U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004.
| | TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ___________
Commission file number 0-22916
PHC, INC.
(Exact name of small business issuer as specified in its charter)
Massachusetts 04-2601571
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Lake Street, Suite 102, Peabody MA 01960
(Address of principal executive offices) (Zip Code)
978-536-2777
(Issuer's telephone number)
-- 1 --
Indicate by check mark whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act 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_ __
Number of shares outstanding of each class of common equity, as of May 3, 2004:
Class A Common Stock 16,575,289
Class B Common Stock 726,991
Transitional Small Business Disclosure Format
(Check one):
Yes______ No X
-- 2 --
PHC, Inc.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - March 31, 2004 and June 30,
2003.
Condensed Consolidated Statements of Operations - Three and nine
months ended March 31, 2004 and March 31, 2003.
Condensed Consolidated Statements of Cash Flows - Nine months ended
March 31, 2004 and March 31, 2003.
Notes to Condensed Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis or Plan of Operation
Item 3. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on form 8-K
Signatures
-- 3 --
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, June 30,
2004 2003
___________ __________
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 963,737 $ 494,991
Accounts receivable, net of allowance
for bad debts of $2,333,907 at March 31,
2004 and $2,348,445 at June 30, 2003 4,924,379 4,345,301
Prepaid expenses 273,901 69,541
Third party settlement receivables 10,046 172,043
Other receivables and advances 307,040 255,006
Deferred income tax assets, net 808,607 808,607
___________ __________
Total current assets 7,287,710 6,145,489
Accounts receivable, noncurrent 505,000 600,000
Other receivables 94,388 111,976
Property and equipment, net 1,296,454 1,295,113
Deferred financing costs, net of amortization
of $134,109 at March 31, 2004 and
$130,109 at June 30, 2003 -- 4,000
Goodwill 969,099 969,099
Other assets 384,431 286,046
___________ __________
Total assets $ 10,537,082 $9,411,723
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,402,578 $860,952
Notes payable--related parties 100,000 100,000
Current maturities of long-term debt 1,885,648 883,659
Revolving credit note 1,675,425 1,103,561
Deferred revenue 65,497 160,720
Current portion of obligations under capital
leases 25,923 50,805
Accrued payroll, payroll taxes and benefits 1,117,415 1,016,088
Accrued expenses and other liabilities 1,412,501 958,527
Convertible debentures 250,000 275,000
___________ __________
Total current liabilities 7,934,987 5,409,312
___________ __________
Long-term debt 432,301 2,030,285
Obligations under capital leases, net of
current portion 23,662 36,869
___________ __________
Total noncurrent liabilities 455,963 2,067,154
___________ __________
Total liabilities 8,390,950 7,476,466
___________ __________
Stockholders' equity:
Class A common stock, $.01 par value;
20,000,000 shares authorized, 14,354,059
and 13,437,067 shares issued at March 31,
2004 and June 30, 2003, respectively 143,541 134,371
Class B common stock, $.01 par value; 2,000,000
shares authorized, 726,991 outstanding
convertible into 726,991 shares of Class
A common stock 7,270 7,270
Additional paid-in capital 20,107,477 19,147,604
Treasury stock, 148,020 shares of Class A common
stock at March 31, 2004 (121,091) (72,380)
and 97,804 shares at June 30, 2003, at cost
Notes receivable, common stock -- (80,000)
Accumulated deficit (17,991,065) (17,201,608)
___________ __________
Total stockholders' equity 2,146,132 1,935,257
___________ __________
Total liabilities and stockholders' equity $ 10,537,082 $ 9,411,723
============ ===========
See Notes to Condensed Consolidated Financial Statements.
