U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005.
|_| 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)
Indicate by check mark whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No___
Number of shares outstanding of each class of common equity, as of May 2, 2005:
Class A Common Stock 17,040,181
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 (Unaudited)
Condensed Consolidated Balance Sheets - March 31, 2005 and June 30,
2004.
Condensed Consolidated Statements of Operations - Three and nine
months ended March 31, 2005 and March 31, 2004.
Condensed Consolidated Statements of Cash Flows - Nine months ended
March 31, 2005 and March 31, 2004.
Notes to Condensed Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis or Plan of Operation
Item 3. Controls and Procedures
PART II. OTHER INFORMATION
Item 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
March 31, June 30,
ASSETS 2005 2004
__________ ________
(unaudited)
Current assets:
Cash and cash equivalents $ 552,874 $ 594,823
Accounts receivable, net of allowance for
doubtful accounts of $1,902,740 at
March 31 and $2,025,888 at June 30 6,790,975 5,165,150
Prepaid expenses 302,463 168,542
Other receivables and advances 1,579,345 860,195
Deferred income tax asset 937,407 842,806
__________ __________
Total current assets 10,163,064 7,631,516
Accounts receivable, non-current 72,500 96,052
Other receivables 86,497 94,469
Property and equipment, net 1,488,525 1,353,975
Deferred financing costs, net of amortization
of $34,097 at March 31, 2005 164,348 --
Customer relationships, net of amortization
of $110,000 at March 31, 2005 and
$20,000 at June 30, 2004, respectively 2,290,000 2,380,000
Goodwill 2,648,209 1,416,119
Other assets 379,354 339,438
___________ ___________
Total assets $17,292,497 $13,311,569
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 787,334 $ 1,713,395
Current portion of obligations under capital
leases 22,741 18,169
Accounts payable 1,721,286 1,668,509
Revolving credit note 2,521,089 1,714,380
Deferred revenue 139,876 38,151
Accrued payroll, payroll taxes and benefits 1,351,219 1,305,490
Accrued expenses and other liabilities 728,730 682,567
Convertible debentures 100,000 250,000
__________ __________
Total current liabilities 7,372,275 7,390,661
Long-term debt, net of current maturities 2,059,963 529,378
Obligations under capital leases, net of
current maturities 14,945 24,493
__________ __________
Total liabilities 9,447,183 7,944,532
__________ __________
Stockholders' equity:
Class A common stock, $.01 par value,
30,000,000 shares authorized, 17,211,919
and 16,744,848 shares issued at March 31,
2005 and June 30, 2004, respectively 172,119 167,448
Class B common stock, $.01 par value,
2,000,000 shares authorized, 776,991
issued and outstanding (each convertible
into one share of Class A common Stock) 7,770 7,770
Additional paid-in capital 23,214,235 22,791,637
Treasury stock, 181,738 shares and 168,136
shares of Class A common stock at
March 31, 2005 and June 30, 2004,
respectively, at cost (155,087) (141,207)
Accumulated deficit (15,393,723) (17,458,611)
__________ __________
Total stockholders' equity 7,845,314 5,367,037
__________ __________
Total liabilities and stockholders' equity $17,292,497 $13,311,569
=========== ===========
See Notes to Condensed Consolidated Financial Statements
3
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
2005 2004 2005 2004
_________________________ _________________________
Revenues:
Patient care, net $6,734,949 $5,583,625 $18,895,774 $16,323,589
Pharmaceutical studies 1,103,205 155,152 3,384,347 500,044
Contract support services 925,528 733,411 2,510,277 2,240,550
__________ __________ ___________ ___________
Total revenues 8,763,682 6,472,188 24,790,398 19,064,183
__________ __________ ___________ ___________
Operating expenses:
Patient care expenses 3,978,278 3,201,426 10,788,687 9,033,540
Cost of contract support services 520,475 546,667 1,595,478 1,667,041
Provision for doubtful accounts 217,756 227,196 800,503 1,113,033
Website expenses 53,835 73,191 149,339 219,537
Administrative expenses 3,010,466 3,096,804 8,908,789 7,446,760
__________ __________ ___________ ___________
Total operating expenses 7,780,810 7,145,284 22,242,796 19,479,911
