320 | $ | 4,156 |
2010 |
| 253 |
| 15 |
| 106 |
| 17 |
| 3,080 |
| 3,471 |
2011 |
| 47 |
| 11 |
| 105 |
| 5 |
| 2,386 |
| 2,554 |
2012 |
| 52 |
| 6 |
| -- |
| -- |
| 2,232 |
| 2,290 |
2013 |
| 44 |
| 2 |
| -- |
| -- |
| 1,931 |
| 1,977 |
2014 |
| -- |
| -- |
| -- |
| -- |
| 8,678 |
| 8,678 |
Thereafter |
| -- |
| -- |
| -- |
| -- |
| -- |
| -- |
Total | $ | 1,048 | $ | 53 | $ | 348 | $ | 50 | $ | 21,627 | $ | 23,126 |
* Total does not include the amount due under the revolving credit note of $1,119,705. This amount represents accounts receivable funding as described below and is shown as a current note payable in the accompanying financial statements.
In October 2004, the Company entered into a revolving credit, term loan and security agreement with CapitalSource Finance, LLC to replace the Company’s primary lender and provide additional liquidity. Each of the Company’s material subsidiaries, other than Pivotal Research Centers, Inc, is a co-borrower under the agreement. This agreement was amended on June 13, 2007 to increase the amount available under the term loan, extend the term, decrease the interest rates and modify the covenants based on the Company’s current financial position. The agreement now includes a term loan in the amount of $3,000,000, with a balance of $802,143 at September 30, 2008, and an accounts receivable funding revolving credit agreement with a maximum loan amount of $3,500,000. In conjunction with this refinancing, the Company paid $32,500 in commitment fees and approximately $53,000 in legal fees and issued a warrant to purchase 250,000 shares of Class A Common Stock at $3.09 per share valued at $456,880. The relative fair value of the warrants was recorded as deferred financing costs and is being amortized over the period of the loan as additional interest.
The term loan note carries interest at prime plus .75%, but not less than 6.25%, with twelve monthly reductions in available credit of $50,000 beginning July 1, 2007 and increasing to $62,500 on July 1, 2009 until the expiration of the loan. As of September 30, 2008 the Company had $1,447,857 available under the term loan.
The revolving credit note carries interest at prime plus .25%, but not less than 4.75% paid through lock box payments of third party accounts receivable. The revolving credit term is three years, renewable for two additional one-year terms. The balance on the revolving credit agreement as of September 30, 2008 was $1,119,705. For additional information regarding this transaction, see the Company’s current report on form 8-K filed with the Securities and Exchange Commission on October 22, 2004. The balance outstanding as of September 30, 2008 for the revolving credit note is not included in the above table. The average interest rate paid on the revolving credit loan, which includes the amortization of deferred financing costs related to the financing of the debt, was 7.9%.
This agreement was amended on June 13, 2007 to modify the terms of the agreement. Advances are available based on a percentage of accounts receivable and the payment of principal is payable upon receipt of proceeds of the accounts receivable. Interest is payable monthly at prime (4.00% at September 30, 2008) plus 0.25%, but not less than 4.75%. The amended term of the agreement is for two years, renewable for two additional one year terms. Upon expiration, all remaining principal and interest are due. The revolving credit note is collateralized by substantially all of the assets of the Company’s subsidiaries except Pivotal Research Centers, Inc. and guaranteed by PHC.
Off Balance Sheet Arrangements
The Company has no off-balance-sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to the Company.
Litigation
The Company is subject to various claims and legal action that arise in the ordinary course of business. In the opinion of management, the Company is not currently a party to any proceeding that would have a material adverse affect on its financial condition or results of operations.