-- 4 --
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended
March 31, March 31,
__________________________________________
2004 2003 2004 2003
Revenues:
Patient care, net $ 5,583,625 $ 5,341,816 $16,323,589 $15,863,921
Contract support services 733,411 393,328 2,240,550 943,513
Pharmaceutical study 155,152 136,690 500,044 711,957
___________ __________ ___________ ___________
Total revenues 6,472,188 5,871,834 19,064,183 17,519,391
___________ __________ ___________ ___________
Operating expenses:
Patient care expenses 3,201,426 2,638,772 9,033,540 7,877,313
Cost of contract support
services 546,667 354,632 1,667,041 855,862
Provision for doubtful accounts 227,196 196,195 1,113,033 818,652
Website expenses 73,191 54,770 219,537 168,345
Administrative expenses 3,096,804 2,369,205 7,446,760 6,631,883
___________ __________ ___________ ___________
Total operating expenses 7,145,284 5,613,574 19,479,911 16,352,055
___________ __________ ___________ ___________
Income (loss) from operations (673,096) 258,260 (415,728) 1,167,336
___________ __________ ___________ ___________
Other expenses:
Interest income 20,888 3,119 26,070 10,943
Other income 26,059 22,830 77,472 75,206
Interest expense and other
financing costs (219,116) (127,324) (466,150) (419,455)
___________ __________ ___________ ___________
Total other expenses (172,169) (101,375) (362,608) (333,306)
___________ __________ ___________ ___________
Income (loss) before provision for
income taxes (845,265) 156,885 (778,336) 834,030
Provision for income taxes -- 26,074 11,121 36,074
___________ __________ ___________ ___________
Income (loss) applicable to common
shareholders $ (845,265) $ 130,811 $ (789,457) $ 797,956
============ =========== =========== ==========
Income (loss) per share information:
Basic income (loss) per common share $ (0.06) $ 0.01 $ (0.06) $ 0.06
============ =========== =========== ==========
Basic weighted average number of
shares outstanding 14,402,988 14,099,929 14,149,261 13,963,138
============ =========== ========== ==========
Diluted income (loss) per common $ (0.06) $ 0.01 $ (0.06) $ 0.06
============ =========== =========== ==========
Diluted weighted average number of
shares outstanding 14,402,988 14,814,570 14,149,261 14,577,540
============ =========== =========== ==========
See Notes to Condensed Consolidated Financial Statements
-- 5 --
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended
March 31,
2004 2003
___________ __________
Cash flows from operating activities:
Net income (loss) $(789,457) $797,956
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 211,031 131,714
Non-cash compensation expense 128,586 19,198
Changes in operating assets and liabilities:
Accounts receivable (356,527) 454,663
Prepaid expenses (204,360) (145,097)
Other assets (160,269) (98,090)
Accounts payable 547,146 (271,344)
Accrued expenses and other liabilities 482,698 145,651
___________ __________
Net cash provided by (used in) operating
activities (141,152) 1,034,651
___________ __________
Cash flows from investing activities:
Acquisition of property and equipment (150,488) (172,128)
___________ __________
Net cash used in investing activities (150,488) (172,128)
___________ __________
Revolving credit note, net 571,864 (119,044)
Repayment of debt, net (659,084) (738,391)
Deferred financing costs 4,000 6,000
Issuance of common stock 897,398 73,408
Purchase of treasury stock (48,711) --
Costs related to issuance of capital stock (5,081) (7,212)
___________ __________
Net cash provided by (used in) financing
activities 760,386 (785,239)
___________ __________
NET INCREASE IN CASH AND CASH EQUIVILENTS 468,746 77,284
BEGINNING CASH AND CASH EQUIVILENTS 494,991 204,564
___________ __________
ENDING CASH AND CASH EQUIVILENTS $ 963,737 $ 281,848
=========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 338,233 $ 419,406
Income taxes 18,713 113,163
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of common stock in cashless
exercise of options $ -- $ 302,516
Issuance of common stock in cashless
exercise of warrants -- 42,363
See Notes to Condensed Consolidated Financial Statements
-- 6 --
PHC, INC. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2004
Note A - The Company
PHC, Inc. (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 provides
management, administrative and online behavioral health services. The Company
primarily operates under three business segments:
(1) 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 eight psychiatric treatment locations which include Harbor
Oaks Hospital, a 64-bed psychiatric hospital located in New Baltimore, Michigan
and six outpatient behavioral health locations (two in Las Vegas, Nevada
operating as Harmony Healthcare, one in Shawnee Mission, Kansas operating as
Total Concept, which was recently closed and three locations operating as
Pioneer Counseling Center in the Detroit, Michigan metropolitan area);
(2) Behavioral health administrative services, including delivery of
management, administrative and help line services. PHC, Inc. provides management
and administrative services for its behavioral health treatment subsidiaries.