__________ __________ ___________ ___________
Income (loss) from operations 982,872 (673,096) 2,547,602 (415,728)
__________ __________ ___________ ___________
Other income (expense):
Interest income 15,004 20,888 49,535 26,070
Other income 31,568 26,059 58,060 77,472
Interest expense and other
financing costs (148,988) (219,116) (491,840) (466,150)
__________ __________ ___________ ___________
Total other expenses, net (102,416) (172,169) (384,245) (362,608)
__________ __________ ___________ ___________
Income (loss) before provision
for taxes 880,456 (845,265) 2,163,357 (778,336)
Provision for income taxes -- -- 98,469 11,121
__________ __________ ___________ ___________
Net income (loss) applicable
to common shareholders $ 880,456 $ (845,265) $ 2,064,888 $ (789,457)
========== =========== =========== ============
Basic net income (loss) per
common share $ 0.05 $ (.06) $ 0.12 $ (0.06)
========== =========== =========== ============
Basic weighted average number
of shares outstanding 17,648,412 14,402,988 17,474,155 14,149,261
========== =========== =========== ============
Diluted net income (loss) per
common share $ 0.05 $ (.06) $ 0.11 $ (0.06)
========== =========== =========== ============
Diluted weighted average number
of shares outstanding 18,690,012 14,402,988 18,234,480 14,149,261
========== =========== =========== ============
See Notes to Condensed Consolidated Financial Statements.
4
PHC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended
March 31,
2005 2004
___________________________
Cash flows from operating activities:
Net income (loss) $ 2,064,888 $(789,457)
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 324,397 211,031
Non-cash stock-based compensation 78,656 128,586
Changes in:
Accounts receivable (2,313,451) (356,527)
Prepaid expenses and other current assets (133,921) (204,360)
Other assets (144,057) (160,269)
Accounts payable 52,777 547,146
Accrued expenses and other liabilities 199,942 482,698
____________ __________
Net cash provided by (used in) operating
activities 129,231 (141,152)
____________ __________
Cash flows from investing activities:
Acquisition of property and equipment (359,407) (150,488)
Costs related to business acquisition (62,258) --
____________ __________
Net cash used in investing activities (421,665) (150,488)
____________ __________
Cash flows from financing activities:
Revolving debt, net 806,709 571,864
Long-term debt, net (538,850) (659,084)
Deferred financing costs (164,348) 4,000
Exercise of options 15,500 897,398
Purchase of treasury stock (13,880) (48,711)
Cost related to issuance of common stock (30,000) (5,081)
Exercise of warrants 175,354 --
____________ __________
Net cash provided by financing activities 250,485 760,386
____________ __________
Net (decrease) increase in cash and cash
equivalents (41,949) 468,746
Cash and cash equivalents balance, beginning
of period 594,823 494,991
____________ __________
Cash and cash equivalents balance, end of period $ 552,874 $ 963,737
============ =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $485,659 $ 338,233
Income taxes 118,550 18,713
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Pivotal Acquisition Note A earn out consideration
recorded $1,169,832 $ --
Exercise of warrants through reduction of
convertible debt 14,250 --
See Notes to Condensed Consolidated Financial Statements.
5
PHC, INC. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2005
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:
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);
Pharmaceutical study services, including four clinical study sites: two in
Arizona, in Peoria and Mesa, one Michigan location in Royal Oak, Michigan and
one in Midvale, Utah. These research sites conduct studies of the effects of
specified pharmaceuticals on a controlled population through contracts with
major manufacturers of the pharmaceuticals. All of the Company's research sites
operate as Pivotal Research Centers;
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
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 nine months ended
March 31, 2005 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 were
subject to variable accounting from the date of the modification. During the
quarter ended March 31, 2005, all remaining repriced options were exercised.
