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 SEPTEMBER 30, 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)
(Former Name, former address and former fiscal year, if changed since last
report) Check 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____
Applicable only to corporate issuers
Number of shares outstanding of each class of common equity, as of October 31,
2004
Class A Common Stock 16,599,985
Class B Common Stock 776,991
Transitional Small Business Disclosure Format
(Check one):
Yes______ No X
-- 1 --
PHC, Inc.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 2004 (unaudited)
and June 30, 2004.
Condensed Consolidated Statements of Operations (unaudited) - Three
months ended September 30, 2004 and September 30, 2003.
Condensed Consolidated Statements of Cash Flows (unaudited) - Three
months ended September 30, 2004 and September 30, 2003.
Notes to Condensed Consolidated Financial Statements (unaudited) -
September 30, 2004.
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
-- 2 --
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, June 30,
ASSETS 2004 2004
_______________________________________________________________________________
Current assets:
Cash and cash equivalents $ 156,959 $ 594,823
Accounts receivable, net of allowance for doubtful
accounts of $1,775,046 at September 30, 2004,
$2,025,888 at June 30, 2004 5,672,548 5,165,150
Prepaid expenses 534,374 168,542
Other receivables and advances 1,380,282 860,195
Deferred income tax asset 937,406 842,806
___________ ___________
Total current assets 8,681,569 7,631,516
Accounts receivable, non-current 85,000 96,052
Other receivable 88,995 94,469
Property and equipment, net 1,539,754 1,353,975
Deferred financing costs 60,000 --
Customer relationships, net of amortization of
$50,000 at September 30, 2004 and $20,000 at June 30,
2004 2,350,000 2,380,000
Goodwill 1,434,972 1,416,119
Other assets 357,453 339,438
___________ ___________
Total assets $14,597,743 $13,311,569
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,024,485 $ 1,668,509
Current maturities of long-term debt 487,898 1,713,395
Revolving credit note 1,952,058 1,714,380
Deferred revenue 107,147 38,151
Current maturities of obligations under capital
leases 44,504 18,169
Accrued payroll, payroll taxes and benefits 1,286,307 1,305,490
Accrued expenses and other liabilities 749,772 682,567
Convertible debentures 250,000 250,000
___________ ___________
Total current liabilities 6,902,171 7,390,661
___________ ___________
Long-term debt, less current maturities 1,525,994 529,378
Obligations under capital leases, net of current
maturities 22,267 24,493
___________ ___________
Total noncurrent liabilities 1,548,261 553,871
___________ ___________
Total liabilities 8,450,432 7,944,532
___________ ___________
Stockholders' equity:
Preferred stock, 1,000,000 shares authorized,
none outstanding at
September 30, 2004 and June 30, 2004 -- --
Class A common stock, $.01 par value; 20,000,000
shares authorized 16,772,348 and 16,744,848
shares issued September 30, 2004 and June
30, 2004, respectively 167,723 167,448
Class B common stock, $.01 par value; 2,000,000
shares authorized, 776,991 issued and outstanding
September 30, 2004 and June 30,
2004, convertible into one share of Class A common
stock 7,770 7,770
Additional paid-in capital 22,809,888 22,791,637
Treasury stock, 181,738 shares at September 30,
2004 and 168,136 at June 30, 2004, at cost (155,087) (141,207)
Accumulated deficit (16,682,983) 17,458,611)
___________ ___________
Total stockholders' equity 6,147,311 5,367,037
Total liabilities and stockholders' equity $14,597,743 $13,311,569
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
-- 3 --
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
September 30,
2004 2003
__________________________
Revenues:
Patient care, net $ 6,209,499 $ 5,192,560
Pharmaceutical studies 1,086,590 143,482
Contract support services 661,426 767,125
___________ ___________
Total revenue 7,957,515 6,103,167
___________ ___________
Operating expenses:
Patient care expenses 3,430,945 2,694,015
Cost of contract support services 516,909 553,929
Provision for doubtful accounts 254,109 462,891
Website expenses 46,981 66,695
Administrative and other operating expenses 2,823,736 2,146,091
___________ ___________
Total operating expenses 7,072,680 5,923,621
___________ ___________
Income from operations 884,835 179,546
___________ ___________
Other income (expense):
Interest income 17,039 2,724
Other income, net 12,809 14,771
Interest expense (113,055) (133,892)
___________ ___________
Total other expense, net (83,207) (116,397)
___________ ___________
Income before provision for taxes 801,628 63,149
Provision for income taxes 26,000 10,000
___________ ___________
Net income $ 775,628 $ 53,149
========== ==========
Basic net income per common share $ .04 $ .00
========== ==========
Basic weighted average number of shares outstanding 17,360,604 14,069,204
========== ==========
Fully diluted net income per common share $ .04 $ .00
========== ==========
Fully diluted weighted average number of shares
outstanding 18,155,364 14,789,056
========== ==========
See Notes to Condensed Consolidated Financial Statements.