Wellplace, formerly known as Pioneer Development and Support Services ("PDSS"),
provides help line services primarily through contracts with major railroads,
smoking cessation contracts with the states of Nebraska and Kansas and a call
center contract with the State of Michigan. Pioneer Pharmaceutical Research
conducts studies of the effects of psychiatric pharmaceuticals on a controlled
population through contracts with major manufacturers of these pharmaceuticals;
and
(3) Behavioral health online services, are provided through Behavioral
Health Online, Inc., the Company's internet operations, which provides Internet
support services for all other subsidiaries of the Company and provides
behavioral health education, training and products for the behavioral health
professional, through its website wellplace.com.
Note B - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-QSB and Item 310 of
Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the nine months ended March 31, 2004 are not necessarily indicative
of the results that may be expected for the year ending June 30, 2004. The
accompanying financial statements should be read in conjunction with the June
30, 2003 consolidated financial statements and footnotes thereto included in the
Company's 10-KSB filed on September 19, 2003.
Note C - Stock Based Compensation
The Company re-priced 791,500 options in January 2001 of which 103,500
remained outstanding at June 30, 2003 and 50,000 at March 31, 2004 and are
subject to variable accounting from the date of the modification through the
date of exercise or expiration. Compensation expense relating to vested repriced
options was $16,511 for the nine months ended March 31, 2004 compared to
compensation expense of $14,175 for the nine months ended March 31, 2003.
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123 but applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
its plans. If the Company had elected to recognize compensation cost for the
plans based on the fair value at the grant date for awards granted, consistent
with the method prescribed by SFAS No. 123, the net income (loss) per share
would have been changed to the pro forma amounts indicated below:
-- 7 --
Three MonthsEnded Nine Months Ended
March 31, March 31,
2004 2003 2004 2003
Net income (loss), as reported $(845,265) $130,811 $(789,457) $797,956
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects 747 31,368 103,229 19,198
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (36,902) (46,542) (184,422) (102,382)
__________ _________ _________ __________
Pro forma net income (loss) $(881,420) $115,637 $(870,650) $714,772
========== ========= ========== ==========
Earnings (loss) per share:
Basic - as reported $ (0.06) $ 0.01 $ (0.06) $ 0.06
========== ======== ========== ========
Basic - pro forma $ (0.06) $ 0.01 $ (0.06) $ 0.05
========== ======== ========== ========
Diluted - as reported $ (0.06) $ 0.01 $ (0.06) $ 0.05
========== ======== ========== ========
Diluted - pro forma $ (0.06) $ 0.01 $ (0.06) $ 0.06
========== ======== ========== ========
Note D - Reclassifications
Certain March 31, 2003 amounts have been reclassified to be consistent with
the March 31, 2004 presentation.
Note E - 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:
-- 8 --
TREATMENT ADMINISTRATIVE ONLINE
SERVICES SERVICES SERVICES ELIMINATIONS TOTAL
For the three months ended
March 31, 2004
Revenues - external customer $ 5,583,625 $ 888,563 $ -- $ -- $ 6,472,188
Revenues - intersegment 65,660 733,620 75,000 (874,280) --
Net income (loss) (218,760) (553,314) (73,191) -- (845,265)
For the three months ended
March 31, 2003
Revenues - external customers $ 5,408,116 $ 463,718 $ -- $ -- $ 5,871,834
Revenues - intersegment 400 665,556 75,000 (740,956) --
Net income (loss) 822,844 (637,263) (54,770) -- 130,811
For the nine months ended
March 31, 2004
Revenues - external customers $16,333,689 $ 2,730,494 $ -- $ -- $19,064,183
Revenues - intersegment 176,000 2,201,340 225,000 (2,602,340) --
Net income (loss) 779,782 (1,349,702) (219,537) -- (789,457)
Identifiable assets at
March 31, 2004 7,951,487 2,562,476 23,119 -- 10,537,082
For the nine months ended
March 31, 2003
Revenues - external customers $15,930,221 $ 1,589,170 $ -- $ -- $ 17,519,391
Revenues - intersegment 249,500 1,978,668 225,000 (2,453,168) --
Net income (loss) 2,543,431 (1,577,130) (168,345) -- 797,956
Identifiable assets at
March 31, 2003 7,699,250 1,583,264 91,324 -- 9,373,838
Litigation settlement and related legal fees for the three and nine months ended
March 31,2004 of $833,000 and $1,031,249, respectively, are included in the net
loss from Treatment Services.