Compensation expense relating to the vested repriced options was $16,435 for the
fiscal year
6
Note C- Stock Based Compensation (continued)
ended June 30, 2004 and $69,175 for the three-month and nine month period ended
March 31, 2005, as compared to $9,415 and $16,511 for the three months and nine
months ended March 31, 2004, respectively. The Company has adopted the
disclosure only provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation", but applies
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations in accounting for its plans. If the
Company had elected to recognize compensation cost for the plans based on the
fair value at the grant date for awards granted, consistent with the method
prescribed by SFAS No. 123, net income (loss) and Net income (loss) per share
would have been changed to the pro forma amounts indicated below:
Three Months Ended Nine Months Ended
March 31, March 31,
2005 2004 2005 2004
__________________________________________________
Net income (loss), as reported $880,456 $(845,265) $2,064,888 $(789,457)
Add: Stock-based employee compensation
expense included in reported net
income, net of related tax effects 70,575 747 78,656 103,229
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (93,775) (36,902) ( 184,506) (184,422)
_________ ___________ ___________ _________
Pro forma net income (loss) $ 857,256 $(881,420) $1,959,038 $(870,650)
========= =========== =========== ===========
Earnings (loss) per share:
Basic - as reported $ 0.05 $ (0.06) $ 0.12 $ (0.06)
========= =========== =========== ===========
Basic - pro forma $ 0.05 $ (0.06) $ 0.11 $ (0.06)
========= =========== =========== ===========
Diluted - as reported $ 0.05 $ (0.06) $ 0.11 $ (0.06)
========= =========== =========== ===========
Diluted - pro forma $ 0.05 $ (0.06) $ 0.11 $ (0.06)
========= =========== =========== ===========
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. 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
March 31, 2005
Revenue-external
customers $ 6,734,949 $1,103,205 $ 925,528 $ -- $ -- $8,763,682
Revenues -
intersegment 5,940 -- 15,437 690,000 (711,377) --
Net income (loss) 1,186,896 59,042 399,053 (764,535) -- 880,456
7
Note D - Business Segment Information (continued)
Treatment Pharmaceutical Contract Administrative
Services Study Services Services Services Eliminations Total
_________________________________________________________________________
For the three
months ended
March 31, 2004
Revenue-external
customers $ 5,583,625 $ 155,152 $ 733,411 $ -- $ -- $ 6,472,188
Revenues -
intersegment 65,660 -- -- 808,620 (874,280) --
Net income
(loss) (218,760) (44,751) 186,744 (768,498) -- (845,265)
For the nine
months ended
March 31, 2005
Revenue-external
customers $18,895,774 $3,384,347 $2,510,277 $ -- $ -- $24,790,398
Revenues -
intersegment 5,940 -- 40,132 2,034,000 (2,080,072) --
Net income
(loss) 3,182,988 211,794 896,799 (2,226,693) -- 2,064,888
Total assets 9,267,352 5,717,032 563,097 1,745,016 -- 17,292,497
For the nine
months ended
March 31, 2004
Revenues - external
customers $16,333,689 $ 489,944 $2,240,550 $ -- $ -- $19,064,183
Revenues -
intersegment 176,000 -- -- 2,426,340 (2,602,340) --
Net income
(loss) 779,782 (37,778) 630,509 (2,161,970) -- (789,457)
Total assets as
of June 30,
2004 7,799,709 3,620,676 283,666 1,607,518 -- 13,311,569
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 $3.0 million. The Company did not release the 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. Included in other income for the three months ended March 31, 2005 is a
payment of $25,000, received by the Company, related to a release of one
insurance company.
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 $146,000 in legal fees related to their cooperation.
8
Note F - 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. During the three months ended March 31, 2005, the lender requested that
the Company sign two replacement notes for the original $3,500,000 note to make
it possible for them to assign a portion of the debt to an affiliate company.
