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 DECEMBER 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)
- -------------------------------------------------------------------------------
(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 January 28,
2005:
Class A Common Stock 16,742,593
Class B Common Stock 776,991
Transitional Small Business Disclosure Format
(Check one):
Yes______ No X
-- 1 --
PHC, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - December 31, 2004 (unaudited)
and June 30, 2004.
Condensed Consolidated Statements of Operations (unaudited) - Three
and six months ended December 31, 2004 and December 31, 2003.
Condensed Consolidated Statements of Cash Flows (unaudited) - Six
months ended December 31, 2004 and December 31, 2003.
Notes to Condensed Consolidated Financial Statements (unaudited) -
December 31, 2004.
Item 2. Management's Discussion and Analysis or Plan of Operation
Item 3. Controls and Procedures
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
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
December 31, June 30,
ASSETS 2004 2004
__________ __________
(unaudited)
Current assets:
Cash and cash equivalents $ 181,233 $ 594,823
Accounts receivable, net of allowance for
doubtful accounts of $1,830,729 at December
31 and $2,025,888 at June 30 5,576,870 5,165,150
Prepaid expenses 468,866 168,542
Other receivables and advances 1,970,857 860,195
Deferred income tax asset 937,407 842,806
__________ __________
Total current assets 9,135,233 7,631,516
Accounts receivable, non-current 80,000 96,052
Other receivable 82,048 94,469
Property and equipment, net 1,513,182 1,353,975
Deferred financing costs, net of amortization
of $15,688 at December 31, 2004 182,757 --
Customer relationships, net of amortization
of $80,000 at December 31, and $20,000 at
June 30 2,320,000 2,380,000
Goodwill (Note F) 2,648,209 1,416,119
Other assets 377,087 339,438
__________ __________
Total assets $16,338,516 $13,311,569
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,723,097 $ 1,668,509
Current maturities of long-term debt 777,275 1,713,395
Revolving credit note 2,241,434 1,714,380
Deferred revenue 82,182 38,151
Current portion of obligations under
capital leases 32,421 18,169
Accrued payroll, payroll taxes and benefits 1,355,783 1,305,490
Accrued expenses and other liabilities 868,797 682,567
Convertible debentures 235,750 250,000
__________ __________
Total current liabilities 7,316,739 7,390,661
Long-term debt 2,203,526 529,378
Obligations under capital leases 18,292 24,493
__________ __________
Total liabilities 9,538,557 7,944,532
__________ __________
Stockholders' equity:
Class A common stock, $.01 par value,
30,000,000 shares authorized, 16,909,331
and 16,744,848 shares issued at December
31 and June 30, respectively 169,093 167,448
Class B common stock, $.01 par value,
2,000,000 shares authorized, 776,991
issued and outstanding December 31 and
June 30, each convertible into one share
of Class A common Stock 7,770 7,770
Additional paid-in capital 23,052,362 22,791,637
Treasury stock, 181,738 shares and 168,136
shares of Class A common stock at December
31 and June 30, respectively, at cost (155,087) (141,207)
Accumulated deficit (16,274,179) (17,458,611)
__________ __________
Total stockholders' equity 6,799,959 5,367,037
__________ __________
Total liabilities and stockholders' equity $16,338,516 $13,311,569
=========== ===========
See Notes to Condensed Consolidated Financial Statements
-- 3 --
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
_______________________________________________
2004 2003 2004 2003
_______________________________________________
Revenues:
Patient care, net $ 5,951,326 $ 5,547,404 $12,160,825 $10,739,964
Pharmaceutical studies 1,194,552 201,410 2,281,142 344,892
Contract support services 923,323 740,014 1,584,749 1,507,139
__________ ___________ ___________ ___________
Total revenues 8,069,201 6,488,828 16,026,716 12,591,995
_________ ___________ ___________ ___________
Operating expenses:
Patient care expenses 3,379,464 3,017,610 6,810,409 5,832,114
Cost of contract support services 558,094 623,445 1,075,003 1,177,374
Provision for doubtful accounts 328,638 422,946 582,747 885,837
Website expenses 48,523 79,651 95,504 146,346
Administrative expenses 3,074,587 2,267,355 5,898,323 4,292,957
__________ __________ ___________ ___________
Total operating expenses 7,389,306 6,411,007 14,461,986 12,334,628