-- 4 --
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended
September 30,
2004 2003
_______________________________________________________________________________
Cash flows from operating activities:
Net income $ 775,628 $ 53,149
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 99,025 63,088
Non cash stock-based compensation 6,926 86,223
Deferred taxes (94,600) --
Changes in:
Accounts receivable (1,010,959) (334,004)
Prepaid expenses (365,832) (309,320)
Other assets (18,015) 6,001
Accounts payable 355,976 460,094
Accrued expenses and other liabilities 117,018 (299,083)
___________ ___________
Net cash used in operating activities (134,833) (273,852)
___________ ___________
Cash flows from investing activities:
Acquisition of property and equipment (254,804) (20,224)
Costs related to business acquisition (18,853) --
___________ ___________
Net cash used in investing activities (273,657) (20,224)
___________ ___________
Cash flows from financing activities:
Revolving debt, net 237,678 182,845
Principal payments on long-term debt (204,772) (247,694)
Deferred financing costs (60,000) 2,000
Issuance of common stock for warrants 11,600 --
Purchase of treasury stock from former employee (13,880) --
___________ ___________
Net cash used in financing activities (29,374) (62,849)
___________ ___________
NET DECREASE IN CASH AND CASH EQUIVALENTS (437,864) (356,925)
Beginning cash and cash equivalents 594,823 494,991
___________ ___________
ENDING CASH AND CASH EQUIVALENTS $ 156,959 $ 138,066
=========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $104,927 $ 130,041
Income taxes 77,500 24,492
See Notes to Condensed Consolidated Financial Statements.
-- 5 --
PHC, INC. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 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 conducts
pharmaceutical research studies, operates help lines for employee assistance
programs, call centers for state and local programs and provides management,
administrative and online behavioral health services. The Company primarily
operates under four 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 six psychiatric treatment
locations which include Harbor Oaks Hospital, a 64-bed psychiatric
hospital located in New Baltimore, Michigan and five outpatient
behavioral health locations (two in Las Vegas, Nevada operating as
Harmony Healthcare and three locations operating as Pioneer Counseling
Center in the Detroit, Michigan metropolitan area);
(2) Pharmaceutical study services, including three clinic study sites: two
in Arizona, in Peoria and Mesa, and one Michigan location in Royal
Oak. 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;
(3) Call center and help line 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 the state of Kansas and a call center
contract with the State of Michigan. The call centers both operate as
Wellplace; and
(4) 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.
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 generally accepted accounting principles 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 three months ended September 30,
2004 are not necessarily indicative of the results that may be expected for the
year ending June 30, 2005. The accompanying financial statements should be read
in conjunction with the June 30, 2004 consolidated financial statements and
footnotes thereto included in the Company's 10-KSB filed on September 24, 2004.
Note C- Stock Based Compensation
The Company re-priced options to purchase 791,500 shares of Class A Common Stock
in January 2001 of which 50,000 remained outstanding at September 30, 2004 and
are subject to variable accounting from the date of the modification.