The outstanding balance on the term loan and the revolving credit loan on March
31, 2005 was $1,220,000 and $2,521,089, respectively.
Under the revolving credit agreement, the Company must meet certain financial
and administrative covenants, as defined therein. As of March 31, 2005, the
Company was not in compliance with one of the financial covenants. The Company's
failure to meet these covenants was a result of a Michigan Quality Assurance
Assessment fee that the Company was not previously subject to and was not
included in the Company's budget. The Company is appealing the size and
substance of the fee based on the size of the facility. In previous years the
fee was only assessed on larger facilities. The Company received notification
from the lender on May 10, 2005 waiving the covenant non-compliance at March 31,
2005.
Note G - Recent Accounting 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 is
required to adopt SFAS No. 123 (R) on July 1, 2005. The effect of this change on
the results of operations of the Companuy is unknown at this time.
9
Item 2. Management's Discussion and Analysis or Plan of Operation
PHC, INC. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
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," "can," "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. it
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 nine months ended March 31, 2005 compared
to the same period 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 Arizona, Michigan and Utah.
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. The extent of any future regulatory changes and their impact on
the Company's business is unknown. The current administration has put forth
proposals to mandate equality in the benefits available to those individuals
suffering from mental illness (The Parity Act). If passed as proposed, this
legislation may 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.
10
Critical Accounting Policies
The preparation of our financial statements in accordance with accounting
principles generally accepted in the United States of America, requires
management to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, expenses and related disclosures. On an on-going
basis, we evaluate our estimates and assumptions, including but not limited to
those related to revenue recognition, accounts receivable reserves, income tax
valuation allowances, and the impairment of goodwill and other intangible
assets. We base our estimates on historical experience and various other
assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
Revenue recognition and accounts receivable:
Patient care revenues and accounts receivable are recorded at established
billing rates or at the amount realizable under agreements with third-party
payors, including Medicaid and Medicare. Revenues under third-party payor
agreements are subject to examination and contractual adjustment, and amounts
realizable may change due to periodic changes in the regulatory environment.
Provisions for estimated third party payor settlements are provided in the
period the related services are rendered. Differences between the amounts
provided and subsequent settlements are recorded in operations in the year of
settlement. Amounts due as a result of cost report settlements is recorded and
listed separately on the consolidated balance sheets as "Other receivables,
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.
11
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
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 increased 35.41% to $8,763,682 for the three months ended
March 31, 2005 from $6,472,188 for the three months ended March 31, 2004 and
increased 30.04% to $24,790,398 for the nine months ended March 31, 2005 from
$19,064,183 for the nine months ended March 31, 2004.
Net patient care revenue increased 20.62% to $6,734,949 for the three months
ended March 31, 2005 from $5,583,625 for the three months ended March 31, 2004
and 15.76% to $18,895,774 for the nine months ended March 31, 2005 from
$16,323,589 for the nine months ended March 31, 2004. This increase in revenue
is due primarily to the addition of the 30 adjudicated juvenile beds at Detroit
Behavioral Institute which helped to create a 22.42% increase in patient days
for the three months ended March 31, 2005 and 13.26% increase in patient days
for the nine months ended March 31, 2005 over the same periods last year.
Renewed marketing efforts have helped to maintain increased census in the
current quarter, but the economy continues to play a major role in the number of
people seeking treatment.
Two key indicators of profitability of inpatient facilities are patient days, or
census, and payor mix. Patient days is the product of the number of patients
times length of stay. Increases in the number of patient days result in higher
census, which coupled with a more favorable payor mix (more patients with higher
paying insurance contracts or paying privately) will usually result in higher
profitability. Therefore, patient census and payor mix are monitored very
closely.