-- 9 --
Note F - Equity Financing
During the quarter ended March 31, 2004, the Company offered for sale an
aggregate of up to 800,000 shares of its Class A common Stock and warrants to
purchase up to 200,000 shares of its Class A Common Stock, for a total of
$880,000, in order to supplement debt for financing the acquisition, discussed
at Note H, and to provide short-term working capital. As a result of this
offering the Company issued 684,999 shares of Class A Common Stock and warrants
to purchase 171,249 shares of Class A Common Stock at a purchase price of
$753,499.
Note G - Legal Proceedings
A medical malpractice claim was filed by a former patient against the
Company's subsidiary, North Point-Pioneer, Inc. and a former clinician, alleging
sexual abuse by a former clinician that first manifested itself prior to the
Company's acquisition of the subsidiary in 1996. At trial in December 2002, a
jury returned a verdict in favor of the plaintiff in the amount of approximately
$9 million plus interest and taxable costs and attorney's fee for conduct. The
clinician declared bankruptcy and was not a party to the proceeding. After
numerous successful motions by the Company to reduce the amount of the verdict,
a judgment in the amount of $3,079,741 was entered on October 24, 2003.
The Company's subsidiary, North Point-Pioneer, Inc., is covered by
malpractice insurance in the amount of $1 million provided by Frontier Insurance
Company, which is insolvent and is being administered by the State of New York.
Representatives of Frontier's receiver acknowledged to the Company, Frontier's
obligations under the policy and the Company has recovered a small portion of
the legal fees expended to date on this matter.
Subsequent to quarter end, the Company successfully resolved this medical
malpractice lawsuit. As a result of the settlement, the Company made payment of
approximately $463,000, which compares to the previous judgment of approximately
$3 million. The Company has not released other parties, including an insurance
company. Payments made by insurance and other related parties, if collected,
could significantly reduce the Company's financial burden below the $463,000
payment.
The financial impact of this $463,000 settlement and related legal fees of
approximately $370,000 are reflected in the operating results of the quarter
ended March 31, 2004. The Company will continue to seek reimbursement from all
sources for amounts expended on this case.
Note H - Subsequent Events
In addition to the litigation settlement referenced above, in April 2004
the Company finalized the agreement to purchase Pivotal Research Centers, LLC
("Pivotal") for approximately $1.5 million in cash and $500,000 in Pioneer class
A common stock with additional amounts due based on future earnings. Pivotal,
which is based in Phoenix, AZ, performs all phases of clinical research for
Phase I-IV drugs under development through two dedicated research sites.
Subsequent to quarter end, the Company offered for sale an aggregate of up to
1,918,196 shares of its Class A Common Stock and warrants to purchase up to
479,549 shares of Class A Common Stock for a total of $2,110,016. This
-- 10 --
transaction was effected to provide cash for the use in the acquisition of
Pivotal Research Centers, LLC and for working capital. Initial financing
discussions resulted in $114,500 of financing costs expensed in this quarter
that would have been deferred and amortized over the term of the debt if the
loan transaction had been completed. This amount is included in interest expense
and other financing costs in the accompanying condensed consolidated statements
of operations. For further information regarding the acquisition see the
Company's report on form 8-K filed on May 13, 2004.