Compensation expense relating to the vested repriced options was zero for the
for the three months ended September 30, 2004 compared to a reversal of
compensation expense of $3,915 for the three months ended September 30, 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
-- 6 --
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 per share would have been changed to
the pro forma amounts indicated below:
Three Months Ended
September 30,
2004 2003
_______________________________________________________________________________
Net income, as reported $775,628 $ 53,149
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects
6,926 86,223
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (34,951) (97,773)
___________ _________
Pro forma net income $747,603 $ 41,599
=========== =========
Earnings per share:
Basic - as reported $ 0.04 $ 0.00
========= =========
Basic - pro forma $ 0.04 $ 0.00
========= =========
Diluted - as reported $ 0.04 $ 0.00
========= =========
Diluted - pro forma $ 0.04 $ 0.00
========= =========
Note D - 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 Pharmaceutical Contract Administrative
Services Study Services Services Services Eliminations Total
For the three months ended
September 30, 2004
Revenues - external
customers $ 6,209,499 $ 1,086,590 $ 661,426 $ -- $ -- $ 7,957,515
Revenues - intersegment -- -- 11,282 654,000 (665,282) --
Net income (loss) 1,280,646 60,257 138,517 (703,792) -- 775,628
Identifiable assets 8,964,865 4,130,433 284,412 1,218,033 -- 14,597,743
For the three months ended
September 30, 2003
Revenues - external
customers 5,202,660 133,382 767,125 -- -- 6,103,167
Revenues - intersegment 40,400 -- -- 808,860 (849,260) --
Net income (loss) (99,118) (112,621) 213,196 51,692 -- 53,149
Identifiable assets 7,810,401 252,733 503,747 1,080,376 -- 9,647,257
-- 7 --
Note E - Legal Proceedings
In April 2004, the Company successfully resolved its medical malpractice
lawsuit. As a result of the settlement, the Company made a 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 during the year ended June 30, 2004. The Company will
continue to seek reimbursement from all sources for amounts expended on this
case.
In fiscal 2004, the State of Nebraska asked the Company to provide the
history of payments received from the State of Nebraska and the payments made to
a consultant in Nebraska for his work on the smoking cessation contract. In the
fourth quarter of fiscal 2004, the Company became aware that the State and the
Federal governments are investigating the consultant. The Company is cooperating
fully with the investigating agencies on this matter and does not believe that
it has done anything improper in connection with its arrangement with this
consultant. There has been no further contact with the company regarding this
investigation.
Note F - Subsequent Events
Subsequent to quarter end the Company re-financed its revolving credit line
and term loan scheduled to expire in November 2005.
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. The agreement includes a term loan in the amount of $1,400,000
and an accounts receivable funding revolving credit agreement with a maximum
loan amount of $3,500,000, including $900,000 available as an overline for
growth.
The term loan note carries interest at prime plus 3.5%, but not less than
9%, with twelve monthly principal payments of $25,000, 12 monthly principal
payments of $37,500, and eleven monthly principal payments of $50,000 beginning
November 1, 2004 with balance due at maturity, on October 1, 2007.
The revolving credit note carries interest at prime plus 2.25%, but not
less than 6.75% paid through lock box payments of third party accounts
receivable. The revolving credit term is three years, renewable for two
additional one-year terms. 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.
-- 8 --
Item 2. Management's Discussion and Analysis or Plan of Operation
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 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. Although the Company has changed the focus and
reduced expenses of its internet operation, Behavioral Health Online, Inc.
continues 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 expenses of the internet
operation decreased approximately 30% for the quarter ended September 30, 2004
compared to the quarter ended September 30, 2003, as the effect of cost cuts
resulting from the change in focus were realized. 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 illness through its clinics in Michigan and
Arizona.
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. 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.
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 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 the inpatient and outpatient behavioral health
-- 9 --
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 fee contracts to
provide telephone support. Revenue for these services is recognized ratably over
the service period.
All revenues reported by the Company are shown net of estimated allowances
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 American
Institute of Certified Public Accountants "Audit and Accounting Guide for Health
Care Organizations."
Allowance for doubtful accounts:
The provision for bad debt 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 70-100% 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 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.
Valuation of Goodwill and Other Intangible Assets
Goodwill and other intangible assets are initially created as a result of
business combinations or acquisitions. The values the Company records for
goodwill and other intangible assets represent fair values calculated by
independent third-party appraisers. Such valuations require the Company to
provide 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. 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, customer contracts and relationships, and (ii) 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.