__________ __________ ___________ ___________
Income from operations 679,895 77,821 1,564,730 257,367
__________ __________ ___________ ___________
Other income (expense):
Interest income 17,492 2,458 34,531 5,182
Other income 13,683 36,643 26,492 51,414
Interest expense (229,797) (113,142) (342,852) (247,034)
__________ __________ ___________ ___________
Total other expenses, net (198,622) (74,041) (281,829) (190,438)
__________ __________ ___________ ___________
Income before provision for taxes 481,273 3,780 1,282,901 66,929
Provision for income taxes 72,469 1,121 98,469 11,121
__________ __________ ___________ ___________
Net income applicable to common
shareholders $ 408,804 $ 2,659 $1,184,432 $ 55,808
=========== =========== ========== ===========
Basic net income per common
share $ 0.02 $ 0.00 $ 0.07 $ 0.00
=========== =========== ========== ===========
Basic weighted average number of shares
outstanding 17,417,238 14,043,665 17,388,921 14,038,877
=========== ========== ========== ===========
Fully diluted net income per common
share $ .02 $ 0.00 $ 0.06 $ 0.00
=========== =========== ========== ===========
Fully diluted weighted average number
of shares outstanding 18,471,375 14,921,550 18,274,631 14,804,158
=========== ========== ========== ===========
See Notes to Condensed Consolidated Financial Statements.
-- 4 --
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
December 31
2004 2003
____________ ____________
Cash flows from operating activities:
Net income $1,184,432 $ 55,808
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 209,525 131,977
Non-cash stock-based compensation 8,081 126,592
Changes in:
Accounts receivable (1,493,909) (89,120)
Prepaid expenses and other current assets (300,324) (306,897)
Other assets (137,020) (45,733)
Accounts payable 54,588 413,817
Accrued expenses and other liabilities 280,554 (303,232)
____________ ____________
Net cash used in operating activities (194,073) (16,788)
____________ ____________
Cash flows from investing activities:
Acquisition of property and equipment (303,962) (106,767)
Costs related to business acquisition (62,258) --
____________ ____________
Net cash used in investing activities (366,220) (106,767)
____________ ____________
Cash flows from financing activities:
Revolving debt, net 527,054 184,044
Long-term debt, net (256,569) (431,409)
Deferred financing costs (182,757) 4,000
Costs related to issuance of capital stock (20,000) --
Issuance of common stock 92,855 36,200
Purchase of treasury stock (13,880) (33,711)
____________ ____________
Net cash provided by (used in) financing
activities 146,703 (240,876)
____________ ____________
Net decrease in cash and cash equivalents (413,590) (364,431)
Beginning cash and cash equivalents 594,823 494,991
____________ ____________
Ending cash and cash equivalents $ 181,233 $ 130,560
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 306,441 $ 236,684
Income taxes 113,050 18,713
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Pivotal Acquisition Note A earn out consideration
recorded $1,169,832 $ --
Increase in equity from cashless exercise of
warrants 14,250 --
See Notes to Condensed Consolidated Financial Statements
-- 5 --
PHC, INC. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
December 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 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 seven psychiatric treatment
locations which include Harbor Oaks Hospital, a 64-bed psychiatric
hospital located in New Baltimore, Michigan, Detroit Behavioral
Institute, a 30-bed psychiatric hospital dedicated to adjudicated
juveniles located in Detroit, 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 clinical study sites:
two in Arizona, in Peoria and Mesa, and one Michigan location in Royal
Oak, Michigan. 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 adjustments) considered necessary for a fair
presentation have been included. Operating results for the six months ended
December 31, 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 June 30, 2004 and
December 31, 2004 and are subject to variable accounting from the date of the
modification. Compensation expense relating to the vested repriced options was
$16,435 for the fiscal year ended June 30, 2004. No compensation expense
relating to 5,000 vested repriced options at December 31, 2004 was recorded for
the three month or six month periods ended December 31, 2004, compared to an
expense of $7,096 and $3,181 for the three months and six months ended December
31, 2003, respectively.