Item 2. Management's Discussion and Analysis or Plan of Operation
PHC, INC. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview
The Company presently provides behavioral health care services through two
substance abuse treatment centers, a psychiatric hospital and five 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 out patient 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. Although the Company has changed the focus and
reduced expenses of its' internet operation, Behavioral Health Online, Inc., to
provide technology and internet support for the Company's other operations, it
also continues to provide behavioral health information and education through
its web site at Wellplace.com. The Company's research subsidiary, Pioneer
Pharmaceutical Research, contracts with major manufacturers of psychiatric
pharmaceuticals to assist in the study of the effects of certain pharmaceuticals
in the treatment of specific mental illnesses. With the acquisition of Pivotal
Research Centers, LLC subsequent to quarter end, Pivotal will provide all
oversight and all research activities will be included as Pivotal activity.
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 ongoing 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. If
passed, this legislation will improve access to the Company's programs. 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.
-- 11 --
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 and the
impairment of long-lived assets and goodwill. 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 are recorded and
listed separately on the consolidated balance sheets as "Other receivables,
third party". 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 one "at-risk" contract. The contract calls for
the Company to provide for all of their 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 this contract are
recorded as incurred. The Company provides most of the outpatient care directly
and, through utilization review, monitors closely, and pre-approves all
inpatient and outpatient services not provided directly. The contract is
considered "at-risk" because the payments to third-party providers for services
rendered could equal or exceed the total amount of the revenue recorded.
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.
Contract support service revenue is a result of fixed contracts to provide
telephone support. Revenue for these services is recognized ratably over the
service period, as there is no contingency for a change in the contracted amount
based on services provided.
-- 12 --
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 60-100% of the outstanding balance. These percentages vary by
facility based on each facility's experience in 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 30% 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 considers estimated future
taxable income or loss and other available evidence when assessing the need for
its deferred tax valuation allowance.
Property and equipment:
Property and equipment are stated at cost. Depreciation is provided over
the estimated useful lives of the assets using accelerated and straight-line
methods.
Goodwill:
The excess of the purchase price over the fair market value of net assets
of an acquisition is recorded as goodwill. The Company's net goodwill relates to
the treatment services segment of the Company and is evaluated at least annually
for impairment.
Results of Operations
Total net revenue from operations increased 10.22% to $6,472,188 for the
three months ended March 31, 2004 from $5,871,834 for the three months ended
March 31, 2003 and increased 8.82% to $19,064,183 for the nine months ended
March 31, 2004 from $17,519,391 for the nine months ended March 31, 2003.
Net patient care revenue increased 4.53% to $5,583,625 for the three months
ended March 31, 2004 from $5,341,816 for the three months ended March 31, 2003
and 2.90% to $16,323,589 for the nine months ended March 31, 2004 from
$15,863,921 for the nine months ended March 31, 2003. This increase in revenue
is due primarily to a 6.57% increase in patient days for the three months ended
March 31, 2004 and 3.94% increase in patient days for the nine months ended
March 31, 2004 over the same periods last year. The increase in patient days can
be partially attributed to an increase in available beds at our Utah facility in
-- 13 --
November 2003. Renewed marketing efforts have helped to maintain increased
census in the current quarter, but the economy continues to play a major role in
the number of people seeking treatment.
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 increased 86.46% to
$733,411 for the three months ended March 31, 2004 from $393,328 for the three
months ended March 31, 2003 and increased 137.47% to $2,240,550 for the nine
months ended March 31, 2004 from $943,513 for the same period last year. This
increase in revenue is due to the March 2003 start of the Michigan call center
contract, which produces a set revenue of $156,000 per month and the smoking
cessation contract for the State of Kansas, which started in July 2003, and
currently provides $6,600 in gross revenue monthly.
Revenue from pharmaceutical studies increased 13.51% to $155,152 for the
three months ended March 31, 2004 from $136,690 for the three months ended March
31, 2003 and decreased 29.76% to $500,044 for the nine months ended March 31,
2004 from $711,957 for the same period last year. These changes in revenue are
due to changes in the number of active studies and the number of patients
enrolled in the studies. The current Pioneer research business is expected to
increase substantially as a result of the synergies with our recent acquisition
of Pivotal Research Centers, LLC ("Pivotal"). Pivotal brings a top-tier client
base, state-of the art competencies and more than a decade of experience to the
Pioneer family. (For more information regarding the Pivotal acquisition see the
Company's report for form 8-K filed with the Securities and Exchange Commission
on May 13, 2004.)