-- 10 --
Results of Operations
Total net revenue from operations increased 30.4% to $7,957,515 for the
three months ended September 30, 2004 from $6,103,167 for the three months ended
September 30, 2003 due to increased census and better payor mix at our inpatient
facilities and increased pharmaceutical study revenue as a result of the
acquisition of Pivotal Research Centers (Pivotal).
Net patient care revenue increased 19.6% to $6,209,499 for the three months
ended September 30, 2004 from $5,192,560 for the three months ended September
30, 2003. This increase is a result of an 11% increase in census at our
inpatient facilities.
Two of the 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
results in higher census, which coupled with a more favorable payor mix (more
patients with higher paying insurance contracts or paying privately) usually
results in higher profitability. Therefore, patient census and payor mix are
monitored very closely.
Revenue from pharmaceutical studies increased 657.3% to $1,086,590 for the
three months ended September 30, 2004 from $143,482 for the three months ended
September 30, 2003. This increase is due to the acquisition of Pivotal Research
Centers, LLC. Without the acquisition, research revenue would have declined as
the Michigan site which produced most of the research revenue was in the process
of moving to a more strategic location.
Contract support services revenue provided by Wellplace decreased 13.8% to
$661,426 for the three months ended September 30, 2004 from $767,125 for the
three months ended September 30, 2003. The cost of providing these services also
decreased 6.7% to $516,909 for the three months ended September 30, 2004 from
$553,929 for the three months ended September 30, 2003. These decreases are due
to the expiration of the Nebraska smoking cessation contract. The state did not
renew the contract and is now providing the services internally.
Patient care expenses increased 27.4% to $3,430,945 for the three months
ended September 30, 2004 from $2,694,015 for the three months ended September
30, 2003. This increase is directly related to the increase in revenue from both
the inpatient facilities and pharmaceutical studies. The increase in inpatient
expenses is found primarily in variable costs such as food, lab fees, laundry,
patient activities, patient transportation and other patient related expenses,
while the increase in pharmaceutical study expenses is primarily in professional
fees for services rendered. The Company continues to look for new ways to cut
costs through operating efficiencies without sacrificing patient care.
Provision for doubtful accounts decreased 45.1% to $254,109 for the three
months ended September 30, 2004 from $462,891 for the three months ended
September 30, 2003. The amount charged is based on the age of the outstanding
receivables, which is indicative of their collectability. The Company's policy
is to maintain a higher reserve against older receivables.
Website expenses decreased 29.6% to $46,981 for the three months ended
September 30, 2004 from $66,695 for the three months ended September 30, 2003.
This is a result of a decrease in depreciation expense as the assets previously
being depreciated are now fully depreciated.
Administrative expenses increased 31.6% to $2,823,736 for the three months
ended September 30, 2004 from $2,146,091 for the three months ended September
30, 2003. This increase is due to the expenses related to Pivotal Research
Centers, LLC which was acquired April 30, 2004. The administrative expenses of
the pharmaceutical study division increased to $691,056 for the quarter ended
September 30, 2004 from $105,046 for the same period last year. Excluding
Pivotal, increases in insurance rates resulted in a 64.1% increase in insurance
expense to $122,164 in the current quarter from $74,467 for the same period last
year and increased rent expense of 11.5% to $249,740 for the three months ended
September 30, 2004 from $223,956 for the three months ended September 30, 2003.
This increase is due to incremental increases built into current leases.
-- 11 --
Interest expense decreased 18.4% to $113,055 for the three months ended
September 30, 2004 from $133,892 for the three months ended September 30, 2003.
This decrease in interest is due to the decrease in interest rates on the
Company's long-term debt.
The Company's provision for income taxes of $26,000 for the quarter ended
September 30, 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 quarter 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 assets
due to the uncertainty surrounding their realizability.
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, which has resulted in improved cash collections. Although the
Company's receivables have increased three percent over the past three months,
the Company's reserve for bad debts based on the age of receivables and the
growth in receivables this quarter is due primarily to increased revenue. The
growth of managed care has negatively impacted reimbursement for behavioral
health services with a higher rate of denials requiring higher reserves so the
age of receivables is monitored closely.