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
-- 6 --
Note C- Stock Based Compensation (Continued)
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 Six Months Ended
December 31, December 31,
_____________________ _________________________
2004 2003 2004 2003
_____ ____ ____ ____
Net income, as reported $408,804 $ 2,659 $1,184,432 $ 55,808
Add: Stock-based employee
compensation expense included in
reported net income, net of related
tax effects 1,155 16,259 8,081 102,482
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects (34,505) (31,897) (90,731) (147,520)
________ ________ __________ __________
Pro forma net income (loss) $375,454 $(12,979) $1,101,782 $ 10,770
========= ========= ========== =========
Earnings (loss) per share:
Basic - as reported $ 0.02 $ 0.00 $ 0.07 $ 0.00
======== ======== ========== =========
Basic - pro forma $ 0.02 $ 0.00 $ 0.06 $ 0.00
======== ======== ========== =========
Diluted - as reported $ 0.02 $ 0.00 $ 0.06 $ 0.00
======== ======== ========== =========
Diluted - pro forma $ 0.02 $ 0.00 $ 0.06 $ 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:
Pharmaceutical
Treatment Study Contract Administrative
Services Services Services Services Eliminations Total
______________________________________________________________________________
For the three months
ended December 31, 2004
Revenues - external
customers $5,951,326 $1,194,552 $923,323 $ -- $ -- $8,069,201
Revenues - intersegment -- -- 13,413 690,000 (703,413) --
Net income (loss) 715,446 92,495 359,229 (758,366) -- 408,804
For the three months
ended December 31, 2003
Revenues - external
customers $5,547,404 $ 201,410 $740,014 $ -- $ -- $6,488,828
Revenues - intersegment 69,940 -- -- 808,860 (878,800) --
Net income (loss) 522,400 17,994 173,569 (711,304) -- 2,659
-- 7 --
Note D - Business Segment Information (continued)
Pharmaceutical
Treatment Study Contract Administrative
Services Services Services Services Eliminations Total
____________________________________________________________________________
For the six months
ended December 31, 2004
Revenues - external
customers $12,160,825 $2,281,142 $1,584,749 $ -- $ -- $16,026,716
Revenues - intersegment -- -- 24,695 1,344,000 (1,368,695) --
Net income (loss) 1,996,092 152,752 497,746 (1,462,158) -- 1,184,432
Identifiable Assets 8,748,318 5,606,002 587,041 1,397,155 -- 16,338,516
For the six months
ended December 31, 2003
Revenues - external
customers $10,750,064 $ 334,792 $1,507,139 $ -- $ -- $12,591,995
Revenues - intersegment 110,340 -- -- 1,617,720 (1,728,060) --
Net income (loss) 996,742 8,773 443,765 (1,393,472) -- 55,808
Identifiable Assets 7,699,722 226,622 312,379 1,221,109 -- 9,459,832
Note E - Legal Proceedings
In April 2004, the Company successfully resolved a medical malpractice
lawsuit brought against the Company. 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 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 to date has expended
approximately $145,000 in legal fees.
Note F - Increase in Intangible Assets
For the eight month period ended December 31, 2004, since the acquisition
of Pivotal, the income from the acquired operations exceeded the required EBITDA
targets set in the acquisition documents to trigger the recording of the earn
out as stipulated by Note A. The recording of this liability resulted in an
increase in goodwill of $1,169,832. Goodwill was also increase by additional
legal costs related to the transaction.
Note G - Debt Refinancing
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. 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
-- 8 --
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 balance
due on the term loan as of December 31, 2004 was $1,295,000.
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. The outstanding balance on the revolving credit note
as of December 31, 2004 was $2,241,434.
In connection with this agreement, the Company issued warrants to purchase
up to 250,000 shares of the Company's Class A Common Stock at $1.15 per share.
The Warrants vest immediately and expire on the 10th anniversary of issuance.