Revenue from pharmaceutical studies increased 611.05% to $1,103,205 for the
three months ended March 31, 2005 from $155,152 for the three months ended March
31, 2004 and increased 576.81% to $3,384,347 for the nine months ended March 31,
2005 from $500,044 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 26.19% to
$925,528 for the three months ended March 31, 2005 from $733,411 for the three
months ended March 31, 2004 and increased 12.04% to $2,510,277 for the nine
months ended March 31, 2005 from $2,240,550 for the same period last year. This
increase in revenue is due to the October 2004 increase in the Michigan call
center contract, which increased the monthly revenue on this contract from
$157,000 to $240,000 per month.
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Patient care expenses increased 24.27% to $3,978,278 for the three months ended
March 31, 2005 from $3,201,426 for the three months ended March 31, 2004 and
19.43% to $10,788,687 for the nine months ended March 31, 2005 from $9,033,540
for the nine months ended March 31, 2004. This increase in expenses is due
primarily to the increase in in-patient days noted above with the majority of
the increases in expenses directly related to patient census such as payroll,
food, laundry, hospital supplies and pharmacy and the increase in patient
expenses related to increased pharmaceutical study activity. Pharmaceutical
studies account for approximately 34% and 41% of the increase in-patient care
expenses for the quarter and nine months, respectively.
Contract support services expenses decreased 4.79% to $520,475 for the three
months ended March 31, 2005 from $546,667 for the three months ended March 31,
2004 and 4.29% to $1,595,478 for the nine months ended March 31, 2005 from
$1,667,041 for the same period last year. This decrease is a result of more
efficient use of staff and the elimination of the smoking cessation contract
that was labor intensive and carried high outside service costs such as
printing.
Provision for doubtful accounts decreased 4.16% to $217,756 for the three months
ended March 31, 2005 from $227,196 for the three months ended March 31, 2004 and
28.08% to $800,503 for the nine months ended March 31, 2005 from $1,113,033 for
the same period last year. This is a result of a decrease in the age of the
Company's receivables and the Company's policy to maintain reserves based on the
age of the receivables.
The environment the Company operates in today makes collection of receivables,
particularly older receivables, more difficult than in previous years.
Accordingly, the Company has increased staff, standardized some procedures for
collecting receivables and instituted a more aggressive collection policy.
Although the Company has maintained its aggressive collection policy, the
Company's gross accounts receivable from patient care have increased
approximately 17% over the past three months and 20% over the past nine months.
This increase is primarily a result of increased revenues but is also affected
by the growth of managed care with slower payments and a higher rate of denials.
Website expenses decreased 26.45% to $53,835 for the three months ended March
31, 2005 from $73,191 for the three months ended March 31, 2004 and 31.98% to
$149,339 for the nine months ended March 31, 2005 from $219,537 for the nine
months ended March 31, 2004. This is a result of the costs of Internet set up
being fully expensed.
Administrative expenses decreased 2.79% to $3,010,466 for the three months ended
March 31, 2005 from $3,096,804 for the three months ended March 31, 2004 and
increased 19.63% to $8,908,789 for the nine months ended March 31, 2005 from
$7,446,760 for the same period last year. These changes are a result of the
higher legal fees and the settlement costs recorded in the third quarter of last
year, which were partially offset by the increased administrative expenses
related to Pivotal operations and Detroit Behavioral Institute, Inc., the new
facility in Michigan. In addition to the expenses related to Pivotal, the
individual expenses affected included: general insurance expense which increased
approximately 28% for the quarter ended March 31, 2005 and 42% for the nine
month period ended March 31, 2005 as compared with the same periods last year.
Utilities increased approximately 25% for the quarter ended March 31, 2005 and
2% for the nine months ended March 31, 2005 as compared to the same periods last
year. Rent expense increased approximately 13% for the quarter ended March 31,
2005 and 10% for the nine months ended March 31, 2005 as compared to the same
periods last year. Fees and licenses increased approximately 237% for the
quarter ended March 31, 2005 and 159% for the nine months ended March 31, 2005
as compared to the same periods last year as a result of the newly instituted
Michigan quality assurance assessment fee. The charge to compensation expense of
approximately $69,000 for previously repriced options, affected an increase in
officers compensation expense of approximately 25% for the quarter ended March
31, 2005 and 8% for the nine months ended March 31, 2005 as compared to the same
periods last year.