Patient care expenses increased 21.32% to $3,201,426 for the three months
ended March 31, 2004 from $2,638,772 for the three months ended March 31, 2003
and 14.68% to $9,033,540 for the nine months ended March 31, 2004 from
$7,877,313 for the nine months ended March 31, 2003. This increase in expenses
is due primarily to the increase in-patient days noted above with the majority
of the increases in expenses directly related to patient census such as payroll,
food, laundry, hospital supplies and pharmacy.
Contract support services expenses increased 54.15% to $546,667 for the
three months ended March 31, 2004 from $354,632 for the three months ended March
31, 2003 and 94.78% to $1,667,041 for the nine months ended March 31, 2004 from
$855,862 for the same period last year. These increases are a direct result of
the increased expenses incurred with the inclusion of the full year of the
Michigan call center contract and the smoking cessation contract for the State
of Kansas with related start-up costs.
Provision for doubtful accounts increased 15.80% to $227,196 for the three
months ended March 31, 2004 from $196,195 for the three months ended March 31,
2003 and 35.96% to $1,113,033 for the nine months ended March 31, 2004 from
-- 14 --
$818,652 for the same period last year. This is a result of an increase in
the age of the Company's receivables and the Company's policy to maintain a
higher reserve against older receivables.
The environment the Company operates in today makes collection of
receivables, particularly older receivables, more difficult than in previous
years. Accordingly, the Company has increased staff, standardized some
procedures for collecting receivables and instituted a more aggressive
collection policy. Although the Company has maintained its aggressive collection
policy, the Company's gross accounts receivable from patient care have increased
approximately seven percent over the past three months. The growth of managed
care has negatively impacted reimbursement for behavioral health services with
slower payment and a higher rate of denials requiring higher reserves and more
stringent collection practices.
Website expenses increased 33.63% to $73,191 for the three months ended
March 31, 2004 from $54,770 for the three months ended March 31, 2003 and 30.41%
to $219,537 for the nine months ended March 31, 2004 from $168,345 for the nine
months ended March 31, 2003. This is a result of increased depreciation expense
based on a revision of the estimated remaining useful life of the assets.
Without this change, website expenses would have remained relatively stable.
Website expenses are expected to continue at this level for the remainder of the
fiscal year, as the Internet Company's focus will remain internal and the
accelerated depreciation will continue through fiscal year end.
Administrative expenses increased 30.71% to $3,096,804 for the quarter
ended March 31, 2004 from $2,369,205 for the quarter ended March 31, 2003 and
12.29% to $7,446,760 for the nine months ended March 31, 2004 from $6,631,883
for the same period last year. This increase is due to the increase in legal
fees and settlement costs of approximately $833,000 recorded in the quarter
ended March 31, 2004, which resulted in a total of $1,031,000 incurred during
the nine months ended March 31, 2004 (see Part II, Item 1 Legal proceedings for
details regarding the legal settlement). General insurance expense also
increased approximately 69% for the quarter ended March 31, 2004 and 55% for the
nine month period ended March 31, 2004 as compared with the same periods last
year. Utilities increased approximately 5% for the quarter ended March 31, 2004
and 13% for the nine months ended March 31, 2004 as compared to the same periods
last year. Rent expense increased approximately 8% for the quarter ended March
31, 2004 and 7% for the nine months ended March 31, 2004 as compared to the same
periods last year.
Other income increased 14.14% to $26,059 for the three months ended March
31, 2004 from $22,830 for the three months ended March 31, 2003 and 3.01% to
$77,472 for the nine months ended March 31, 2004 from $75,206 for nine months
ended March 31, 2003. This increase is primarily due to an increased request for
medical records at our treatment facilities.