The number of shares issuable upon exercise can be adjusted for certain dilutive
events, as defined. The Company valued these warrants using Black-Scholes option
pricing model and the following assumptions: a fair market value of $1.15 per
share, a risk-free interest rate of 4%, an expected volatility of 45%, an
expected life of ten years and an expected dividend yield of zero. The Company
allocated the proceeds received from the financing agreement between the related
debt and the warrant on the basis of fair value of the individual component at
the date of issuance and determined that the warrants value was $167,184. This
value was recorded as a discount to the related debt.
Also, under the revolving credit agreement, the Company must meet certain
financial and administrative covenants, as defined. As of December 31, 2004, the
Company was not in compliance with all of the financial covenants. The Company
received notification from the lender on February 10, 2005 waiving the covenant
non-compliance at December 31, 2004. The Company's failure to meet these
covenants was a result of seasonal fluctuations that were not taken into
consideration when the covenant was established. The Company and lender are
working to adjust the covenants to take seasonality into consideration.
Note H - Recent Account Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS
No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 (R) supersedes
APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS
No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123 (R) is
similar to the approach described in SFAS No. 123. However, SFAS No. 123 (R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the statement of operations based on their
fair values. Pro-forma disclosure is no longer an alternative. The Company
expects to adopt SFAS No. 123 (R) on July 1, 2005.
-- 9 --
Item 2. Management's Discussion and Analysis or Plan of Operation
This report contains certain forward-looking statements with respect to the
financial condition, results of operations, plans, objectives, future
performance and business of the Company including statements preceded by,
followed by or that include words or phrases such as "believes," "expects,"
"anticipates," "plans," "trend," "objective," "continue," "remain," "pattern' or
similar expressions or future or conditional verbs such as "will," "would,"
"should," "could," "might," "con," "may" or similar expressions, which are
intended to identify "forward looking statement" within the meaning of the
Private Securities Litigation Reform Act of 1995.
The Company does not undertake, and specifically disclaims any obligation,
to update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
Overview
The Company presently provides behavioral health care services through two
substance abuse treatment centers, two psychiatric hospitals 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 over 30% for the quarter and six months ended December 31,
2004 compared to the same periods last year, as the savings resulting from the
change in focus are being 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. As part of the Government Medicare
Program, reimbursement rates for behavioral health care have increased. This
increase may have a positive impact on performance at the Company's one Medicare
facility, Harbor Oaks Hospital. The Company is exploring the possibility of
becoming a Medicare provider at its other in- patient facilities.
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.
-- 10 --
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,
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
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 AICPA "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 bases 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
-- 11 --
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.
Results of Operations
Total net revenue from operations increased 24.4% to $8,069,201 for the
three months ended December 31, 2004 from $6,488,828 for the three months ended
December 31, 2003 and 27.3% to $16,026,716 for the six months ended December 31,
2004 from $12,591,995 for the six months ended December 31, 2003.
Net patient care revenue increased 7.3% to $5,951,326 for the three months
ended December 31, 2004 from $5,547,404 for the three months ended December 31,
2003 and 13.2% to $12,160,825 for the six months ended December 31, 2004 from
$10,739,964 for the six months ended December 31, 2003. This increase in revenue
is due primarily to a small increase in patient days at our substance abuse
facilities for the three months ended December 31, 2004 over the same period
last year and the addition of the new beds at our new Detroit facility, Detroit
Behavioral Institute.
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 493.1% to $1,194,552 for the
three months ended December 31, 2004 from $201,410 for the three months ended
December 31, 2003 and 561.4% to $2,281,142 for the six months ended December 31,
2003 from $344,892 for the same period last year. This increase is due to the
acquisition of Pivotal Research Centers, LLC on April 30, 2004.
Contract support services revenue provided by Wellplace increased 24.8% to
$923,323 for the three months ended December 31, 2004 from $740,014 for the
three months ended December 31, 2003 and increased 5.1% to $1,584,749 for the
six months ended December 31, 2004 from $1,507,139 for the six months ended
December 31, 2003. The cost of providing these services decreased 10.5% to
$558,094 for the three months ended December 31, 2004 from $623,445 for the
three months ended December 31, 2003 and 8.7% to $1,075,003 for the six months
ended December 31, 2004 from $1,177,374 for the same period last year. This
increase in revenue and decrease in expenses are due to the elimination of the
Nebraska smoking cessation contract, which carried with it higher costs than the
expansion of the Michigan call center contract.