13
Interest income decreased 28.17% to $15,004 for the three months ended March 31,
2005 from $20,888 for the three months ended March 31, 2004 and increased 90.01%
to $49,535 for the nine months ended March 31, 2005 from $26,070 for the same
period last year. The increase for the nine months ended March 31, 2005 from the
nine months ended March 31, 2004 is a result of a change in the Company's
policy, which now charges finance charges when extending credit to patients.
Although patients requiring credit to pay for services have always signed an
agreement to pay finance charges, the Company recently implemented the policy to
charge for credit to discourage long term credit for services. The decrease for
the three months ended March 31, 2005 from the three months ended March 31, 2004
is a result of the Company's policy to extend credit on a more limited basis
which reduced the interest income for patients and limited excess funds in
interest bearing accounts.
Other income increased 21.14% to $31,568 for the three months ended March 31,
2005 from $26,059 for the three months ended March 31, 2004 and decreased 25.06%
to $58,060 for the nine months ended March 31, 2005 from $77,472 for nine months
ended March 31, 2004. These changes are due to the elimination of rental income
from the sublease of the New York property, formerly occupied by BSC, which was
partially offset by the payment of $25,000 in a legal settlement (see Note E -
Legal Proceedings, on page 8 of this report for details).
Interest expense and other financing costs decreased 32.00% to $148,988 for the
three months ended March 31, 2005 from $219,116 for the three months ended March
31, 2004 and increased 5.51% to $491,840 for the nine months ended March 31,
2005 from $466,150 for the same period last year. The decrease for the three
months is due to lower overall interest rates and decreases in long term debt.
The increase for the nine months is due in part to the interest on Note A of the
Pivotal acquisition and 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 nine months ended
March 31, 2005 is significantly below the Federal statutory rate of 34%
primarily due to the availability of net operating loss carry-forwards. Total
income tax expense for the nine months ended March 31, 2005 represents state
income taxes for certain subsidiaries with no available net operating loss
carry-forwards. The Company has provided a significant valuation allowance
against its deferred tax asset due to potential changes in IRS rules that may
limit the accessibility of the loss carry-forwards.
Liquidity and Capital Resources
The Company's net cash provided by operating activities was $129,231 for the
nine months ended March 31, 2005 compared to $141,152 of cash used in operations
for the nine months ended March 31, 2004. Cash flow provided by operations in
the nine months ended March 31, 2005 consists of net income of $2,064,888 plus
depreciation and amortization of $324,397, non-cash equity based charges of
$78,656 and an increase in accounts payable and other liabilities of $252,719
less cash used for net changes in accounts receivable and other operating assets
of $2,591,429.
Cash used in investing activities in the nine months ended March 31, 2005
consisted of $359,407 in capital expenditures compared to $150,488 in capital
expenditures during the same period last year and costs related to a business
acquisition of $62,258. The capital expenditures primarily related to the set up
of the Detroit Behavioral Institute operations and the upgrade of the corporate
exchange server in addition to routine equipment replacement.
Cash provided by financing activities of $250,485 in the nine months ended March
31, 2005 was the result of the issuance of common stock for the exercise of
options and warrants offset by costs related to the issuance of common stock,
required reductions in long term debt and the purchase of treasury shares.