Interest income increased 569.70% to $20,888 for the three months ended
March 31, 2004 from $3,119 for the three months ended March 31, 2003 and 138.23%
to $26,070 for the nine months ended March 31, 2004 from $10,943 for the same
period last year. This is a result of a change in the Company's policy which now
charges finance charges when extending credit to patients. Although patients
requiring credit to pay for services have always signed an agreement to pay
finance charges, the Company recently implemented the policy to charge for
credit.
-- 15 --
Interest expense and other financing costs increased 72.09% to $219,116 for
the three months ended March 31, 2004 from $127,324 for the three months ended
March 31, 2003 and 11.13% to $466,150 for the nine months ended March 31, 2004
from $419,455 for the same period last year. This increase is due to the
immediate write off of $114,500 of costs related to the Company's initial
efforts to finance the Pivotal acquisition primarily through debt. This amount
would have been amortized over the term of the loan had the loan been
consummated. It was determined that equity financing would be in the best
interest of the Company and its shareholders when favorable loan terms could not
be secured. Without this one time expense, interest expense for the quarter
would have decreased 17.83% to $104,616 for the three months ended March 31,
2004 from $127,324 for the three months ended March 31, 2003 and 16.17% to
$351,650 for the nine months ended March 31, 2004 from $419,455 for the same
period last year. This decrease is due to the general decline in interest rates,
the refinancing of debt in November 2001 at a more favorable rate, and repayment
of long-term debt.
The Company's provision for income taxes of $11,121 for the nine months
ended March 31, 2004 is significantly below the Federal statutory rate of 34%
primarily due to the availability of net operating loss carry-forwards. Total
income tax expense for the nine months ended March 31, 2004 represents state
income taxes for certain subsidiaries with no available net operating loss
carry-forwards. The Company has provided a significant valuation allowance
against its deferred tax asset due to potential changes in IRS rules that may
limit the accessibility of the loss carry-forwards.
Liquidity and Capital Resources
The Company`s net cash used in operating activities was $141,152 for the
nine months ended March 31, 2004 compared to $1,034,651 of cash provided by
operations for the nine months ended March 31, 2003. Cash flow used in
operations in the nine months ended March 31, 2004 consists of net loss of
$789,457 less depreciation and amortization of $211,031, non-cash equity based
charges of $128,586 and an increase in accounts payable and other liabilities of
$1,029,844 less cash used for net changes in accounts receivable and other
operating assets of $721,156.
Cash used in investing activities in the nine months ended March 31, 2004
consisted of $150,488 in capital expenditures compared to $172,128 in capital
expenditures during the same period last year. These funds were primarily used
to repair and upgrade the company's owned real estate.
Cash provided by financing activities of $760,386 in the nine months ended
March 31, 2004 was the result of the issuance of common stock in a private
placement outlined below offset by required reductions in long term debt and the
purchase of treasury shares.
During the quarter ended March 31, 2004, the Company offered for sale an
aggregate of up to 800,000 shares of its Class A common Stock and warrants to
purchase up to 200,000 shares of its Class A Common Stock, for a total of
$880,000, in order to supplement debt for financing the acquisition, discussed
at Note H, and to provide short-term working capital. As a result of this
offering the Company issued 684,999 shares of Class A Common Stock and warrants
-- 16 --
to purchase 171,249 shares of Class A Common Stock at a purchase price of
$753,499.
Subsequent to quarter end, the Company offered for sale an aggregate of up
to 1,918,196 shares of its Class A Common Stock and warrants to purchase up to
479,549 shares of Class A Common Stock for a total of $2,110,016. This
transaction was effected to provide cash for the use in the acquisition of
Pivotal Research Centers, LLC and for working capital when it was determined
that financing terms would not be favorable or in the best interest of the
company and its shareholders.
A significant factor in the liquidity and cash flow of the Company is the
timely collection of its accounts receivable. Accounts receivable from patient
care, net of allowance for doubtful accounts, increased approximately 10% to
$5,429,379 on March 31, 2004 from $4,945,301 on June 30, 2003. This increase has
resulted in increased efforts and staff and a renewed focus on our accounts
receivable management practices. We have maintained a high number of support
staff for collections, including outsourcing. We have standardized additional
procedures for collecting receivables and reviewed and amended contracts, where
necessary to improve collections. The increased staff has allowed the Company to
concentrate on current accounts receivable to resolve any problem issues early,
which results in a smaller number of uncollectable accounts. 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.