Liquidity and Capital Resources
The Companys net cash used in operating activities was $134,833 for the
quarter ended September 30, 2004 compared to cash used by operating activities
of $273,852 for the quarter ended September 30, 2003. Cash flow from operations
in the quarter ended September 30, 2004 consists of net income of $775,628, an
increase in deferred taxes of $94,600 and other assets of $18,015, an increase
in accounts payable of $355,976, an increase in accrued expenses of $117,018,
and non-cash charges to net income for depreciation of $99,025 and stock based
compensation of $6,926. This cash flow from operations was offset by an increase
in accounts receivable of $1,010,959 and an increase in prepaid expenses of
$365,832.
Cash used in investing activities in the quarter ended September 30, 2004
consisted of $254,804 in acquisition of property and equipment and $18,853 in
costs related to the acquisition of a business for a total use of cash in
investing activities of $273,657.
Cash used in financing activities in the quarter ended September 30, 2004
primarily consisted of $32,906 in net debt borrowings which was offset by
$60,000 in deferred financing costs and $13,880 in the purchase of treasury
stock, which was partially offset by $11,600 cash received for the issuance of
warrants.
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 9.0% to
$5,757,548 on September 30, 2004 from $5,261,202 on June 30, 2004. This increase
is due in part to the delay in payment of receivables by one of our state payors
due to temporary budget constraints. It is also due to higher revenues during
the quarter. The minimal increase is a result of better accounts receivable
management due to increased staff, standardization of some procedures for
collecting receivables and 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 uncollectable. 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 fifteen
consecutive quarters with the exception of the litigation settlement and related
legal costs incurred in the third quarter of fiscal year 2004. While it is
difficult to project whether the current positive business environment towards
behavioral health treatment and the new business opportunities will continue, it
gives 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
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as of September 30, 2004 have not changed materially since the Company's year
end as reported in the Company's Form 10-KSB except for, subsequent to quarter
end, the re-financing of its revolving credit line and term loan scheduled to
expire in November 2004.
Subsequent to the quarter ended September 30, 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. The agreement
includes a term loan in the amount of $1,400,000 and an accounts receivable
funding revolving credit agreement with a maximum loan amount of $3,500,000,
including $900,000 available as an overline for growth.
The term loan note carries interest at prime plus 3.5%, but not less than
9%, with twelve monthly principal payments of $25,000, 12 monthly principal
payments of $37,500, and eleven monthly principal payments of $50,000 beginning
November 1, 2004 with balance due at maturity, on October 1, 2007.
The revolving credit note carries interest at prime plus 2.25%, but not
less than 6.75% paid through lock box payments of third party accounts
receivable. The revolving credit term is three years, renewable for two
additional one-year terms. 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.
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.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings.
In April 2004, the Company successfully resolved its medical malpractice
lawsuit. As a result of the settlement, the Company made a 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 during the year ended June 30, 2004. The Company will
continue to seek reimbursement from all sources for amounts expended on this
case.
In fiscal 2004, the State of Nebraska asked the Company to provide the
history of payments received from the State of Nebraska and the payments made to
a consultant in Nebraska for his work on the smoking cessation contract. In the
fourth quarter of fiscal 2004, the Company became aware that the State and the
Federal governments are investigating the consultant. The Company is cooperating
fully with the investigating agencies on this matter and does not believe that
it has done anything improper in connection with its arrangement with this
consultant. There has been no further contact with the company regarding this
investigation.
Item 6. Exhibits and reports on Form 8-K.
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 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 two reports on form 8-K during the quarter ended
September 30, 2004. The first report, filed on September 1, 2004, provided the
same earnings information to the public as shown in the Company's press release
as required by Item 12 of the instructions for form 8-K. The second report,
filed on September 23, 2004 provided information regarding a material definitive
agreement and related potential sale of equity securities as required by Items
1.01 and 3.02 of the instructions for form 8-K.
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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: November 12, 2004 /s/ Bruce A. Shear
Bruce A. Shear
President
Chief Executive Officer
Date: November 12, 2004 /s/ Paula C. Wurts
Paula C. Wurts
Controller
Treasurer
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