| Item 3. | Quantitative and Qualitative Disclosure About Market Risk |
The market price of our common stock could be volatile and fluctuate significantly in response to various factors, including:
| • | Differences in actual and estimated earnings and cash flows; |
| • | Operating results differing from analysts’ estimates; |
| • | Changes in analysts’ earnings estimates; |
| • | Quarter-to-quarter variations in operating results; |
| • | Changes in market conditions in the behavioral health care industry; |
| • | Changes in market conditions in the research industry; |
| • | Changes in general economic conditions; and |
| • | Fluctuations in securities markets in general. |
Financial Risk
| • | Our interest expense is sensitive to changes in the general level of interest rates. With respect to our interest-bearing liabilities, all of our long-term debt outstanding is subject to rates at prime plus .25% and prime plus .75%, which makes interest expense fluctuate with changes in the prime rate. On this debt, each 25 basis point increase or decrease in the prime rate will affect an annual increase or decrease in interest expense of approximately $5,300. |
| • | Failure to meet targeted revenue projections could cause us to be out of compliance with covenants in our debt agreements requiring a waiver from our lender. A waiver of the covenants may require our lender to perform additional audit procedures to assure the stability of their security which could require additional fees. |
Operating Risk
| o | Aging of accounts receivables could result in our inability to collect receivables. As our accounts receivable age and become uncollectible our cash flow is negatively impacted. Our accounts receivable from patient accounts (net of allowance for bad debts) were $6,951,012 at September 30, 2008, $6,474,733 at June 30, 2008 and $6,559,387 at June 30, 2007. As we expand, we will be required to seek payment from a larger number of payors and the amount of accounts receivable will likely increase. We have focused on better accounts receivable management through increased staff, standardization of some procedures for collecting receivables and a more aggressive collection policy in order to keep the change in receivables consistent with the change in revenue. We have also established a reserve policy, allowing greater amounts of reserves as |
accounts age from the date of billing. If the amount of receivables, which eventually become uncollectible, exceeds such reserves, we could be materially adversely affected. The following chart represents our Accounts Receivable and Allowance for Doubtful Accounts at September 30, 2008 and June 30, 2008, respectively, and Bad Debt Expense for the three months ended September 30, 2008 and the year ended June 30, 2008:
|
| Accounts Receivable |
| Allowance for doubtful accounts |
| Bad Debt Expense |
|
|
|
|
|
|
|
September 30, 2008 | $ | 9,239,264 | $ | 2,288,252 | $ | 445,814 |
June 30, 2008 |
| 8,705,104 |
| 2,230,371 |
| 1,311,431 |
| o | The Company relies on contracts with more than ten clients to maintain patient census at its inpatient facilities and the loss of any of such contracts would impact our ability to meet our fixed costs. We have entered into relationships with large employers, health care institutions and labor unions to provide treatment for psychiatric disorders, chemical dependency and substance abuse in conjunction with employer-sponsored employee assistance programs. The employees of such institutions may be referred to us for treatment, the cost of which is reimbursed on a per diem or per capita basis. Approximately 30% of our total revenue is derived from these clients. No one of these large employers, health care institutions or labor unions individually accounts for 10% or more of our consolidated revenues, but the loss of any of these clients would require us to expend considerable effort to replace patient referrals and would result in revenue losses and attendant loss in income. |
Item 4T. Controls and Procedures
Evaluation of Disclosure Controls and Procedures |
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified within the SEC’s Rules and Forms, and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was necessarily required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our management does not expect that our disclosure controls or our internal controls over financial reporting will prevent all error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of a control system are met. Further, any control system reflects limitations on resources and the benefits of a control system must be considered relative to its costs. These limitations also include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of a control. A design of a control system is also based upon certain assumptions about potential future conditions and over time controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.
At the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures to meet the criteria referred to above. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective.
Change in Internal Controls
During the three months ended September 30, 2008, there were no changes in our internal controls or in other factors that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 2. | Repurchase of Treasury Stock |
During the Quarter the Company purchased equity securities as follows:
Period |
| (a) Total Number of Shares Purchased |
| (b) Average Price Paid per Share |
|
|
|
|
|
July 1, 2008 – July 31, 2008 |
|
25,000 |
$ |
2.1964 |
|
|
|
|
|
August 1, 2008 – August 31, 2008 |
|
-- |
|
-- |
|
|
|
|
|
September 1, 2008 – September 30, 2008 |
|
1,592 |
|
2.45 |
Item 6. | Exhibits |
Exhibit List
Exhibit No. | Description |
|
|
31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PHC, Inc. | ||
Registrant |
Date: November 12, 2008 | /s/ Bruce A. Shear |
| Bruce A. Shear |
| President |
| Chief Executive Officer |
Date: November 12, 2008 | /s/ Paula C. Wurts |
| Paula C. Wurts |
| Treasurer |
| Chief Financial Officer |