A significant factor in the liquidity and cash flow of the Company is the timely
collection of its accounts receivable. Total outstanding accounts receivable
from patient care, net of allowance for doubtful accounts, increased 30.5% to
$6,863,475 at March 31, 2005 from $5,261,202 at 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 higher revenues
during the quarter. The Company monitors increases in accounts receivable
closely and, based on the aging of the receivables outstanding, is confident
14
that the increase is not indicative of a payor or collection problem. Over the
years the Company has increased staff, standardized some procedures for
determining insurance eligibility and collecting receivables and established a
more aggressive collection policy. The increased staff has allowed the Company
to concentrate on current accounts receivable and resolve any issues before they
become uncollectible. The Company's collection policy calls for earlier contact
with insurance carriers with regard to payment, use of fax and registered mail
to follow-up or resubmit claims and earlier employment of collection agencies to
assist in the collection process. The Company's 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 seventeen 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
predict based upon prior experience, if the current positive business
environment towards behavioral health treatment and new business opportunities
continues, the Company believes that it will see continued improved results.
The Company's future minimum payments under contractual obligations related to
capital leases, operating leases and term notes as of March 31, 2005 are listed
below.
Year Ending Term Capital Operating
March 31, Notes Leases Leases Total
______________ _________ ________ __________ __________
2005 $887,336* $22,741 $1,365,933 $2,276,010
2006 876,228 10,229 1,087,062 1,973,519
2007 674,766 4,574 869,466 1,548,806
2008 278,385 141 813,632 1,092,158
2009 202,939 -- 409,027 611,966
Thereafter 166,964 -- -- 166,964
______________ _________ ________ __________ __________
Total minimum
payments $3,086,618 $37,685 $4,545,120 $7,669,423
=========== ======== =========== ==========
* Includes $100,000 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. During the quarter ended March 31, 2005, the lender requested that the
Company sign two replacement notes for the original $3,500,000 note to make it
possible for them to assign a portion of the debt to an affiliate company. The
replacement notes are included as exhibits to this Report on Form 10Q-SB.
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 March 31, 2005 was $1,220,000 and is included in the table above
based on its payment terms.
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 March 31, 2005
was $2,521,089.
Under the revolving credit agreement, the Company must meet certain financial
and administrative covenants, as defined therein. As of March 31, 2005, the
Company was not in compliance with one of the financial covenants. The Company's
failure to meet these covenants was a result of a Michigan Quality Assurance
Assessment fee that the Company was not previously subject to and was not
included in the Company's budget. The Company is appealing the size and
substance of the fee based on the size of the facility. In previous years the
fee was only assessed on larger facilities. The Company received notification
from the lender on May 10, 2005 waiving the covenant non-compliance at March 31,
2005.
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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 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was held on December 21, 2004.
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
with a total of 11,878,609 votes counted, 11,036,072 for and 842,537 opposed.
Under the Plan 350,000 shares of Class A Common Stock are available for issuance
to non-employee directors only, subject to the terms and conditions of the Plan.
Item 6. Exhibits and reports on Form 8-K.
Exhibit List
Exhibit No. Description
10.47 One of two (2) Revolving Credit Notes in the amount of $1,500,000
issued to replace the $3,500,000 note signed in favor of CapitalSource
Finance, LLC dated October 19, 2004 by PHC of Michigan, Inc., PHC of
Nevada, Inc., PHC of Utah, Inc., PHC of Virginia, Inc., North Point -
Pioneer, Inc., Wellplace, Inc., Detroit Behavioral Institute, Inc.
10.48 One of two (2) Revolving Credit Notes in the amount of $2,000,000
issued to replace the $3,500,000 note signed in favor of CapitalSource
Finance, LLC dated October 19, 2004 by PHC of Michigan, Inc., PHC of
Nevada, Inc., PHC of Utah, Inc., PHC of Virginia, Inc., North Point -
Pioneer, Inc., Wellplace, Inc., Detroit Behavioral Institute, Inc.
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. 1350, as adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
Reports on Form 8-K
The Company filed one report on form 8-K during the quarter ended March 31,
2005. This report 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.
17
Signatures
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
PHC, Inc.
Registrant
Date: May 13, 2005 /s/ Bruce A. Shear
_____________________________
Bruce A. Shear
President
Chief Executive Officer
Date: May 13, 2005 /s/ Paula C. Wurts
_______________________________
Paula C. Wurts
Controller
Treasurer
18