Patient care expenses increased by 12.0% to $3,379,464 for the three months
ended December 31, 2004 from $3,017,610 for the three months ended December 31,
2003 and 16.8% to $6,810,409 for the six months ended December 31, 2004 from
$5,832,114 for the six months ended December 31, 2003. The increases in expenses
for the quarter is due primarily to the increase in patient days noted above
with the primary increases in expenses directly related to patient census such
as payroll, food, hospital supplies and pharmacy. This amount also includes
expenses directly related to the increase in Pharmaceutical Research business in
the form of patient stipends, which accounts for approximately 25% of the
three-month increase and 15% of the six-month increase. During the quarter, the
Company also opened the first phase of the new inpatient program, Detroit
Behavioral Institute, at the Detroit Medical Center and has experienced
increased patient care revenue and expected inflated patient care and
administrative expenses related to the start up while the unit census is
growing.
Website expenses decreased 39.1% to $48,523 for the three months ended
December 31, 2004 from $79,651 for the three months ended December 31, 2003 and
34.7% to $95,504 for the six months ended December 31, 2004 from $146,346 for
the six months ended December 31, 2003. This is a result of a decrease in
depreciation expense as Internet set up is now fully depreciated.
-- 12 --
Administrative expenses increased 35.6% to $3,074,587 for the quarter ended
December 31, 2004 from $2,267,355 for the quarter ended December 31, 2003 and
37.4% to $5,898,323 for the six months ended December 31, 2004 from $4,292,957
for the six months ended December 31, 2003. This increase is related in part to
the addition of Detroit Behavioral Institute, increases in salaries and payroll
taxes and a substantial increase in general and professional liability insurance
costs. Administrative expenses for the new 30-bed facility, Detroit Behavioral
Institute, were $293,751 and $357,202 for the quarter and six months,
respectively. Salaries without Pivotal increased 26.8% to $821,157 from $647,559
for the quarter ended December 31, 2004 and 25.7% to $1,486,036 from 1,182,382
for the six months ended December 31, 2004 and general insurance expense without
Pivotal increased 42.0% for the quarter ended December 31, 2004 and 50.97% for
the six-month period ended December 31, 2004, as compared with the same periods
last year. This is due to general increases in property and professional
liability insurance and the implementation of a "terrorist acts" surcharge on
all policies.
Interest expense increased 103.1% to $229,797 for the three months ended
December 31, 2004 from $113,142 for the three months ended December 31, 2003 and
38.8% to $342,852 for the six months ended December 31, 2004 from $247,034 for
the same period last year. This increase is due in part to the booking of the
interest on Note A of the Pivotal acquisition. This Note was contingent on the
profitable operations of Pivotal from the acquisition through December 31, 2004;
therefore, the Note was not recorded and no interest was accrued until the
certainty of profitability could be determined. The increase is also due to
financing costs related to the recent refinancing of the Company's long-term
debt and receivables financing and the increased borrowing to provide funds for
the start up of Detroit Behavioral Institute.
The Company's provision for income taxes of $98,469 for the six month
period ended December 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 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
asset due to IRS rules that may limit the accessibility of the loss
carry-forwards.
Provision for doubtful accounts decreased 22.3% to $328,638 for the three
months ended December 31, 2004 from $422,946 for the three months ended December
31, 2003 and 34.2% to $582,747 for the six months ended December 31, 2004 from
$885,837 for the six months ended December 31, 2003. This is a result of the
Company's recent success in collecting 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, which has resulted in improved cash collections. Although the
Company's receivables from our treatment facilities have increased 7.5%,
approximately 30% percent of the increase is directly related to the new beds of
Detroit Behavioral Institute and these receivables are less than 30 days old.
The Company continues to reserve for bad debts based on the age of the
receivable in consideration of past managed care denials and difficulty in
collection of older receivables. The growth of managed care has negatively
impacted reimbursement for behavioral health services with a higher rate of
denials requiring higher reserves.