At the same time, the Company continues to closely monitor reserves for bad debt
based on potential insurance denials and past difficulty in collections.
The Company has operated ongoing operations profitably for thirteen
consecutive quarters with the exception of the litigation settlement and related
legal costs. The current positive business environment towards behavioral health
treatment and the new business opportunities give us confidence to foresee
continued improved results.
The Company's future minimum payments under contractual obligations related
to capital leases, operating leases and term notes for each fiscal year ending
as of June 30 are listed below. There have been no material changes in these
obligations as of March 31, 2004.
-- 18 --
Year Ending Term Capital Operating
June 30, Notes Leases Leases Total
__________ __________ __________ __________ __________
2004 $ 883,659 $ 55,954 $ 845,972 $1,785,585
2005 1,680,415 18,832 745,767 2,445,014
2006 47,598 12,825 499,244 559,667
2007 32,306 7,788 437,680 477,774
2008 35,337 649 326,396 362,382
Thereafter 234,629 -- 142,913 377,542
__________ __________ __________ __________
Total minimum
payments $2,913,944 $ 96,048 $ 2,997,972 $6,007,964
=========== ======== =========== ==========
-- 17 --
As a part of the acquisition costs of Pivotal on April 30, 2004 the Company
signed three promissory notes with a maximum value of $2.5 million. The true
value of these notes will be based on the future earnings of Pivotal and the
increase in net income of the current Pioneer research operations as a result of
synergies created by the Pivotal operations. No payments are due on these notes
prior to January, 2005.
Item 3. 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.
As of 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
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their most recent evaluations.
-- 19 --
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
A medical malpractice claim was filed by a former patient against the
Company's subsidiary, North Point-Pioneer, Inc. and a former clinician, alleging
sexual abuse by a former clinician that first manifested itself prior to the
Company's acquisition of the subsidiary in 1996. At trial in December 2002, a
jury returned a verdict in favor of the plaintiff in the amount of approximately
$9 million plus interest and taxable costs and attorney's fee for conduct. The
clinician declared bankruptcy and was not a party to the proceeding. After
numerous successful motions by the Company to reduce the amount of the verdict,
a judgment in the amount of $3,079,741 was entered on October 24, 2003.
The Company's subsidiary, North Point-Pioneer, Inc., is covered by
malpractice insurance in the amount of $1 million provided by Frontier Insurance
Company, which is insolvent and is being administered by the State of New York.
Representatives of Frontier's receiver acknowledged to the Company, Frontier's
obligations under the policy and the Company has recovered a small portion of
the legal fees expended to date on this matter.
Subsequent to quarter end the Company successfully resolved this medical
malpractice lawsuit. As a result of the settlement, the Company made payment of
approximately $463,000, which compares to the previous judgment of approximately
$3 million. The Company has not released other parties, including an insurance
company. Payments made by insurance and other related parties, if collected,
could significantly reduce the Company's financial burden below the $463,000
payment.
The financial impact of this settlement and related legal fees is reflected
in the operating results of the quarter ended March 31, 2004. The Company will
continue to seek reimbursement from all sources for amounts expended on this
case.
-- 20 --
Item 6. Exhibits and reports on Form 8-K.
Exhibit List
Exhibit Description
No.
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of the 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.
Reports on Form 8-K
The Company filed one report on form 8-K during the quarter ended March 31,
2004. This report provided the same earnings information to the public as shown
in the Company's quarterly press release as required by Item 12 of the
instructions for form 8-K.
-- 21 --
Signatures
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
PHC, Inc.
Registrant
Date: May 13, 2004 /s/ Bruce A. Shear
_________________
Bruce A. Shear
President
Chief Executive Officer
Date: May 13, 2004 /s/ Paula C. Wurts
_________________
Paula C. Wurts
Controller
Treasurer
-- 22 --