Liquidity and Capital Resources
The Company's net cash used in operating activities was $194,073 for the
six months ended December 31, 2004 compared to $16,788 for the same period last
year. Cash flow from operations in the six months ended December 31, 2004
consists of net income of $1,184,432 plus depreciation and amortization of
$209,525, increase in accounts receivable of $1,493,909, increase in prepaid
expenses of $300,324, increase in accrued expenses of $280,554, increase in
accounts payable of $54,588, an increase in other assets of $137,020 and
non-cash equity based charges of $8,081.
Cash used in investing activities in the six months ended December 31, 2004
consisted of $303,962 in capital expenditures compared to $106,767 in capital
expenditures in the same period last year and costs related to a business
acquisition of $62,258.
Cash used in financing activities in the six months ended December 31, 2004
primarily consisted of $270,485 in net debt borrowings which was offset by
$182,757 in deferred financing costs, $20,000 in costs related to the issuance
of capital stock and $13,880 in the purchase of treasury stock, which was
partially offset by $92,855 cash received in the exercise of warrants.
-- 13 --
A significant factor in the liquidity and cash flow of the Company is the
timely collection of its accounts receivable. Current accounts receivable from
patient care, net of allowance for doubtful accounts, increased 7.5% to
$5,656,870 on December 31, 2004 from $5,261,202 on June 30, 2004. This increase
is due in part to the new receivables being generated by Detroit Behavioral
Institute, the new 30 bed adjudicated boys unit in Detroit, and a delay in
payment of receivables by one of our State payors due to budget constraints. It
is also due to high 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 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. 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 sixteen
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, if the current positive business environment towards
behavioral health treatment and new business opportunities continue, we are
confident that we may see continued improved results.
The Company's future minimum payments under contractual obligations related
to capital leases, operating leases and term notes as of December 31, 2004 are
listed below.
Year Ending Term Capital Operating
December 31, Notes Leases Leases Total
_____________________________________________________________________________
2005 $1,253,792* $28,202 $1,495,087 $2,777,081
2006 832,145 16,697 1,322,882 2,171,724
2007 817,885 10,647 1,008,456 1,836,988
2008 349,860 2,168 823,136 1,175,164
2009 195,507 -- 810,463 1,005,970
Thereafter 175,312 -- 275,215 450,527
__________ ________ _________ __________
Total minimum payments $3,624,501 $ 57,714 $5,735,239 $9,417,454
=========== ======== =========== ==========
* Includes $235,750 in convertible debentures
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. 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 balance
due on the term loan as of December 31, 2004 was $1,295,000.
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. The outstanding balance on the revolving credit note
as of December 31, 2004 was $2,241,434.
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.
-- 14 --
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.
-- 15 --
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was held on December 21, 2004.
In addition to the election of directors (with regards to which (i) proxies were
solicited pursuant to Regulation 14A under the Securities and Exchange Act of
1934, as amended, (ii) there was no solicitation in opposition to the
management's nominees as listed on the proxy statement, and (iii) all of such
nominees were elected), the stockholders approved the increase in authorized
shares of Class A Common Stock from 20,000,000 to 30,000,000 shares.
Because sufficient proxies were not received to hold the vote on the new
non-employee director stock option plan to replace the plan expiring in October
2005, the meeting was adjourned and re-convened on January 20, 2005 at which
time the 2005 Non-Employee Director Stock Option Plan (the "Plan") was approved.
Under the Plan 350,000 shares of Class A Common Stock are available for issuance
to non-employee directors only as stipulated in the Plan.
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 December
31, 2004. The first report, filed on October 22, 2004 provided information
regarding a material definitive agreement as required by Item 1.01 of the
instructions for form 8-K. The second report, filed on November 10, 2004,
provided the same earnings information to the public as shown in the Company's
quarterly press release as required by Item 2.02 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: February 11, 2005 /s/ Bruce A. Shear
_________________________
Bruce A. Shear
President
Chief Executive Officer
Date: February 11, 2005 /s/ Paula C. Wurts
_________________________
Paula C. Wurts
Controller
Treasurer
-- 17 --